Off-payroll working (IR35) – Back to the future

In this article we will discuss your obligations under IR35 as an end-client, how to better satisfy these obligations as well as covering HMRC’s increasing focus on compliance and how best your business can act in order to manage this risk.

‘IR35’ The recent landscape

April 2021

• HMRC expanded the existing Off-payroll working rules (‘IR35’) to the private sector.

September 2022

• In the September mini-budget, Liz Truss reversed the 2017 and 2021 revisions to Off-payroll working rules.

October 2022 

• The new chancellor Jeremy Hunt cancelled the proposed reversal.
• As a result, engager/End-Users continue to have responsibilities under IR35.

HMRC are ramping up activity

HMRC have highlighted Off-payroll working (“OPW” – more commonly referred to as “IR35”) as a key focus area for revenue collection, with published targets (see Table 5.2: Growth Plan 2022 reversals) stating raising in excess of £8bn by 2027/28. Resources have actively been diverted from other departments to focus on potential IR35 non-compliance.

HMRC may approach businesses engaging off-payroll workers in a number of ways, via HMRC Employer compliance reviews, direct OPW investigations, examining a wider supply chain of labour which you might be part of, or by reviewing Company filings, such as Corporate Tax submissions and research and development claims containing OPW information.

HMRC are also increasingly challenging status determinations, as we have seen with the well-publicised tribunals concerning the sports and entertainment sector. HMRC have become more bullish in the Courts in recent times, as a result of more successful rulings in their favour. However, we have also seen successful appeals in favour of the taxpayer, the most recent being the S&L Barnes Limited “IR35” case.

Who does “IR35” OPW apply to?

IR35 applies to businesses that engage individuals via a Personal Service Company (“PSC"), including via an Agency.  For IR35 to apply, the business needs to be deemed as ‘medium’ or ‘large’ by HMRC. The size criteria for this being that a business satisfies any two of the following three conditions:

• Annual Turnover of £10.2m or more;
• Balance Sheet value of £5.1m or more; and
• Employs 50 employees or more.

Conversely, no such criteria applies in cases where businesses and organisations in the UK engage individuals directly (opposed to via a PSC). As such, all organisations in the UK will be required to manage employment status compliance and should be checking how they have engaged suppliers (e.g. is the supplier a registered business at Companies House or just a sole trader?). 

Please note, HMRC may actively challenge whether an engagement is with a PSC or an individual by interrogating the contract, the invoice and where the money is paid to. It is therefore vital to know your supply chain. Therefore, a good place to start is checking that the PSC is registered at Companies House.

Obligations under IR35 post April 2021

Businesses that are medium or large and that have an engagement falling within the scope of IR35 are required to:

• Accurately determine the tax status of individuals who are engaged off-payroll. This means the End-User has the responsibility for identifying relevant off-payroll engagements and determining the employment status of the worker providing their “personal” services via a PSC. There is no mandatory way or method of determining and assessing employment status in the UK. However, to show reasonable care, it is vital to document assessments carefully and ensure key factors like mutuality of obligation between the parties, control, financial risk, substitution etc have been fully considered.
• Produce a Status Determination Statement (‘SDS’) in respect of status assessments within IR35. The End-User will then be required to distribute the SDS to the PSC (and any Agency where applicable). Again, there is no mandatory template or format in which to produce a SDS. Many businesses look to use HMRC’s Check Employment Status Tool (“CEST”) here given it is free and has been created by HMRC. However, HMRC will only stand by the result if the assessment is “accurate”.
• If the worker is deemed to be ‘Inside’ of IR35, the Fee payer (end-User or Agency responsible for payment to PSC) will be required to deduct (and pay to HMRC) Income tax, Employee’s National Insurance Contributions, Employers’ National Insurance Contributions, Student loan deductions and potentially Apprenticeship Levy via payroll as a “Deemed employment payment”.
• In a scenario where the PSC/contractor disagrees with the SDS provided, the End-User will be required to review any new information provided by the PSC/contractor and ‘re-assess’ the IR35 status. The End-User will have 45 days to enact this reassessment. In this scenario, it is useful to have a thorough process to deal with disagreements in place.

Please note, all public sector organisations also need to manage employment status in the same manner as medium/large businesses.

Is CEST sufficient?

Accuracy of HMRCs CEST tool

HMRC’s CEST (Check Employment Status for Tax) tool has been widely criticised, primarily due to the tool not accurately reflecting case law, particularly seen in recent employment status tribunals. Specifically, the CEST tool does not accurately represent the Tripartite test established within ‘Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497. Specifically, the tool:

• Omits ‘Mutuality of obligation’ from its analysis, inflating ‘inside’ determinations – this remains a key area of review given the position of the PGMOL case.
• has a different approach to assessing the level of control held over how contractors perform their services.
• Undervalues contractors operating as a ‘Business on own account’, inflating ‘inside’ determinations. This has been particularly poignant within key recent case law victories such as S & L Barnes Ltd v HMRC [2023]. 

Given this, it would be more suitable to apply a more holistic assessment, with assistance from relevant specialists to produce accurate assessments that are supported by the current case law.

Engager reliance on the CEST tool

Of the 1,125,408 determinations given up to 23 Sept 2021, a significant 20.8% of determinations are declared as ‘undetermined’. In this scenario, the engager/End-User would still be responsible for finalising the status determination outside of CEST.

Concerningly for businesses, HMRC are increasingly challenging and dismissing the outputs from CEST in reviewing an end-clients’ efforts to be compliant within IR35. Therefore, you may not be able to rely on the use of CEST to demonstrate the ‘reasonable care’ HMRC are expecting. Before conducting a CEST review, HMRC will refuse to validate an assessment in the scenario where:

“information you have provided was checked and found to be inaccurate. Additionally HMRC will also not stand by results achieved through contrived arrangements designed to get a particular outcome from the services. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties”.

Therefore, who is defining “accuracy” and how it is being defined leads to disputes and challenges, particularly where there is a lack of clear governance and policy in place.

Given the above, if an engager/End-User chooses to rely on CEST, it is imperative that their understanding of the circumstances of any engagement is thorough, and that they have accurately answered the CEST questionnaire.

Key takeaways

• Engagers should be fully aware of their supply chain, particularly the presence of any PSCs providing personal services.
• Engagers within the scope of ‘IR35’ should have strong controls and governance in place around compliance, particularly the production and distribution of accurate SDSs.
• Have a thorough appeals process in place to deal with disagreements.
• Ensure ALL staff involved in the engagement process hold a thorough understanding of the organisation’s IR35 obligations.

Further support

Our team has extensive experience with supporting clients in managing their IR35 obligations. These include (but are not limited to):

• Framework/governance risk reviews, including follow up consultancy relating to improvements to existing processes.
• Educational workshops to ensure an end-client’s obligations are known throughout the business.
• ‘Role-based’ and Bespoke individual Employment status assessments
• Expert support in managing a HMRC compliance review.

If you believe any of the above could be useful to you or wish to discuss any other Employment related matters, please do get in touch with our Employment Tax team.

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