With less than six months left until the introduction of the IR35 regulations in the private sector, HM Revenue & Customs (HMRC) has finally released additional guidance to help clarify this complex area of taxation.
From 6 April 2020, the off-payroll rules (IR35) are going to be extended across the private sector bringing large and medium-sized companies under the regulatory framework that is currently in place in the public sector.
Under the changes it will be the responsibility of engagers to decide the employment status of a contractor who supplies their services via a personal services company (PSC).
One key development from HMRC’s latest off-payroll rules update, which sets out the approach to the operation and enforcement of the new regulations, is that the new rules can only be applied retrospectively in cases of suspected fraud or criminal behaviour.
The Association of Taxation Technicians (ATT) has welcomed the move saying that it removes any ambiguity in regards to whether HMRC could use a change of status as a reason to enquire into a contractor’s tax affairs from previous years.
In its recent publication, HMRC also announced that it would launch an enhanced version of the check employment status for tax (CEST) tool before the end of the year, following criticism of its existing system.
Introduced in 2017 to assist with the determination of employment status, and therefore a person’s tax treatment, the CEST requires users to complete a set of step-by-step questions.
However, subsequent legal cases regarding status have led to questions about CEST’s effectiveness after it was shown to conflict with the Courts’ rulings. In fact, CEST has proved to only be accurate in 85 per cent of cases and HMRC has conceded that a minority of employment cases can be less straightforward and require one-to-one support from specialist advisers.
HMRC has estimated that only one in 10 people, outside of the public sector, who should be paying tax under the current off-payroll working rules are doing so correctly and it believes that the IR35 reforms will raise an additional £3 billion in tax over the next four years.
