A series of high-profile tax payments from government departments this summer has highlighted that the transition to IR35 compliance is far from over for the public sector, despite new responsibilities for managing off-payroll contractors being introduced back in 2017.
The eye-watering cumulative sums included the annual financial reports of the Department for Work and Pensions (£87.9m), Home Office (£33.5m) and HM Courts & Tribunal Service (£12.5m), which serve as a stark reminder to the private sector that although HM Revenue & Customs is still in the soft launch phase for the news rules, liabilities for non-compliance can still be building up.
For those of us who have been providing advice on the off-payroll working rules since they were first introduced, it is frustrating to see many private sector businesses repeating the same mistakes. So, what can we learn from the public sector four years on?
Firstly, the government’s Check Employment Status for Tax tool, or in fact any automated tool, cannot be relied on solely to satisfy HMRC’s guidelines. We have seen many businesses approach CEST as a catch-all solution in the first quarter of the year, but it is clear from these reports that relying on CEST alone does not demonstrate "reasonable care" as outlined in HMRC’s guidelines.
Nor does using CEST mitigate for the hirer being liable for any mistakes that result in unpaid tax and national insurance contributions or fines. The HMCTS annual report explicitly states that the £12.5m deduction was for "incorrect assessments of the employment status of workers".
These tools are only as good as the information provided and do not by themselves guarantee IR35 compliance. In fact, the latest CEST data shows 20 per cent of its determinations are in a grey area, meaning a more nuanced, in other words person-led, exploration is needed.
HMRC’s guidelines are clear that failing to input information properly, failing to take account of all relevant evidence, or relying on untrained staff to make assessments all demonstrate lack of reasonable care.
Nearly six months into the new legislation, now is a sensible time to review the processes in place around use of the tool, the confidence of the people using it and to conduct a sample audit to double-check work done to date.
An ongoing task
The second lesson is that management of the new IR35 responsibility is an ongoing task. Working practices frequently change, so contractor statuses need to be reviewed regularly. HMRC’s guidelines clearly state that a new assessment must be made "if there are material changes to a worker’s terms and conditions, or working practices".
Once again, an automated tool is not a sufficient solution for this. Hiring managers and others in the business need to understand IR35, be able to recognise when a contract has changed and reconsider IR35 status at that point. This can be supplemented by sample audits at regular intervals and ongoing training and awareness of relevant staff. Just like any risk management issue, there needs to be a reasonable process to ensure you are applying the rules adequately.