Should this decision be maintained, advisers will need to consider not just the substance of the activities carried out, but also the contractual basis on which relationships are formed — in particular, whether clients should establish a general partnership (and sign any contracts themselves) to guarantee that they are out of scope of IR35.
HMRC’s approach
In recent years, HMRC has enquired more frequently and successfully into off-payroll arrangements — particularly with certain public bodies such as the Department for Environment, Food and Rural Affairs, the Ministry of Justice, and the Department for Work and Pensions — considering them to be a source of increased tax liability.
In March, the success of the rules was quantified by the Office for Budget Responsibility, which estimated an annual tax yield resulting from IR35 reform of £1.5bn (double its previous estimates), with much of the new revenue resulting from deterring non-compliance by imposing greater risk on end clients.
However, HMRC’s wins have not come without losses as well. Lineker and Kelly (among other media personalities) for instance, have shown that HMRC’s opinion is just that — an opinion — and is not always held up by the courts.
Combine these losses with the fact that private companies may be more reluctant than the type of public bodies referred to above to accept HMRC’s stance, and the department might find it more difficult to increase revenues through enquiries in future years.
To minimise the prospect of HMRC enquiries, businesses should tighten policies around employment status determination. A good starting point for this is to use its Check Employment Status for Tax tool. However, there are some important considerations to take to ensure a determination stands up to HMRC scrutiny.
HMRC states that it will honour CEST outputs provided the information given remains “accurate” for the whole engagement.
On the surface this seems like a fair concession; if responses are accurate and give a self-employed determination, HMRC will stand by it. However, the danger is that HMRC’s guidance and its approach to cases makes it difficult for clients to ensure that they have been sufficiently “accurate”.
For example, HMRC considers that where an end client has a right to control (regardless of whether control is exercised), the engagement relationship is one of employment. Consequently, if it views that the end client will always have a hypothetical right to control, any answer provided in CEST to the contrary could be treated as inaccurate.
A reasonable concern, therefore, is that HMRC may always reject CEST outputs where a self-employed outcome hinges on control.
Similar concerns also apply across other factors, such as the right for a contractor to send a substitute. At face value, it might be interpreted that a contractual right to send a substitute demonstrates sufficient accuracy for CEST purposes. However, in practice, HMRC will only accept substitution as a relevant factor where there is a genuine unfettered right to it.
