Our Head of Tax explores the wider implications of HMRC’s handling of an IR35 enquiry
With businesses bracing themselves for the introduction of IR35 reform in the private sector, HMRC’s line of questioning in an ongoing IR35 investigation has raised further questions about the reliability of the taxman’s Check Employment Status for Tax (CEST) tool.
These latest concerns have emerged after a tax inspector put forward 134 questions while probing the IR35 status of a contractor who I am supporting. In stark contrast, HMRC’s controversial CEST tool asks a maximum of 30 questions with regards to status.
So why is this important as we close in on IR35 reform? And why does this latest development cast even more doubt over CEST? I’ll explain…
IR35 investigations are rigorous, CEST is not
HMRC encourages businesses to use CEST when determining the IR35 position of contractors. On 6th April, this will become the responsibility of medium and large private sector companies when reform is enforced.
However, that a tax inspector can request over four times the amount of information during an IR35 investigation compared to CEST exposes the tool’s lightweight nature, in my opinion.
Should an organisation rely on an answer provided by CEST, only for HMRC to investigate this at a later date, it’s highly likely that the tax office would uncover information that CEST hasn’t taken into account.
This is a major problem and could see a business held responsible for incorrect IR35 determinations despite having used HMRC’s very own tool to determine the status of contractors.
If this was to happen it wouldn’t be the first time. The NHS was handed a staggering £4.3m tax bill in 2019 for incorrect IR35 decisions that were made based on information provided by CEST.
Aside from the shocking disparity in diligence taken by HMRC via CEST and during an IR35 enquiry, this case has brought to light several other points – each of which are relevant to businesses impacted by IR35 changes.
HMRC’s focus is on the contract, not working practices
In this case, the onus – for the time being anyway – is on the contractual conditions and how that affects IR35 status. HMRC have not examined the contractor’s actual working practices. This isn’t always the taxman’s line of enquiry, given that actual working practices – which often reflect the true nature of an engagement – can hold the key to IR35 status.
While I’m not surprised by HMRC’s approach here, businesses should take note. More than anything it reflects the freedom the tax office allows itself when investigating an engagement. For example, if HMRC thought they had a greater prospect of success examining the working practices they would have focused on these.
Taking the taxman’s unpredictable nature into account, my advice to businesses is to ensure that both the contract and the contractor’s working practices are reviewed from the outset – and should either evolve over time, considered again.
HMRC queries if advice was taken when deciding IR35 status
Towards the end of this extensive list of questions, the contractor has been asked if they sought “external advice” when initially deciding that the IR35 rules didn’t apply, and if so, “who from?”.
From where I stand, there’s only one reason HMRC have done this – to assess if they have grounds to impose a penalty to the contract. If the contractor answers “no” and confirms they didn’t receive support from an IR35 specialist when setting their status, HMRC may be more inclined to impose a penalty.
Based on my recent experience when representing Qdos clients, this question is now becoming commonplace in IR35 investigations. It’s cynical of HMRC, but nothing less than we have come to expect in recent years. Above all else it highlights the importance of engaging a trusted IR35 expert to assist with determinations.
Despite HMRC’s encouragement, CEST is not mandatory
Fortunately, businesses have no legal obligation to use CEST in any capacity when assessing IR35 status – and I can’t stress enough how crucial it is that companies are aware of this. To recap, an answer provided by the tool will be scrutinised in much further detail by HMRC, who certainly won’t stand by a result provided by CEST if they have doubts over its accuracy.
Independent IR35 status reviews also constitute ‘reasonable care’, which needs to be shown by organisations when carrying out assessments. These offer a far more comprehensive assessment of status and one that can be trusted in the event that HMRC opens an IR35 enquiry.
Qdos supports thousands of businesses, helping them manage IR35 reform. The Qdos Status Review facility provides a range of expert IR35 solutions, including IR35 status reviews and IR35 insurance, to allow businesses to compliantly place and engage contract workers. For more information, please get in touch on email@example.com or 0116 478 3390.