Six months into the application of the off-payroll working rules for the private sector and we are still seeing evidence of the problems caused by the unsuitability of HMRC’s Check Employment Status Tool (CEST).
These same rules have been in operation in the public sector since April 2017 and it seems that even the Home Office and Department of Works & Pensions are struggling to apply them properly for their own contractors.
This inability to understand and apply the IR35 rules correctly, even with the ‘assistance’ of the CEST, resulted in further tax and National Insurance liabilities of nearly £30m for the Home Office and £89m for the DWP. These liabilities were revealed in the Departments’ Annual Report & Accounts published this summer and followed enquiries into the status of their contractors launched by HMRC.
Although we are not made fully aware of the circumstances of the HMRC enquiries it seems that the Home Office may have acted ‘carelessly’ in its application of the off-payroll rules. They were hit with a suspended penalty of £4m provided they met certain conditions.
The Home Office Accounts describes these as:
"...meeting our notification and filing obligations, a 100% assurance check on all out of scope determinations, improved governance around our use of contractors and contingent labour, improved training of hiring managers and improved monitoring and assurance over compliance with IR35, not just at the point of procurement but throughout the contract life-cycle..."
The clear implication from this is that not all contracts were examined and/or reviewed during their existence. It seems too that they failed to take specialist advice which would probably have come up with alternative determinations. Such an approach to compliance highlighted both Departmental deficiencies and how easily CEST decisions can be set aside by HMRC during an enquiry.
The DWP’s disclosure and admission of its IR35 liabilities was a little more guarded in the settlement it reached with HMRC for the years 2017 -21. It explained that it had received a letter of offer from HMRC which covered income tax, national insurance, and interest.
No mention is made of penalties, suspended or otherwise.
In its defence the DWP explained:
"... IR35 legislation from 6 April 2017 required public sector bodies, where they engage off-payroll workers, to ensure they correctly assess their "employment status" i.e., correct tax treatment. To do this, DWP utilised HMRC’s CEST (Check Employment Status Tool)."
Lessons to be learned from these mistakes by Government teams who should probably have known better, include the continued need to lobby for a reform or radical improvement of CEST.
Julian Ball, PayStream's Legal Director, says:
"CEST is a useful resource for those that are familiar with IR35 although it needs to be updated to reflect case law and not HMRC’s concept of it which suits its own agenda. For non-experts (like the DWP) it can lead to disaster as HMRC will argue that they would not have answered questions in the same way and will not therefore stand behind the CEST result. Whilst we wait for the drive for a ‘fit for purpose’ CEST, contractors, end clients and everyone in the supply chain should be taking specialist, professional advice in arriving at status determinations. Getting it wrong can be very expensive.
The advantage of using an independent status review service like PayStream’s IR35 Comply is that there is a human being evaluating all of the information provided by the contractor, agency or hirer. This allows us to paint a picture of the overall working circumstances of the role before determining an IR35 status. That independent, specialist review satisfies the reasonable care requirement and can protect the individual or organisation involved."
