IR35 status determination

The Finance Bill 2020 saw an end to IR35 self-determination for contractors except for those working for small companies. For every other arrangement, the party who is responsible for determining IR35 status is the beneficiary of a contractor’s service and skills.

In our series of articles on IR35 determination for employers, we’re examining the process of IR35 status determination today.

For more information, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.

What the new rules require

HRMC now requires employers to provide a status determination statement (SDS) for each contractor they have an arrangement with under the new off-payroll working rules.

Status determination statements include:

a contractor’s employment status
the reasons behind this decision

Status determination statements are now a statutory obligation for employers. They’re also the best way to manage the financial risk you put yourself in every time you determine the nature of your arrangement with a contractor and the resulting tax liability.

If you hire contractors directly, your company is both the “end client” and the “fee payer” under the new rules.

If you hire through a recruitment agency or an umbrella company, your business is, more often than not, classed as the end client and the recruiter/umbrella is classed as the fee payer.

End clients must inform every other party in the contractual chain of an employment status decision on a contractor. This is especially important in longer supply chains.

The fee payer is responsible for collecting income tax and National Insurance contributions (plus the Apprentice Levy if applicable). They must also report any tax paid.

Is using HMRC’s CEST tool “reasonable care”?

You must demonstrate reasonable care when deciding a contractor’s employment status.

You might believe that using HMRC’s Check Employment Status For Tax (CEST) tax tool would be a reliable and trustworthy way to check if a contractor is really self-employed or whether they are, to use the taxman’s phrase, a “hidden employee”.

There are many reasons you shouldn’t trust CEST.

First, HMRC doesn’t make a record of CEST tests.

Second, you can include screenshots of CEST tests in with your IR35 written statement but, if HMRC doesn’t agree with your status decision, then they’ll say that you filled out the CEST wrong in the first place.

Third, and perhaps worst of all, the IR35 test does not constitute reasonable care on the part of HMRC. Contractor Calculator recently revealed that CEST’s source code has been flawed since November 2019.

What if your IR35 status determination is wrong?

If HMRC decides that your assessment of the working arrangements of a contractor is incorrect, they will launch an investigation.

If your status determination is found to be incorrect, they’ll fine your company the tax owed and a penalty on top.

You’ll be liable for your contractor’s:

Income tax
National Insurance contributions (employers’ and employees’)
Tax on any employee benefits received

The severity of the fine will depend on the circumstances. The less reasonable care you’ve taken, the higher the fine.

You can appeal to the First Tier Tribunal. HMRC does have a long history of losing First Tier Tribunal cases which is good to know.

But is it really worth the time, expense and hassle in the first place? This fear of investigation and company liability is part of the reasoning why responsibility for determination was passed from the contractor to the hiring organisation instead.

Why role-based assessments are very bad for determining employment status

Some employers may be tempted to use role-based assessments to create status determinations for contractors doing roughly the same job. They’re like narrower blanket assessments that some employers apply to contractors in general.

Please don’t do this for your business.

HMRC does not consider role-based assessments as a valid assessment methodology when determining self-employment status. Your business insurance writer will not underwrite these assessments and, under current tax law, their use is likely to be deemed as careless.

If HMRC believes your company has been careless, the consequences can be severe.

They may start looking at the tax you have paid as a business as a whole over the last six years looking for other examples of “carelessness”.

Contractors may also object to being assessed by role leading to potential challenges and litigation against your company.

You need to approach this case by case. Consider individual contractors’ working practices and a host of other factors. Is the contractor obliged to deliver all services personally? Can you prove that each contractor is in business on their own account? The same high degree of due diligence needs to be applied for all contractors’ employment status decisions.

Deciding IR35 status for your contractors

We cover what you need to consider when creating a status determination statement in our next article – “What determines IR35 status”?

CoComply is here to help employers navigate the new IR35 legislation. Rather than seeing it as a threat, see it as an opportunity. With so many employers declaring work within IR35 now, set yourself apart by ensuring that your contractors are outside IR35. Save money for your company and allow your contractors to keep more.