In Focus: Tax  

How to make sense of the new IR35 rules

How to make sense of the new IR35 rules
 Photo by Andrea Piacquadio via Pexels

The Covid-19 pandemic has encouraged many businesses to look at hybrid models for flexible work, given the dramatic widespread shift to remote working.

As a result, both corporates (“clients”) and individuals may be considering the potential advantages of a self-employed model, traditionally considered to be more flexible. However, a change to self-employed status is not as easy or as risk-free as it used to be.

Certain contractor engagements may fall within the scope of the off-payroll working rules, the application of which will be extended to medium and large private sector clients from April 6 2021.

This may result in the imposition of additional responsibilities on clients; notably, an obligation to determine the contractor’s status, rather than relying on the individual, through its personal service company, to self-assess.

Clients should therefore urgently review their existing workforce to identify whether the off-payroll working rules apply to any existing engagements, as well as considering any new arrangements in the light of this change. 

Undertaking status determinations

Where the relevant gateway tests are met, companies will need to undertake a “status determination”.

It is necessary for clients to assess whether there is a hypothetical contract of deemed employment which arises by applying relevant tax case law relating to employment status.

There are various factors emerging from case law to be considered in this context.

However, HM Revenue and Custom’s CEST tool (a free service) is a useful starting point, as it provides an indication of an individual’s employment status for tax purposes; the output of which meets the legislative requirements for a valid status determination statement.

However, like any automated tool, the CEST tool has its limitations and clients should consider taking specialist advice.

Clients need to take “reasonable care” in making status determinations, failing which the determination will be rendered invalid and the client will be treated as the deemed employer.

Unsatisfactory situations can arise whereby a valued individual could be deemed an employee for tax purposes but not have employment rights for employment law purposes.

Such individuals may challenge the CEST result, and clients will need to be ready to deal with such challenges and maintain a thorough audit trail in respect of decisions reached. 

Potential impact of the pandemic

The pandemic has led to many people working from home on a daily basis, and clients therefore may need to revisit existing status determinations in the light of these changes to working practices.

The position is, however, far from clear cut, given that the case law relating to employment status illustrates that each case depends on its own facts and outcomes are unpredictable. 

Clients will therefore need to consider their risk appetite and organisational need to retain certain workers who could fall within the scope of the rules.