Defining your employment status for IR35

July 31, 2018

The way HMRC applies the off-payroll working rules has been successfully challenged in a tax tribunal appeal, with implications for contractors and the socalled IR35 regime generally.  The tribunal decision came as HMRC launched a consultation on tackling non-compliance with the IR35 rules in the private sector.

The tribunal ruled in favour of an IT contractor who provided his services to the Department for Work and Pensions (DWP) during 2012/13 through his company, via a recruitment agency. HMRC decided the contractor’s terms of engagement equated to employment under the IR35 rules and deducted over £26,000 in income tax and national insurance contributions from his deemed earnings.

Assessing employment status

In reaching her decision, the judge emphasised that she had looked at the overall picture and made a qualitative assessment of the features of this case, giving useful insights into how to determine employment status.

Mutuality of obligations

HMRC argued the DWP had an obligation to provide work and the contractor had an obligation to perform it under their hypothetical contract. The judge considered this was no more than what exists where any person works for payment. The contractor also worked under a succession of short contracts and the DWP was not obliged to offer further work.

Substitution

The contractor could send a substitute if the DWP agreed, according to the contract with the recruitment consultant.

The contractor admitted he always sought such a clause because it was characteristic of self-employment. Though never used, the substitution right was real and it weighed against employment status.

Control

The contractor had considerable freedom to decide how to meet the needs of the project and the timescale for the work. He had no set hours and worked with minimum supervision, but gave frequent feedback to a DWP manager.

These meetings, on which HMRC’s case had relied, were not indicative of control over an employee but of the DWP ensuring that its needs were met, as any independent contractor would require.

Private sector changes

Since April 2017, public sector clients (or the agency where there is one) have been responsible for deciding an individual’s IR35 status and deducting tax and NICs where necessary. HMRC estimated compliance with the off-payroll working rules at 10%, but the public sector rules have increased this. An HMRC consultation running until 10 August 2018 sets out proposals for increasing compliance in the private sector. One proposal was to extend the public sector rules to the private sector, but HMRC has also aired other possibilities. For example, clients could be required to ask the personal service company to provide a completed determination under HMRC’s ‘check employment status for tax’ (CEST) service.

HMRC says CEST gives an answer in 85% of cases and that the outcome is self-employment in 60% of these. However, CEST has been heavily criticised and does not test for mutuality of obligations at all. Given the importance of mutuality of obligations in this case, CEST may not be the best solution.

If you would like help dealing with the IR35 rules, please let us know.

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