In the last year, many organisations that employ contractors have been assessing ir35 status internally.
It is unsurprising to hear that many have put their faith into the Government’s CEST tool. Made specifically to generate a response to IR35 queries, the tool asks a range of questions. It questions the way the worker will be paid and who chooses when, and where, the worker works.
It also has questions about the end-user, duties or the worker and their entitlement to benefits. The tool then takes these answers and produces a result of employment status. Effectively, it tells the person inputting the questions how to classify that worker for IR35.
You would think there was a responsibility here to ensure it always gives an accurate result, wouldn’t you? Well, you might be wrong about that part.
The CEST tool does produce some indeterminate results. In these instances, it cannot give a final ruling and then professional help should be sought. Between November 2019 and August 2021 there were over 400,000 instances where it failed to give a result.
This is a huge number of hours of additional work for these organisations. Some might say if this tool cannot be relied upon then what is the point of having it at all. There are also cases where increasingly, the CEST tool has shown someone should be considered outside IR35 and then HMRC have come back later to state that this was wrong.
There is the possibility that thousands of users thought they were doing the right thing around IR35, and they have apparently not.
Recently, a company has forensically analysed the code that CEST is based upon. Additionally, they compared HMRC’s failed legal arguments against new laws from the IR35 case against Atholl House in the Court of Appeal. This was based on the case’s primary grounds for appeal that HMRC lost, involving the presenter, Kaye Adams.
The company found failings in CEST, not least its analysis of the questions, which is somewhat basic. There is also evidence that HMRC will not always stand by the information given by CEST.
They say their organisation “will stand by the result given unless a compliance check finds the information provided isn’t accurate.” This certainly gives them the opportunity to step back from the CEST tool as often as they wish.
In February, HMRC made a commitment to ensure that the CEST tool is fully updated. This is even more vital than before as so many new organisations are using it. At this moment in time, businesses potentially risk non-compliance with IR35 if they choose to use CEST.
The stakes are high when they use CEST when assessing ir35 status. Although it does seem to err on the side of putting contractors inside IR35 which is perhaps a safe position for businesses, this is not exactly fair for contractors.
Hopefully they will make good on their promise and make the necessary improvements. A more sophisticated, and fair CEST tool will be a great benefit for businesses now and in the future.
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What Does an £11 Million Tax Bill Mean for Contractors?
It seems that umbrella companies cannot help but spend time in the headlines at the moment.
Although, this is not the place to be, especially not when it leads to a huge £11 million tax bill to pay. That has certainly been an ouch moment for Exchequer Solutions Ltd. (ESL). They just lost their first-tier tribunal against HMRC regarding the tax rules prior to 2016.
The basis of the case is in whether an overarching employment practice was operating at that time. There is an issue with the claiming of expenses and that every workplace could be considered ‘temporary’. This is not the case now and things have changed. It offers an important lesson though.
There are always things that umbrella companies hinge their business practices on. They need to ensure they are competitive and attractive against the next umbrella company. What will ensure that a client chooses them rather than another provider?
They need to find a method or a loophole that will give their clients something back. This is all well and good, but it does create issues as so many of these potential loopholes are in a grey area. That is to say that no one can be sure whether HMRC is going to choose those issues specifically to pick up on later.
This is and will always be a risk, where HMRC think that rules have been broken. They do not hold back coming after potential culprits.
In the case of umbrella companies, perhaps for contractors this is not such an issue. As in the ESL case, it is the umbrella company that has the liability when issues such as allowed expenses are challenged.
However, there is always the potential of something going awry. If you get an offer from an umbrella company offering a new kind of allowance, it would be worth taking caution. Read your contract carefully and do not be afraid to ask and challenge things you are unsure about.
With the rise of preferred supplier’s lists for umbrella companies, it is doubtless that contractors may find themselves working with unfamiliar umbrellas more and more.
Whether ESL will need to pay an £11 million tax bill is yet unknown. This is only the first-tier tribunal so can be further challenged. Even if not, they may yet come to a settlement to make it all go away quietly.
Either way it is yet another example of HMRC putting themselves out there in these kind of cases. It is wise to remember that this can happen anytime and many years later, not just with something recent. So, contractors should not get too excited that the risk is all with the umbrella company and there is no personal culpability.
It is still important for contractors to ensure that everything feels right and above board, such as with expenses. Everything must be real and as accurate as possible. This is the way to ensure that you are operating within the rules of law, whether they are a little grey or not.
