There has been much debate about the upcoming changes to the Off-Payroll Working Rules and in particular, the introduction of IR35 to the private sector. The new rules require businesses to assess whether a contractor is genuinely self-employed or, in the words of HMRC, a “disguised employee”. With the April 2020 deadline fast approaching, HR professionals need to make sure they have identified and assessed every single limited company contractor they work with to determine whether they fall ‘inside’ or ‘outside’ IR35.
To meet the requirements of the law, HR teams must demonstrate “reasonable care” in assessing their workforce rather than simply applying blanket determinations. To fulfil this, businesses need to seek the right advice. Short cuts, leading to incorrect assessments, could mean more pain in the long run.
When politicians debated the IR35 rollout in Parliament, MP Ged Killen, stated “one of the major issues with the IR35 changes is the great difficulty in assessing whether an individual should be caught by the rules. Her Majesty’s Revenue and Customs’ guidance and tools are far from 100 per cent effective, and there is a lot of complex case law.” Another MP, Susan Elan Jones, said “the thing that really strikes me is how complicated it is.” It is therefore not surprising that businesses are struggling with the implementation of the rules.
CEST in a nutshell
HMRC has developed an online tool, Check Employment Status for Tax service (CEST for short) to help with determinations. CEST consists of four sections: personal service, control, financial risk and part and parcel. The hirer is guided through the sections sequentially and if HMRC decides that the contractor strongly passes either section one, two or three, it will skip the remainder of the questions and the hirer will be advised that the contractor is outside IR35.
CEST has been controversial since it was first launched for use in the public sector in 2017. Some within the industry have been troubled by the lack of testing that CEST received before it was launched. Others have criticised the way in which it is designed to only pass contractors in cases of absolute certainty. This means that if you don’t provide certain specific answers to particular questions, your contractor will be considered inside IR35 – even in cases where they would not actually fail all of the tests required. CEST also completely ignores the ‘mutuality of obligation’ test, which many consider one of the most important factors when determining employment status, while putting too much emphasis on whether or not the individual has the right to use a substitute to fulfil their contract.
A number of high-profile cases in the public sector have fuelled further criticism. One Freedom of Information request found that 99 per cent of contractors working for Network Rail were deemed inside IR35 as a result of using HMRC’s CEST tool in a role-based blanket approach. Just seven out of the 817 contractors assessed were found to be outside the off-payroll rules, which far exceeds HMRC’s own estimation that roughly a third of contractors will be caught by the legislation.
Understanding the nuances
Many of the questions on CEST could be described as vague and the wording confusing. It can be difficult for HR professionals to know how to answer all of the questions truthfully on behalf of contractors because work situations are rarely black and white.
In many instances, CEST is unable to understand the nuances and complexities of an individual’s working conditions and how to apply employment law accordingly. As a result, assessments made using HMRC’s CEST tool are unlikely to give hirers or contractors total confidence in the outcome. Furthermore, the contractor and the taxman both reserve the right to challenge the tool’s judgment if they believe that questions have been answered incorrectly or that the situation is contrived.
Given the complexity of IR35 legislation, minimising contractor conflict and confusion is crucial. Contractors will understandably have fears regarding their take home pay, and it is up to HR teams to allay those fears. It is vital that contractors understand how seriously you are taking the reforms and that they know you are taking the relevant steps to maintain their contractor status.
Working with specialists
Assessing your whole contractor workforce is a big job, many HR teams are turning to specialist support. Experienced professionals are able to take the subtleties of individual circumstances into consideration as they navigate this complex employment law. This support can help hirers audit their contractor workforce and comply with the law, while giving all parties – the hirer, contractors and HMRC – the peace of mind that ‘reasonable care’ has been demonstrated. Lawyers can also advise on which roles are clearly inside or outside of IR35 and what sort of changes could be made to working practices to help keep a contractor outside of IR35, but within the law.
If you want to access specialist IR35 advice, however, be careful who you turn to. There are a lot of people offering advice that do not have the appropriate knowledge, experience or qualifications. There are also a number of IR35 assessment tools entering the market, some are better than others, but it is essential that if you are placing reliance on the output of an assessment tool that you do this with expert guidance and support. It’s essential that advisors who you turn to obtain this support have specialist experience in IR35 – the law is not straightforward and you want to know the support and insight you are paying for is absolutely watertight and that HMRC will have no grounds to challenge your determinations, paperwork or processes.
Contractor circumstances vary – there’s no ‘one size fits all’ and HMRC’s digital tool can only provide a certain level of analysis. In contrast, IR35 specialists can support HR professionals beyond status determinations and help put policies, processes and structures in place so that hirers and their agencies can work together, compliantly and with the least impact upon resourcing and cost. This holistic, human approach helps companies get their houses in order for the long-haul.