In IR35

In a new collaborative whitepaper produced by ContractorCalculator and The Law Place, a former HMRC tax inspector has claimed that recruiters and employment agencies will be at no risk of liabilities provided their client has used the Revenue’s CEST tool to incorrectly determine a contracting professional’s IR35 status.

The whitepaper, CEST: not fit for purpose, is the culmination of an 18-month investigation into the reformed off-payroll tax rules known as IR35.

Former HMRC inspector Philip Manley, currently a tax partner at Dow Schofield Watts, has put forward the case in the whitepaper that agencies may in certain instances be at zero risk of tax liabilities for processing personal service company contracting professionals, provided the latter’s IR35 status had been incorrectly assessed by an end client using the heavily-criticised CEST tool. This would not, Manley argues, constitute ‘reasonable care.’

New IR35 rules render end clients, recruiters and employment agencies liable for unpaid tax if a contractor is subsequently deemed by HMRC to be inside IR35. However, the new investigation has discovered instances in which the agency would not be liable. The two key instances come under section 61T of the legislation:

  • If an agency asks for the reasoning behind a client’s IR35 decision but does not receive a response from the latter within 31 days.
  • If a client can be shown to have failed to take reasonable care during their IR35 assessment of a contractor.

In other words, agencies are free to overrule a client’s IR35 assessment if they believe it to be incorrect, without becoming liable for any unpaid tax.

ContractorCalculator CEO and founder, Dave Chaplin, explained: “CEST evidently appears to fail the reasonable care requirement. Where the agency has in writing that the end client used CEST, it can now decide whether or not to disregard the decision and make its own reasoned decision regarding the contractor’s employment status, arguably without worrying about the tax risk. To some extent, this is good news for agencies.”

Agencies, he said are under no legal obligation to inform end clients that they have decided to overrule an incorrect assessment with an accurate one. In the event of an HMRC investigation, though, agencies would need to confirm to the taxman that the end client had used CEST to reach an incorrect IR35 decision, which does not constitute reasonable care.

Chaplin concluded by saying that unless HMRC is able to refute the substantial evidence detailing CEST’s flaws, it is now obvious that the tool is not fit for purpose. He added: “Years of case law, and most remarkably of all, HMRC’s own guidance for reasonable care, suggests that CEST must be improved or removed.”

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