The IR35 Assessment is one of the most hotly discussed topics of UK tax legalisation for 2020.
A lot of this hot gossip focuses around what happens 'on the ground' within a business and a little term call reasonable care. Let's look at both.
To do the assessment you need to think carefully – it’s a little bit about contract terms, but a lot about on the ground working practices. All these sorts of things need considering (according to HMRC’s manual):
"Control, personal service, equipment, financial risk, basis of payment, mutuality of obligation, holiday pay, sick pay and pension rights, part and parcel of the organisation, right to terminate a contract, opportunity to profit from sound management, personal factors, length of engagement, intention of the parties."
HMRC also quote one of the famous cases about how to work out the employment status of someone:
"It must be emphasised that status in not a matter to be determined by running down some form of check list or adding up the number of factors pointing toward employment and comparing that result with the number pointing toward self employment. It is a matter of evaluating the overall picture that emerges from a detailed review of all the facts."
So it’s a difficult process to get right, but you still have a legal obligation to take reasonable care when making that assessment. If you don’t take reasonable care, you could increase your tax risk.
HMRC has given little guidance on what that means in the context of IR35 and therefore businesses have been left to debate what it is they have to do to jump this regulatory hurdle. There is some guidance on what ‘reasonable care’ means generally under tax law, and it’s clear that it will be judged subjectively, taking into account ability and circumstances. What would a prudent and reasonable version of you do in the circumstances, taking into account the nature and resources of your business? Being flippant about compliance or generally careless when undertaking assessments won’t cut it with HMRC.
Whether we get more guidance on what constitutes reasonable care in the IR35 context remains to be seen, because right now the final details are not known. But it is clear that affected private sector businesses must give serious consideration now to whether they have the in-house resource and expertise to implement these changes, or whether they must look outside for support.
Remember, if you don’t use reasonable care, you bear the tax risk for non-payment of income tax and NICs.
HMRC have built a tool named CEST to help clients make their assessment using reasonable care. We would recommend familiarising yourself and key people within your organisation with this tool now.
However, there are questions about its effectiveness, mainly due to the fact that some of the items that must be considered during the assessment process (mutuality of obligation between a client and the contractor, for example) are missing from the tool.
HMRC recognise that the tool needs to be improved and are working on it, but this is a classic ‘chicken and egg’ scenario: internal systems and processes are likely to need to be ready before any new CEST tool
It is also possible to use the CEST tool and not get a definitive in or out of IR35 answer. The third scenario is that more information is needed and you need to ring HMRC. This is not a practical method if you have to do this for every single contract with a contractor in your business.
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