Hiring Managers: the rules around hiring contractors are changing.
You are now responsible for determining their status inside or outside of IR35 and paying any fees necessary. Failure to do so may result in some nasty intervention from HMRC and a hefty tax bill.
So, to help we’re bringing together the IR35 Tests you need to know about to help you become IR35 compliant come April 2020.
What is IR35?
IR35 is a set of tax laws designed to figure out whether a self-employed worker is genuine or cheating the tax system by working as a ‘disguised employee’.
IR35 has been active since HMRC first realised there was a loophole in how contractors were paying things like holiday pay, national insurance and PAYE.
That was 2000 and Gordon Brown was Chancellor of the Exchequer. Major throwback.
Since then, public sector contractors have been responsible for self-assessing their IR35 status and National Insurance Contributions. This arrangement has, according to HMRC, been less than satisfactory and the HMRC estimates that, under current rules, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023/24.
A big problem for HMRC.
An even bigger problem for HMRC was the scale of the contractor market. There are an estimated 1.77 Million contractors in the UK. That’s a lot for a reportedly understaffed department to keep in check.
Wouldn’t it be a lot easier to police the one commonality between all these contractors: the person hiring them?
So in 2020, that’s exactly what they decided to start doing with a new wave of IR35 legislation.
That legislation will be applied to the private sector and it will shift responsibility for paying these taxes and fees away from the contractor and towards the fee-payers. (The sweeping term for the person responsible for paying the contractor).
It may all seem like doom and gloom but the silver lining here is that HMRC “seem” to have a pretty stable standard for what IR35 compliance looks like and that’s unlikely to change.
So if you’re IR35 compliant now – you’ll be IR35 compliant come April 2020.
With that in mind, it’s a good idea to do all the hard work now while there’s still time.
And a number of IR35 tests and checklists have sprung up over the past few months that are geared towards the upcoming changes.
We’ve brought the most authoritative ones together in one place so you can easily build a good picture of which of your contractors fall inside and which fall outside.
Who Should Take The Test? Contractor or Hiring Manager?
Come April 2020, the hiring manager will be fully responsible for the determination of their contractors and the payment of any retrospective PAYE tax and National Insurance.
As such, it’s our recommendation that all hiring managers take the initiative now and start running these tests with or for their contractors.
Build it into the contracting recruitment process and you’ll be in a very strong position come April 2020.
To support our own contractors threatened by the new changes, we’ve built our own determination tool, VenturiOPRaaS.
Working with external consultancies, tax and legal advisors, Venturi has invested heavily in partnerships with industry experts to build a solution that is compliant and can mitigate the risks associated with OPR for end-users/clients and contractors.
This solution involves a multi-step approach of reviewing, auditing, assessing the contractor population and indemnifying outside workers with bespoke insurance.
At the centre of the VenturiOPRaaS strategy is a determination tool, backed by a leading contractor tax and insurance specialist. The VenturiOPRaaS tool has been built based on case law IR35 tribunals since 2000, making it one of the leading tools on the market.
Unlike many other tools, VenturiOPRaaS has human intervention; a tax expert, not just an algorithm and each and every case is reviewed individually – ensuring contractors have an expert determination that is aligned to their individual assignment and hiring managers stay within the reasonable care clause with determinations.
IR35 Shield, built with Contractor Calculator, is the defacto standard for IR35 compliance tests. IR35 Shield has been helping contractors with their determination for the best part of a decade now and will provide the best protection for hiring managers who now bear the weight of total responsibility.
IR35’s ever-changing nature has been a constant thorn in the side of UK contractors. Not only do they need to focus on complying, but they need to keep up to date with all the changes happening.
IR35 Shield deftly navigates these choppy waters through regular updates to their test delivered through AI technology.
IR35 Shield is powered by an expert AI-driven assessment technology, which has been refined over 10 years along-side ever-changing UK IR35 case law. The assessments deliver the same status as the judge’s rulings on all IR35 cases, giving anyone tested peace of mind.
Once completed IR35 Sheild will generate a comprehensive 25+ page Status Determination Statement and certificate.
Signing this as the employer will give your contractor ultimate protection and strengthen your defense against an HMRC investigation.
HMRC CEST Test
HMRC’s CEST test has been giving Contractors nightmares since it’s release after the Public sector reforms in 2017.
You’d think that those enforcing the legislation would have the most robust tool.
Sadly, that isn’t the case.
To help work out whether or not a particular contract falls within IR35, HMRC released an online tool shortly before the public sector rollout in early 2017.
The CEST tool will work out whether or not “a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”
Using a multiple-choice system, the CEST tool (Check Employment Status for Tax) collects information relating to the individual, such as:
- Does the contractor provide their services via a limited company?
- Is the contractor an ‘office holder’?
- Can the worker provide a substitute (or have they already)?
- To what extent does the client exert control over the contractor, e.g. can they move the contractor to a different role/location, decide how and when the work is done, etc.?
- What happens if the client is unhappy with the contractor’s work?
- How is the contractor paid – fixed price, or by the time period?
- Does the contractor receive any ’employee’ type benefits from the client?
Once the answers have been processed by the CEST tool, you will be told whether or not the Intermediaries Legislation (IR35) applies to this particular engagement.
You will be able to read and download a summary of your answers, and how HMRC has interpreted its understanding of IR35 as it relates to each employment status factor.
If you’re caught, then the engager becomes responsible for operating IR35, and if not – you can carry on operating outside IR35.
In some cases – the tool will be unable to determine employment status at all.
Why is the HMRC CEST tool so Controversial?
If you’ve been keeping up to date on IR35 you’ll know that HMRC figure determination out based on key criteria or IR35 rules that paint a picture of what the working relationship is between contractor and employer.
They’re looking at aspects like mutuality of obligation, access and more to figure out if your contractor is close to being a full-time employee and, as such, should be paying employed levels of tax.
Here is where the cracks begin to appear for the CEST test.
Critics claim that CEST excludes certain key status indicators, whilst being overly-reliant on others.
Moreover, the CEST tool comes in for most criticism for boiling down something as complicated as a relationship between a contractor and an employer to 16 very rigid questions.
Dave Chaplin, from ContractorCalculator, actually submitted a Freedom of Information request to HMRC. Here are his thoughts on the HMRC tool:
“As a result of our extensive investigations into the CEST tool, it is now common knowledge that it does not adhere to the law, misses key parts of the law, gives inaccurate answers and is loaded in favour of the taxman.”
“HMRC claims, without any evidence, that it thinks a third of contractors should be inside IR35. Yet at the IR35 tribunal for BBC presenters, the CEST tool indicated that 92% of the Corporation’s freelancers were caught – which HMRC blames on the BBC for having historic practices that “had gone adrift”. HMRC also estimates that the tax take in the public sector is £550m, which is almost double what the OBR had expected…”
“If firms want to protect themselves from HMRCs draconian tax grab, then asking HMRC for advice might not be the best place to start.”