IR35 Off Payroll Working – Lesson to be learned from the public sector changes & HMRC ‘nudge’ letters

Unless you have been hiding under a rock you will be aware that back in July HMRC issued draft legislation on their proposed changes to the current IR35 Off Payroll Working rules in the Private Sector from April 2020, bringing the rules in line with those implemented to the Public Sector in April 2017. While HMRC are looking to introduce these changes due to their estimate that they will bring in excess of £1billion additional taxes, there is still a lot to be learned from when these changes were introduced to the Public Sector and actions to be taken to ensure businesses are ready for carrying out their new obligations from next year and that HMRC’s tools are fit for purpose.

A recent case which was heard by the First Tier Tribunal (“FTT”) regarding the status of a medical professional carrying out work for 2 local hospitals is an example of this, highlighting the further work required to HMRC’s current Check Employment Status for Tax tool (“CEST”) to ensure it is fit for purpose come April 2020.

The facts of the case…

This case involved a medical professional who was engaged with 2 separate local hospitals via his own personal service company (“PSC”) under 2 separate engagements, dating back to the 2013/14 tax year. Under the historic IR35 rules in the Public Sector and under the current rules in the Private Sector, the responsibility to establish the status of a contractor sat with the PSC. This meant it was also the PSC’s responsibility to then operate the necessary tax and National Insurance withholding under PAYE on the deemed employment payment relating to any contracts established as disguised employments ‘inside’ IR35.

In line with the above, the medical professional’s PSC assessed both contracts and arrived at the conclusion that both were ‘outside’ IR35, therefore no deemed employment payment was calculated and as such, no tax or NIC was deducted under PAYE. However, HMRC challenged this status and sought to recover approximately £30,000 of unpaid tax and National Insurance from the PSC.

The case was then escalated to the FTT, who looked to review the wording of each contract and the surrounding circumstances separately in turn. On conclusion of this extensive review, despite the fact that the individual was carrying out, in essence, the same work under each contract in line with their professional specialism, one contract was deemed disguised employment ‘inside IR35’ with the other being out ‘outside’ IR35. This result was arrived at with reference to the following key differences;

• Termination Periods
• Substitution
• Mutuality of Obligation

Of the above, the main focus of the FTT in establishing the status of each contract was the fact that mutuality of obligation existed under 1 of the contracts, where there was a requirement for the individual to accept work and for the hospital to provide work, which mirrors an employment arrangement but the other did not, indicating the contractor was working for himself.

Interaction with CEST tool 

Looking at the FTT’s result and their focus on mutuality of obligation, this has always been a key point that will be considered by the Courts should the case be escalated to them, however this is not taken into account as part of the current CEST tool and is often overlooked by HMRC at enquiry stage. As such, it is clear that this tool cannot currently be relied on by those responsible for carrying out IR35 status determinations as it does not look at all of the key employment status indicators.

We therefore are awaiting HMRC updating the tool for use come April 2020 by Companies within the Private Sector as part of their change in obligations and also by those in the Private Sector as part of their ongoing obligation under IR35. They have committed that these changes will incorporate “MoO”, but how remains to be seen. The fact it is still missing nearly 3 years after the CEST tool was first implemented demonstrates HMRC’s lack of regard for its importance as an employment status indicator.

HMRC ‘nudge’ letters

In the past few weeks, we also understand that HMRC have issued a substantial number of letters to individual contractors who worked for a large pharmaceutical company during 2018/19 suggesting that their IR35 status is potentially under the spotlight and urging that action is taken this month. Despite these letters being issued, the information we hold suggests that these letters are by no means the start of a formal HMRC enquiry into the contractor’s status and any action taken could have consequences for the contractor themselves, but doing nothing is not recommended either.

As such, we would recommend that those who have received such a letter from HMRC take steps now to review their contracts to ensure that they are correctly applying the current IR35 legislation and paying the appropriate tax and NIC liabilities to HMRC. This can be done by obtaining the independent opinion from a third party specialist who can provide reasoning to their determination to act as back up in the case of any future enquiry launched by HMRC.  

We would however suggest that independent advice is sought regarding your position before responding to these letters.

While we await further guidance from HMRC surrounding how these changes will be operated in the Private Sector come April 2020, if you have any queries or would like to discuss how your business may be impacted, please contact a member of Payroll and Employment Team, or your usual AAB contact.