IR35 and the CEST tool – the saga continues
01 October 2019
This article was featured in the October 2019 issue of the magazine.
Peter Minchinton, employment taxes senior manager at PSTAX, reveals changes that have implications for those relying on the tool’s outcomes
Following the ‘success’ of IR35 in the public sector, off-payroll working is to be extended to the private sector from 6 April 2020.
Although the public sector has lived with off-payroll working for a few years, this is no time to be complacent as there are changes afoot to the rules that will also impact on the public sector.
End-clients will need to implement processes to comply with these proposals, which are summarised below.
HM Revenue & Customs (HMRC) will explore enhancements to the check employment status for tax (CEST) service and associated guidance which will be available to use before the reform comes into force from 6 April 2020. This would require training and updating of internal policy materials. Previous status checks via CEST might be incorrect in the context of the new guidance and would have to be reconsidered. (See Changes to the CEST tool, below, setting out details of certain changes that have already been made.)
The legislation will require engagers to provide a status determination statement directly to workers they engage, as well as the party they contract with, giving off-payroll workers enough certainty over their tax position and their obligations. Engagers will need to implement processes to comply with this requirement.
With regard to the status determination statement the new legislation incorporates section 61N(a) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), as set here:
(1) For the purposes of section 61N ‘status determination statement’ means a statement by the client that (a) states that the client has concluded that the condition in section 61M(1)(d) is met in the case of the engagement [within IR35, (writer’s addition)] and explains the reasons for that conclusion, or (b) states (albeit incorrectly) that the client has concluded that the condition in section 61M(1)(d) is not met in the case of the engagement and explains the reasons for that conclusion.
(2) But a statement is not a status determination statement if the client fails to take reasonable care in coming to the conclusion mentioned in it.
The legislation extends the existing provisions to provide an effective mechanism for the liability to tax and National Insurance contributions (NICs) to be passed down the labour supply chain from one party to the next.
...intention is to discourage end-clients from trying to achieve ‘out of scope’ outcomes...
The legislation requires that all recipients of a status determination must pass it on to the next person in the contractual labour supply chain to ensure that fee-payers who are farther down the chain have the information they need to comply with the rules.
Where the fee-payer or worker has not received the reasons for a status determination the legislation will provide the off-payroll worker the right to seek them from the engager.
There will be a framework for resolving disagreements over employment status decisions for off-payroll workers. However, this might involve end-clients in complicated and time-consuming dispute resolution. The legislation will allow a process allowing for status determinations to be challenged based on a set of requirements set out in the revised legislation at section 61T of ITEPA.
This means that if the worker or the fee-payer disagrees with the determination that has been made then the end-client must review the facts that caused that determination to be made and confirm or revise the determination as necessary. This must be done within 45 days of the request from the worker.
If the end-client confirms that determination, then the end-client/fee-payer must continue to account for tax and NICs. There is nothing apparent in the new legislation that gives the worker or the fee-payer any grounds for appeal against a confirmed determination during the tax year.
Changes to the CEST tool
Although the CEST tool will be updated for April 2020 we know that the tool has changed several times since its inception. For example, the substitution question changed from a positive response (to establish a lack of personal service) to a negative response (“No, we would always accept a substitute…”).
More work has been carried out on the tool lately to make it much more likely to conclude an ‘in scope/employed’ outcome. A summary of the obvious changes follows.
Office holder – The tool has added an exclamation mark with the comment “If you are not sure if these things apply, please ask your management about your organisational structure”.
Personal service – If referencing an engagement that has already started, the tool now offers three potential responses to the question “has the worker’s business arranged for someone else to do the work…”. They are “Yes, and we agreed”, “Yes, but we did not agree” and “No, it has not happened”.
m If the first response is selected, the tool misses out the ‘right to reject’ question and goes straight to the ‘who pays the substitute’ question. If the worker’s business has paid the substitute, the tool confirms an ‘out of scope’ outcome.
m If the second response is selected, the tool also skips the ‘right to reject’ question and moves straight to the ‘worker using a helper’ question. This suggests a view by HMRC that, if the end-client does not agree a substitute, then it must always be personal service. This would appear to be misleading as the true test relates to the right of the worker to provide a substitute, regardless of whether the end-client agrees. The fact that the end-client may not agree is only relevant if the end-client has that right in the first instance.
If the third response is selected, the tool moves to the ‘right to reject’ question and then, if ‘No’ is selected, to the ‘who pays the substitute’ question. If the worker’s business pays the substitute, then the tool confirms an ‘out of scope’ outcome. However, the wording on the tool has changed. It used to advise that, if HMRC investigates, it will be necessary to show that there has been substitution in practice. This was an illogical statement given that the person completing the tool has already responded ‘it has not happened’ to the question regarding substitution.
The revised response states “If HMRC investigates this engagement, the end-client will need to confirm that they would accept substitution. They may also be asked to demonstrate that they have accepted substitution during this, or a similar, engagement.”
Where the person completing the CEST tool has stated that the engagement has not yet started, the tool goes straight to the ‘right to reject’ question, as previously.
Control – These questions appear to be unaffected by the recent revisions to the CEST tool.
Financial risk – Before these most recent changes to the CEST, the positive responses to the question “What does the worker have to provide that they cannot claim as an expense…” would all have resulted in an ‘out of scope’ outcome. However, the tool now distinguishes between the four answers. Where “materials” or “equipment” are selected, the tool confirms an ‘out of scope’ outcome. However, where “vehicle” or “other expenses” are selected, the tool continues to the remaining questions. It is difficult to determine to what extent the outcome is affected by these two latter responses. Completion of the tool to the end, with ‘standard’ out-of-scope answers, seems to result in an ‘Unable to determine’ position.
Integration – These questions appear to be unaffected by the recent revisions to the CEST tool.
By way of summary, the changes to the tool made by HMRC are not only ‘unannounced’ but also have a significant impact on the CEST outcome. Consequently, it is much more difficult to conclude ‘out of scope’ based on financial risk. The changes to ‘personal service’ are more neutral and, on balance, justifiable given that the intention is to discourage end-clients from trying to achieve ‘out of scope’ outcomes based purely on the ‘substitution’ question.
In conclusion, end-clients and fee-payers are advised to review both tax status policies and CEST procedures well before April 2020 to ensure they are prepared for the changes to come into effect next year. The government has pledged to legislate for employment status and, therefore, we can expect many more changes in this area over the coming years.