In recent weeks there have been a couple of interesting developments in relation to IR35.
IR35 is concerned with the tax treatment of workers who provide their services via an intermediary (e.g. a Personal Services Company ('PSC')). In April 2021 the IR35 rules were extended to private sector organisations.
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HMRC has acknowledged that in the first year of IR35 implementation in the private sector, it will need to educate employers and the hope is that enforcement will not be overly officious.
However, a recent HMRC IR35 determination demonstrates how HMRC can approach enforcement and the risks to organisations of getting it wrong. HMRC found that the Home Office was to pay £29.5m in relation to lost tax revenue and a further £4m penalty for incorrectly determining the IR35 status of its contractors. The £4m penalty was handed down as HMRC considered that the Home Office had been "careless" in its implementation of the rules.
The above followed a HMRC ruling that the Department of Work and Pensions was to pay £88m in tax due to the application of the off-payroll working rules. It is understood that DWP used HMRC's CEST tool and, given that this tool is legally binding provided that reasonable care is exercised in its use, one can only assume that HMRC consider DWP did not take reasonable care when using the tool, which is of some concern given that many would consider CEST to be less than intuitive in many instances.
One of the main difficulties for organisations when considering compliance with IR35 is making a status determination. That is, in essence, determining whether or not the worker, absent the intermediary, would be deemed to be an employee, for tax purposes, of the end-user client (i.e. the organisation to which the worker ultimately provides their services).
Determining employment status is a notoriously complex matter, even for lawyers who are experts in the particular field. There are many factors to consider and a status determination is extremely fact-specific, so it is important that organisations are aware of how the arrangements operate in practice.
The UK Government has attempted to assist employers in making status determinations with the creation of the Check Employment Status for Tax ('CEST') tool. Whilst CEST is undoubtedly helpful and we would say it is an essential part of undertaking a status determination, in most instances, it is too simplistic and does not cover all aspects of the arrangements. CEST cannot take account of nuances that exist in working arrangements that can have a significant impact on status determination. We often find that employers use CEST and despite its genuine application, achieve determinations that we consider would not be the outcome in law because the facts are more complex than CEST can analyse.
Status determination has arguably become more complex given the recent decision of the Court of Appeal in Professional Game Match Officials Ltd v HMRC. The case concerned the employment status of football referees. The Court of Appeal agreed with the Upper Tribunal's decision that there was no overarching contract of employment with the referees but considered that on each assignment (i.e. a match day) there could be a contract of employment. The Court of Appeal referred the case back to the Upper Tribunal to consider whether or not there was a contract of employment during each assignment.
This is an important decision, as many arrangements with workers who provide services via a PSC involve the worker being on a form of bank/panel that can be called upon as and when the employer requires. It is often considered in such circumstances that if the employer has no obligation to offer work to the worker and the worker is under no obligation to accept the assignment when offered, then it is a significant indicator that points away from employment status for IR35 purposes. However, this case raises the issue that each assignment may give rise to employment status, and therefore the rules in respect of IR35 would apply.
The question of employment status for tax purposes is complex and the speed of change in its interpretation appears to be increasing, as cases, especially in relation to "gig" economy workers proceed to higher courts to determine employment status for both tax and employment rights purposes. As such, it is vital for employers to review their status determinations regularly.
Should you have any concerns regarding your IR35 compliance, including status determinations, please do not hesitate to contact one of our experts.