In 2017, HMRC launched its Check Employment Status for Tax (CEST) tool to help contractors and end clients determine their employment status for tax purposes when working on specific engagements. The aim of the tool is to help contractors and end clients stay on the right side of the IR35 rules, but it’s faced widespread criticism for being inaccurate and causing more harm than good. Indeed, HMRC admits that in 15% of cases, it can’t provide an accurate determination. So, what happens if you find yourself in that 15%? Or maybe you’ve taken the test and your IR35 status differs to what you think it should be. Do you still have to pay more tax?
If you haven’t used the CEST tool before, it’s basically a questionnaire with multiple choice answers that you fill in about a particular engagement with a client.
The types of questions to expect include:
- Has your business arranged for someone else (a substitute) to do the work instead of you during this engagement?
- Once you start the engagement, does the end client have the right to decide how the work is done?
- Can the end client decide the schedule of working hours?
- Can you choose where you work?
If CEST classes your engagement as self-employed for tax purposes, then you should be paid a gross amount without deducted tax or National Insurance.
But if CEST classes your engagement as employed for tax purposes, then it stipulates that you should tell the organisation that pays your fees (the fee-payer) to deduct tax and National Insurance from your payment. And you could end up being worse off than you expected.
According to HMRC, an individual with an income of £50,000 who works through their own company, but doesn’t follow IR35 the rules, will contribute around £6,000 less (through tax, National Insurance and employer’s NICs) than somebody doing a similar job as an employee. This includes employer NICs contributions of around £5,000.
What to do in the event of a wrong IR35 status outcome
If you believe that your IR35 status has been wrongly determined then don’t give up hope straight away. Firstly, it may be worth doing the CEST questionnaire again, just in case you misread a question or two. Even after that and you still don’t get the outcome you expected, all is not lost. You have options.
CEST is flawed
Remember, the tool could still be wrong. One of the reasons it has faced widespread criticism is because it doesn’t consider mutuality of obligation (MOO), which refers to whether the client feels obligated to keep giving you work, or you as a contractor feel obligated to continue accepting work from a client. The tool also focuses heavily on the right to substitute, insinuating that a contractor must have a substitute ready to hand, which isn’t the case. In short, the questionnaire is far too basic to reflect the complexities of contractor-client working relationships (to find out more, read this article: CEST isn’t best: invest in an IR35 contract review).
HMRC has admitted that its tool isn’t perfect and says itself that it needs to make improvements. In fact, it has confirmed that it will launch an enhanced version of the CEST tool before the end of this year in a bid to reduce user error and consider more detailed information. Until then, it has said that it will give contractors and employers detailed help and guidance, including one-to-one support from specialist advisers on its helpline.
Don’t just take HMRC’s word for it
You do have other options too. The next is to carry out an independent IR35 contract review. This can be tailored according to the differing levels of feedback and options you want and includes overall opinion, a succinct list of essential changes, required insurances, a working practices review, and more. Larsen Howie offers a full range of IR35 reviews, which you can find out more about here.
Organisations such as the NHS are now choosing to carry out independent IR35 reviews following a report that it was hit with a £4.3m tax bill as a direct result of the IR35 status determinations the organisation carried out using CEST.
NHS Digital’s report read:
“We continue to improve our assurance processes to ensure we categorise all engagements in line with best practice. Up to December 2018, we assessed all contractors using the toolkit supplied by HMRC. From January 2019, we are now making an initial assessment internally. Any contractors considered to be outside of scope are then being reassessed by an external provider.”
I’ve failed an IR35 review. What next?
Even after all this and you still end up falling into IR35 (which means you’re classed as employed for tax purposes), it’s not the end of the world. You can continue working as usual, it just means that for this particular contract you will be required to pay a higher tax rate similar to a full-time employee.
It’s worth remembering that IR35 is investigated on a case-by-case basis, so being caught by IR35 on one assignment doesn’t mean it automatically applies to every other job you undertake.
How to appeal your IR35 decision
You do also have the right to appeal a decision.
The first step of appeal is with your client. In HMRC’s legislation for the off-payroll working reforms coming to the private sector in 2020, it introduces a ‘client-led disagreement process’ designed to give contractors the opportunity to overturn what they see as inaccurate status decisions by their clients. This means you can contact your client and they have 45 days to respond to your dispute and give their reasons for determining your IR35 position. You can then confirm or request to change their decision.
If the case needs to be escalated, you could look to take advantage of HMRC’s ‘Alternative Dispute Resolution’ (ADR) service where the case will be independently heard by another inspector, and an impartial HMRC official with no involvement in your case will mediate. In some instances, the appeal can be resolved at this stage. If not, you can escalate your case to an IR35 tribunal, where you can appeal a decision made by HMRC in court.
Before this point, though, it’s certainly worth taking out IR35 insurance to cover your legal advice, representation fees as well as any tax liabilities you end up owing. Without it, your costs could quickly escalate out of control. Larsen Howie provides a full range of IR35 review services and insurances covering the IR35 reforms. To find out more about how we can help you and your business, please get in touch with our team of tax experts. You can also find out more in our Knowledge Hub.