HMRC have recently disclosed data showing that in almost 20% of cases, the Check Employment Status for Tax (CEST) tool was unable to return a conclusive response. The CEST tool therefore leaves many contractors and companies in limbo before the implementation of the private sector IR35 reforms. The CEST tool has been subject to criticism in the past, with critics arguing that the tool is not aligned with IR35 case law. MPs have previously been vocal critics of HMRC’s IR35 tool.
When the private sector IR35 reforms are implemented, private companies will assume responsibility for determining whether the contractors they engage should be taxed (depending on whether the work they do falls within the IR35 rules or not). You should seek legal advice early, and we can offer an initial fixed fee conference with a tax specialist barrister in order to provide guidance on whether your contractors are likely to fall within the IR35 rules or not.
Our London Tax Solicitors and Barristers have vast experience of tax laws and first hand commercial, litigation and advocacy experience. We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.
What is IR35?
HMRC introduced IR35 in 1999. The intention was to tackle “disguised employment” and prevent individuals working in a manner which was effectively the same as employees, but under the guise of limited companies. Companies engage contractors through an intermediary, often a personal services company. These self-employed individuals do not have to pay national insurance and and benefit from lower income tax.
HMRC claim that currently only 1 in 10 contractors, who should be paying these taxes are doing so and that these changes will bring in an additional £3.1bn in additional tax revenue between 2020 and 2024.
Who is affected by IR35 upcoming rules?
• Contractors providing services to medium and large businesses;
• Fee-payers in the recruitment sector; and
• Medium and large businesses in private sector that are end user of the worker’s services.
Originally, the onus was on individuals to assess and then declare to HMRC that they fell under IR35. However, HMRC are now tightening the net on these self–employed workers by shifting that onus to businesses to determine the status of their contractors.
Changes to IR35 Legislation?
Changes are being implicated into IR35 Legislation due to contractors not paying the correct tax and National Insurance and incorrectly assessing their IR35 status. The non-compliance has reportedly costed HMRC millions therefore the rules are changing in hope to ensure compliance.
IR35 changes are being introduced in April 2021 to move the responsibility for assessing IR35 obligations from the contractor to the end user. The fee payer will be responsible for calculating and paying the related tax and National Insurance contributions to HM Revenue & Customs.
Private sector companies will have statutory obligation to assess the deemed employment status of contractors engage through an intermediary and if they are in fact employees, they will need to issue a determination to the contractor and subsequently add the individual to PAYE.
Do the IR35 rules affect my company?
Companies will not have to comply with the new IR35 legislation if they satisfy two or more of the following criteria:
(a) an annual turnover of not more than 10.2 million;
(b) balance sheet total of not more than 5.1 million; and
(c) number of employees of not more than 50.
How has Covid-19 impacted IR35?
Contractors have said that this brief reprieve has granted them temporary relief in times of great job uncertainty, particularly where contractors are often the first overhead to be cut from businesses as they handle the aftermath of the pandemic and its financial impact. This may drive many contractors to seek full employment within their companies to ensure job security moving forward.
How do contractors prepare for IR35?
Contractors should be communicating with their employers and reviewing their existing arrangements. If you are a contractor likely to be affected by IR35 or would like advice on your options, get in touch with our tax team now.
How do companies prepare for HMRC?
There are a number of steps companies should be taking including reviewing their workforce and all of their arrangements with contractors and communicating with any affected contractors about the changes. There may be changes that need to be made to contracts, bot existing and future contracts. We can assist you with the review and advise you on the next steps in preparation for the implementation of the new legislation in April 2021.
Expert London Tax Investigation Lawyers
If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.
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HMRC APPEAL DEADLINES – WARNING
HMRC decision letters containing penalties or imposing assessments offer time limited deadlines within which to appeal. Often these short deadlines (e.g. 30 days) can run from the date of the letter which means you have less time than you think. Your legal rights will become irreversibly time-barred if you fail to take legal action. Therefore, you should seek specific legal advice about your HMRC tax dispute at the very first opportunity so that you understand the time you have left. Failure to take advice or delay in taking action can be fatal to your prospects of success.