New legislation published today will make businesses and other organisations responsible for determining the tax status of the contractors they hire through their own companies and ensuring the necessary employment taxes are paid. Tax advisers are warning that unless there are significant improvements to HMRC’s Check Employment Status for Tax (CEST) tool the new rules1 will lead to uncertainty and protracted disputes.
These comments from the Chartered Institute of Taxation (CIOT) come after the Government today published draft legislation to extend the ‘off-payroll working’ rules, that currently apply to the public sector, to the private sector.
The CEST tool was launched in April 2017 (at the same time as the off-payroll working rules were introduced for the public sector) to help businesses and workers decide the employment status of their engagement. The CIOT has repeatedly raised concerns that CEST does not factor in all the necessary criteria (established in case law) that need to be considered in arriving at its decision as to whether or not IR35 applies; a view borne out by the cases that have been argued in the courts over the years, numbers of which have gone against HMRC2. Consequently, CEST does not always give an accurate employment status determination, and this does not instil confidence in those relying on CEST to help with status decisions, warns the CIOT.
Colin Ben-Nathan, Chair of CIOT’s Employment Taxes Sub-committee, said:
“If businesses are to make the correct decisions on whether the off-payroll rules apply then CEST will need to be significantly improved. While HMRC is looking to enhance CEST to ensure it works more effectively, and will be engaging with stakeholders to test these enhancements, it is only undertaking to roll out the new service before the new off-payroll working rules are introduced next April. However, businesses are already making decisions on contracts and projects that will extend beyond next April and they, and their contractors, need to know urgently how those contracts will be taxed from April 2020. So we think that the improved CEST tool needs to be ready by October 2019 at the latest so that new and existing contracts can be reviewed by April 2020.
“Until CEST takes proper account of mutuality of obligation, multiple engagements, contractual benefits - such as holiday pay, maternity/paternity pay - and whether someone is in business on their own account, it is unlikely it will be able to reach the right decision on status. And this is key because otherwise the lack of confidence in CEST will increase disputes between businesses and contractors and so lead to significant time and effort having to be expended by businesses, contractors, HMRC and the courts in trying to resolve them.”
The draft legislation extending the off-payroll rules from the public sector to the private sector also includes the Government’s approach to exempting small entities from the off-payroll rules and the transfer of liability for PAYE and NICs to the top agency or the end client where an agency further down a supply chain is in default3. HMRC have said this will clarify the steps clients and agencies will be expected to take to show they have taken reasonable care and so avoid a transfer of liability, however CIOT thinks a defence of ‘reasonable care’ should be reflected in the legislation.
Colin Ben-Nathan continued:
“We welcome the Government’s confirmation that small private sector entities will be excluded from the off-payroll working rules, although we are disappointed that the Government has not extended the exclusion to small public sector entities to ensure a level-playing field.
“We also suggested the Government re-consider how employee numbers are to be calculated in the small entity test, as a test based on a simple count of employee numbers (even if averaged across the year) may discriminate against businesses with predominantly part-time employees. While we welcome the Government’s decision that for unincorporated entities a straightforward turnover test will be the sole test of whether the entity is small, for incorporated companies the Companies Act tests will be used and this includes the employee numbers test. We think it would be unfortunate if this test affected the behaviour of some small companies by discouraging them from taking on part-time employees in order to retain their ‘small’ status.
“We also remain concerned by the transfer of liability provisions whereby a failure on the part of a party further down a supply chain can result in PAYE and NIC liabilities falling back to the top agency in the supply chain – and ultimately, where HMRC is unable to recover the liability from that agency, the end client. We agree that there is a need for all parties in the labour supply chain to act appropriately and diligently. However, where HMRC are unable to recover the PAYE and NICs, we think it is unfair and disproportionate for the liability to simply be transferred to the top agency/end client. The Government has said that they do not intend the transfer of liability provisions to apply in cases of genuine business failure but rather than legislating for this they have said that HMRC will clarify the position in guidance. We think the Government should legislate along the same lines as applies for agency workers where liability for PAYE is only transferred in very narrowly defined circumstances.
“Notwithstanding the draft legislation published today on implementation of the off-payroll changes in the private sector, the reality is surely that a more strategic review is required of the taxation of labour so that the differences between being taxed as an employee, as self-employed and contracting via a company are minimised or at least made clearer. Matthew Taylor’s Good Work Plan, published in July 2017, and the Government’s initial response last December represented a start but moving things forward should now be a key priority.”
Notes for editors
1. The off-payroll working rules (often known as ‘IR35’ after the government notice which announced the rules back in 1999) apply to those deemed to be working like employees, typically through their own company. They do not apply to the self-employed.
2. The complexity of IR35 has been noted in First Tier Tribunal decisions such as Albatel (Lorraine Kelly), MDCM, Jensal Software, Atholl House Productions (Kaye Adams) and most recently Kickabout Productions. These cases are examples of where HMRC’s views as to employment status have not been upheld and highlight an important issue with CEST, which is that if the output from the tool does not reflect the decisions made by the courts (and, in particular, if CEST returns ‘false positives’ in such cases), this will not instil confidence to those relying on CEST to help with status decisions. And, ultimately, this will increase the number of cases where status is ‘in dispute’. More recent cases have also highlighted the disparity between HMRC’s views on employment status and that of the courts and tribunals.
3. Often one or more agencies will act as an intermediary as between the business and the contractor’s company which can complicate the flow of funds and deductions for income tax and NICs.
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
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