Despite what HMRC say, CEST is not completely aligned with IR35 case law, overlooks key aspects of the IR35 legislation, has been dismissed in court and cannot provide an answer nearly 20 per cent of the time. For these reasons (and there are plenty more), relying solely on HMRC’s flawed tool endangers IR35 compliance, believe it or not.
Fortunately, it is not mandatory, which is why I recommend that companies steer clear of it entirely.
Issue Status Determination Statements (SDS)
Having assessed IR35 status, end clients must then inform contractors of their position via a Status Determination Statement (SDS). This can be an email or document outlining the deemed IR35 status and the reasons for this particular decision. It should be sent to the contractor and the second party in the supply chain, which is usually the recruitment agency.
Until an SDS has been issued, the end client will hold onto the fee-payer’s responsibilities. This means they are ultimately liable for IR35 - irrespective of whether they are the fee-payer or not - and will be tasked with deducting the correct amount of tax from contractors working inside IR35 and paying this to HMRC.
It therefore goes without saying that the sooner a firm sends compliant SDS documents to the parties requiring one, the better.
Set up compliant payroll processes
Following on from my previous point, if a contractor is deemed inside IR35 - but only after a well-informed IR35 status review - they will be taxed PAYE. This tax must be subtracted from their timesheet or invoice and sent to HMRC, with the contractor paid what’s left. These processes need to be in place by 6 April to avoid a myriad of problems and, in turn, non-compliance.
While in many cases, fee-paying recruitment agencies will be responsible for orchestrating this and making sure it is done in a compliant manner, the end client has a duty to outsource this activity to a trusted party should they not want to handle it themselves.
Maintain a clear audit trail
It is clear that HMRC are determined to raise a significant amount of tax revenue from reform - the apparent £1.3bn the exchequer believes it is missing out on due to non-compliance currently is testament to this.
As a result, businesses would be wise to maintain a clear, traceable and transparent audit trail with regards to all their IR35 activity. Being able to show HMRC, in the event of an investigation, that everything has been done by the book and compliantly will be key in stopping an enquiry in its tracks.
Explore ways to manage IR35 risk
