IR35 is a big factor when it comes to contract work. It can affect your take-home pay, determining the level of tax you’ll have to pay. But, with the boundaries of the legislation becoming so unclear, HMRC has introduced CEST.
‘Check Employment Status for Tax’ is a tool that can be used to clarify whether someone is within IR35 or not. It was a handy resource for many contractors trying to define the rate of their tax. But, unfortunately, the introduction of this tool appears to have been pointless.
IR35 and you
IR35 is the abbreviated term for ‘intermediaries legislation’. It covers the rules that are applied when you work through an intermediary that’s either a limited company or a personal service company. This is how most contractors work for their clients, so it’s something that you need to be aware of.
IR35 has actually been in action since 1999, way before tax went digital. It’s since seen plenty of criticisms and issues. Primarily, the legislation has received backlash from tax experts who claim it was badly implemented.
Why? Because the regulation can inflict unnecessary financial implications for genuine businesses. With the boundaries of the law so blurred and unclear, many have suffered. This is because being determined as within the legislation, you will be expected to pay around 25% extra tax each year.
Problematic legislation
Originally, IR35 had a good purpose. In 1999, HMRC was finding that a lot of businesses were avoiding tax by claiming employees were contractors. By doing this, both the business and employee were able to enjoy reduced tax rates, damaging the revenue for HMRC. As a result, they introduce IR35 to identify whether a party was avoiding tax.
Since then, IR35 has evolved into something more sinister. Instead of reclaiming money lost on tax evasion, the legislation is acquiring a new revenue stream. Over the years, IR35 has experienced some changes. It now focuses on job roles and client relationships rather than the contents of a contract.
This was initially rolled out across the public sector where it damaged the income of contractors en masse. Here, many contractors had utilised their own Limited Companies and were therefore found within the legislation. Private-sector contractors can expect to face a similar process with their businesses when the second phase rolls out in April 2020.
CEST and the benefits for contractors
The CEST IR35 tool created by HMRC, in theory, has plenty of benefits. Contractors can use the tool to identify their employment status. This will determine how HMRC will view them and whether IR35 will apply to them – helping them avoid any major tax errors.
The tool has had its fair share of issues though. Some have found it to be inaccurate as it doesn’t take into consideration certain aspects of employment. Others have deemed it inflexible and not open-minded.
It is important to bear in mind that it is just an automated tool. With this feedback in mind, it’s recommended that you still review your situation yourself, or with a financial advisor, as well as utilising CEST.
To get a good understanding of what you should be evaluating when looking at your financial situation, consider the following:
Control
Consider how controlled your work is. Can your client change how you approach tasks, and can they determine what tasks you complete and when?
As a contractor, you should have complete freedom to choose work and how you do it. If you’re required to wear a uniform, manage or manage others or book in holidays, you’ll likely find yourself violating IR35
Substitution
Contractors can send someone else to do the role if they are qualified to do so. If you’re unable to do this, you’ll again be violating the legislation.
Mutuality of obligation
As a contractor, your client has no obligation to secure more work for you, and if they do, you’re under no obligation to complete it. As an employee, a business would have to source new work. If the latter is true for you, that’s another violation.
The results of the CEST tool have always been viewed as fact by HMRC, or rather, they suggested it would. But, after a new situation has come to light, that might not be the case…
The future of CEST
HMRC have publicly doubted the certainty of CEST, leading to a lot of contractors experiencing concerns for their work and income.
In the case of RALC Consulting Ltd v HMRC, representatives of the tax organisation deemed the CEST assessment as ‘irrelevant’. This was after CEST found the consultants to be outside of IR35.
Thanks to the CEST results being disregarded, contractors will need to be even more aware of IR35. Ensure that you won’t be found to be foul of the legislation and, if there are any uncertainties, clear them up.
This is particularly important if you work with an umbrella company.
Umbrella companies and IR35
CEST, IR35 and all of the complications are another area where umbrella companies can help. By adding contractors to their payroll, umbrella companies make IR35 irrelevant. Contractors are classed as employees and receive full statutory benefits.
If you see an umbrella company claiming that they are ‘IR35 compliant’, this is simply a marketing ploy. All umbrella companies are IR35 compliant by default because the legislation doesn’t really apply to them and their employees.
