HM Revenue & Customs’ longstanding, and recently updated, IR35 rules continue to be a challenge for businesses and contractors alike.
The aim of the IR35 rules is to determine whether a contractor, working through their own company, should be treated as genuinely self-employed or classified as an employee for tax purposes.
For those deemed as employees, payments to them would be taxed in a similar manner to an employee and they will bring further administration and cost to the party engaging them.
At times it can seem like a cat and mouse game as to whether businesses and contractors will be deemed to be in breach of the rules, with potentially significant liability for income tax and national insurance contributions for those found to not comply.
While there has been significant lobbying to repeal the rules, even prior to their changes in the private sector from April 2021 (originally introduced in the public sector in 2017), there has been no indication that the government intends to do so.
We have seen the tax affairs of well-known media individuals under scrutiny where there have been allegations of non-compliance with regards to their self-employed status. They have often provided their services on a self-employed basis through their own companies and been treated as such by those engaging and paying them.
Subsequently, however, they have had their employment status, and therefore the tax treatment of payments received, challenged by HMRC.
Recent cases that have been taken to tribunal and reported on can often be difficult for businesses to identify with, due to their specific nature and the specific roles of the individuals in question.
HMRC’s guidance states that the determination of status “involves painting a picture in each individual case” and while there have been many considerations in each case, a common theme has been the importance of any contractual arrangement being consistent with the reality of working arrangements.
These examples do not always create easy to follow precedents or principles, as there are often differences between the outcomes of cases which, to an outsider, can look very similar.
It is therefore difficult for businesses to understand whether HMRC are taking a particular direction in relation to enforcement and, in particular, the influence of any of the status factors that must be taken into account.
The interpretation and application of the employment status tests can be complex. As these tests are based on case law, there is subjectivity in their application, often due to the context of each engagement.
While technology, such as HMRC’s CEST tool, can help provide clarity in some cases, it doesn’t always provide a conclusion on employment status, with 21 per cent of assessments unable to be concluded, according to HMRC’s statistics.
