A couple of years ago we were discussing if contracting was dead in the water. The introduction of IR35 reforms in April 2017 and April 2021 had raised questions. The issue of IR35 so to speak.
These reforms transferred the responsibility of determining IR35 status from contractors to clients, causing a significant compliance burden. It also brought significant risk to the hirers.
The IR35 regulations were initially created to prevent individuals who work as genuine employees from using personal service companies to gain tax benefits like those of limited companies.
Following the 2021 reforms, it became the responsibility of companies that engage with contractors to determine whether they are subject to IR35 regulations.
By shifting the responsibility from the contractor to the end user many large companies like Tesco and GSK began to review their policies. The issue of IR35 was important to these businesses.
However, under the watch of Liz Truss and Kwasi Kwarteng, a surprise announcement was made in the 2022 mini budget. The Chancellor announced the reversal of the reform. No one was expecting the reversal of the reforms and it was a total shock.
Many of the announcements made in the budget, including those relating to IR35, were surprising. As a result of the mini-budget, the country experienced one of the most tumultuous political periods in recent history. This ultimately led to the appointment of Jeremy Hunt as Chancellor.
Roll forward to 17th October 2022, we had the first Autumn Statement 2022 from the new chancellor. Jeremy Hunt quickly reversed the off-payroll (IR35) rules repeal announced by his predecessor.
The IR35 rules which were reformed in 2017 for the public sector, and in 2021 for the private sector were staying.
Since then, there have been many calls for another IR35 review from the contracting industry but none have been seen yet. Are we expecting these reviews any time soon? We don’t think so. Currently, with all that is happening to the UK economy, there is no appetite within the treasury to tackle IR35.
This has led HM Revenue and Customs (HMRC) to review its own processes when it comes to IR35.
HMRC and IR35
We have had numerous cases go to court over the years over the question of IR35. Some HMRC have won and others they have lost.
HMRC aims to help contractors comply with IR35 regulations. It had developed a tool called CEST which is short for Check Employment Status for Tax. By using this tool there would be no need for ambiguity or at least that is the idea.
The CEST tool was originally designed to give you as a contractor or indeed the hirer for that matter a definite answer of whether you are caught by the IR35 regulations. It requires the user to answer a set of questions regarding the nature of the engagement.
This is to ascertain whether the contractors should be taxed in the same way as permanent employees or as off-payroll workers.
The tool is used to produce Status Determination Statements and IR35 assessments, which are relied on by both organisations and contractors to determine their tax status. But there are problems.
As IR35 is staying, HMRC has now revamped the tool. According to Computer Weekly, the main change has been to re-platform it to HMRC’s own software “Ocelot”. But there is going to be a second stage which will involve re-looking at the questions CEST currently asks.
Why is CEST being changed?
The tool relies heavily on the answers to the questions, and it does not probe further questions. It lacks sophistication in what can sometimes be a complex situation.
What’s more the CEST tool has faced significant criticism from some experts due to its inability to align with IR35 case law.
In several tax Tribunals, the tool’s results have been overturned, and it has been unable to issue a determination in a considerable number of cases. This is costly and embarrassing for HMRC.
What are the changes to CEST
The questions asked by CEST to determine IR35 status will remain the same, but some changes have been made.
- HMRC’s Employment Status Manual is now easier to navigate, as it is embedded into the tool.
- Users can now review answers after each section to reduce errors. This is better than only being able to review answers at the end.
- The tool will clarify the outcome based on the input, helping users understand the reasons behind it.
The launch of CEST 2.0 has generated mixed reactions among off-payroll advisers, with some viewing it as a positive step for improving the tool’s format and process, while others believe that key issues still need to be addressed.
There has been no change to accessing the tool which you can do here
It’s early days and time will tell if the revamp has been successful.
If you want to discuss your personal circumstances a bit more, get in touch with us. You can email your normal manager or if you are not yet working with us then why not look at how we work