IR35 - the history

From April 2021 the extension of Off Payroll responsibilities mean that all medium and large end users are obliged to issue Status Determinations to fee payers and service providers who are providing their services personally.

An absence of a Status Determination, or one which is produced without using reasonable care will leave the end user liable for any Off Payroll assessment that the service provider is a deemed employee in respect of whom deductions of tax and national insurance, both as deemed employer and as deemed employee should have been deducted.

A further requirement is the provision of a mechanism for appeals by fee payers and/or service providers which the end user has to respond to within 45 days of receipt, either confirming or revising the Status Determination.

Many end users have now issued Status Determinations in order to inform service providers of their status from April 2021.

There is freedom for the end user to decide on the method by which it is makes a Status Determination (the Government's CEST tool, a private sector method or its own inhouse option), however whatever method is adopted has to pass a reasonableness test when subject to HMRC review.

The HMRC has published information on what is considered to be reasonable in its Employment Status manual which is available and used by inspectors when conducting reviews.

https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10014

The client must take reasonable care when determining whether the worker would have been an employee if they were engaged directly. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC will rest with it.

HMRC expects each client to carry out a complete and thorough determination and preserve sufficient records to show how the decision was reached.

Examples of behaviours that would indicate a client has taken reasonable care include, but are not limited to:

1. accurately applying and keeping a record of the employment status principles (ESM0500)
2. accurately completing and applying the results of HMRC’s Check Employment Status for Tax (CEST) tool (link is external)
3. applying HMRC guidance on determining status
4. seeking the advice of a qualified, professional advisor
5. having someone with a good understanding of the work to be undertaken involved in the determination process
6. ensuring determinations made for existing engagements are accurate, so mistakes can be identified and not repeated in future determinations.
7. considering whether there is a new contract or a continuance of an existing contract where the terms and conditions or working practices of an engagement change.
8. making a new status determination if there are material changes to a worker’s terms and conditions, or working practices
9. reviewing the processes being applied and amending for future determinations where necessary
10. ensuring it checks and reviews processes of other parties where it subcontracts the determination process to another party. The client remains responsible for the accuracy of the Status Determination even if it subcontracts that responsibility to another party.

End users are therefore encouraged by the above to keep thorough records in relation to Status Determinations (apart from the initial Status Determinations, appeals and any reworked Status Determinations) including records of:

1. the employment status principles used in the Status Determinations
2. the application of HMRC guidance in preparing Status Determinations
3. taking advice of a qualified, professional advisor
4. the skills and attributes of personnel having a good understanding of the work to be undertaken involved in the Status Determination process
5. the Status Determination process including the existence of checks to ensure

the completion of Status Determinations is accurate,

mistakes are identified and not repeated in future determinations.

reviews of information (from appeals, new contracts or changes in working practices)

new Status Determinations if material changes occur

reviews of Status Determination processes amendments where necessary

6. checks of processes of other parties where the end user has subcontracted the Status Determination process to another party.

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