By Jayne Flint

Short-lived chancellor Kwasi Kwarteng had announced in his ‘minor fiscal event’ that the Government was intending to scrap the Off-Payroll Working Rules, often referred to as ‘IR35’ (the Rules) from 6 April next year. However, on 17 October, his replacement Jeremy Hunt confirmed that this is no longer the case.

The Rules were changed for the public sector in 2017, when liability for determining the tax position fell to the entity engaging the contractor (the ‘End User’). After several false starts, the changes came into effect for the private sector from April 2021.

The Rules stipulate that where a consultant provides services through a personal service company (PSC) which passes the ‘gateway test’, the End User will be responsible for determining the deemed employment status of the consultant for tax purposes before the engagement commences.

This is achieved by the End User carrying out a Status Determination Assessment (SDA). To assist business, the Government introduced its own SDA, which is known as ‘CEST’ (Check Employment Status for Tax). A written copy of the results must be provided to the PSC.

If the SDA confirms that the consultant has deemed employment status, the fee payer (usually the End User) will be responsible for paying tax and National Insurance contributions.

IMPLICATIONS OF RETAINING THE RULES

The Government’s rationale for its original proposal to scrap the Rules was to try to reduce the complication for businesses of administering tax. It is certainly the case that transferring responsibility for determining a consultant’s tax position has added an additional layer of administration for businesses; and many organisations have revised their engagement and payroll processes to ensure compliance, which has taken significant time and investment. 

There is also concern regarding the certainty of the CEST tool itself. Particularly, that the questions can be difficult to answer with conviction and some results have been found to be incompatible with recent tribunal decisions, especially with regard to the mutuality of obligation test. 

"This is important because a business that is not compliant will be at risk of negative audit from HMRC"

The results often come back as ‘inconclusive’, which means that despite Government assurance on its website that it will “stand by determinations given by the tool, so long as the information remains accurate”, the user still on occasion has to make a judgement call, even after applying the CEST test. 

This can often result in a contractor being put through payroll where their status cannot not be clarified with absolute certainly, and the End User (understandably) takes a risk averse approach in order to avoid future action by HMRC, even where the parties do not necessarily agree that the test for deemed employment status has been met.

The Government’s decision not to repeal the Rules has therefore come as a big blow for businesses who were, no doubt, looking forward to no longer navigating through this process each time they engage contractors via a PSC. Unfortunately, however, given the continuation of the Rules, these issues are likely to continue to challenge organisations that engage consultants in this way.  

ACTION TO TAKE

Businesses should continue to apply the IR35 Rules. Any organisation that is still not confident about the applicability of the Rules to them should seek expert advice. This is important because a business that is not compliant will be at risk of negative audit from HMRC. 

Remember that the concept of deemed employment status for tax purposes is irrelevant to the consideration of an individual’s status for employment law purposes. Confusingly, this means a person could have deemed employment status for tax purposes, but not be classed as a worker under employment law, or vice versa. 

If an employment tribunal considers that a person is a worker and not a self-employed contractor, that person will be afforded protection as either a worker or an employee (depending on their status). This may include, for example, the right to take paid holidays, to claim unfair dismissal and other rights under the Working Time Regulations, which can be costly to businesses, as recent cases such as Pimlico Plumbers v Smith (2018) and Uber v Aslam and others (2021) have illustrated.

Recent history also suggests that future changes to the Rules cannot be ruled out.

Jayne Flint is an employment team associate at Womble Bond Dickinson, a full-service international and top 20 UK law firm