Within article 1 in our series of articles to help you check your process and management of IR35, we reported that both the DWP and HM Courts & Tribunals Service received large fines and penalties for issuing incorrect IR35 determinations.
It is understood that both organisations were utilising the gov.uk tool – CEST – for making the IR35 determinations, but were still unfortunately making incorrect determinations. Does this mean the CEST tool is not fit for purpose? Not necessarily. It could also be that the responses given by end users to the questions raised by the CEST tool were inaccurate. Remember it is important to respond to the questions on the basis of fact (what is actually happening) as opposed to aspiration. In article 3 of this series, we explore this further.
The Check Employment Status for Tax tool, better known as CEST, was introduced during the public sector reforms back in 2017. Those who have worked with CEST for many years will be well aware of the changes and updates it has undergone, as well as the large amounts of criticism it has received. So with this in mind why would we utilise CEST as the best approach for making an IR35 determination?
Well let’s be honest: (1) It’s built by HMRC so surely they should know their own legislation; (2) it states that HMRC will stand by this result should it be a true and accurate representation of the engagement; and (3) it’s free to use! So I think it’s fair to say that CEST is here to stay and will be adopted by many organisations.
Our approach is that we would recommend the use of CEST in making determinations, but it should not be solely relied upon. Having an accurate view of each contractor engagement to make the determination is vital. Secondly, when making the determination, ensure that when you take into account the contractual terms, you focus primarily on the ACTUAL working practices on the ground.
What about 3rd party status determinations and insurance practices? There are many organisations offering these types of advice and services and at Investigo, we have built up a number of relationships with those whose services we have assessed and believe to be fit for purpose. They can provide helpful insight and additional levels of understanding, informed advice and ensure a ‘belt-and-braces’ approach to IR35 determinations.
In our opinion, with the right process, governance and methodology, these organisations can be utilised as a sanity and reference check to help ensure your practices and decisions are aligned to the legislation and also to audit your determinations. It is certainly worth considering the services of such a third party for some of the more nuanced determinations. The insurance packages, I’m still to be convinced by. If an engagement is outside at the start, and it remains outside throughout its duration, then what do you need the insurance for? I understand the drive for this, especially from a risk perspective, knowing you have accurate determinations but also knowing you have insurance that covers you should HMRC disagree with a determination.
So in conclusion, use CEST, make sure that it’s an accurate reflection of both the contractual terms and working practices (and not what you think they could be!) and periodically sanity check a sample of your determinations with a reputable third party to ensure this represents your interpretation of the legislation. Oh, and don’t forget to store the evidence for when your favourite tax person comes knocking…