Doubt has again been cast on the effectiveness of HMRC’s IR35 tax status checker tool after news that it failed to provide a response in nearly 20 per cent of cases.
The IR35 tax reform legislation that is designed to stop tax avoidance from ‘disguised employment’, which occurs when self-employed contractors set up their own limited company to pay themselves through dividends (which are not subject to National Insurance), and through deliberate misclassification of themselves. From April next year, medium-to-larger private sector organisations will be made responsible for determining whether their non-permanent contractors and freelancers should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35), based upon the work they do and how it is performed. The responsibility for determining whether contactors are inside or outside of the legislation currently lies with the contractors themselves.
The legislation changes next year will mean that the tax liability will be transferred from the contractor to the company that directly engages the contractor.
CEST – The Tax Status Checker Tool
The Check Employment Status for Tax (CEST) service was introduced by HMRC in 2017 to help employers, hirers, and workers to determine the employment status of workers and to ensure the correct tax and national insurance is paid for the work being done.
In 2019 HMRC tried to enhance the online CEST tool to improve the service. The online tool, available here: https://www.gov.uk/guidance/check-employment-status-for-tax asks the user a series of multiple-choice, checkbox-answer questions and delivers a decision based on the answers given about whether the off-payroll working rules (IR35) apply to a contractor (inside or outside the IR35 legislation) or if some work needs to be classed as employment or self-employment for tax purposes.
HMRC figures show that tool was used 975,416 times during the 12 months to 24 November 2020 to determine the IR35 tax status of contractors but, in 19 per cent of cases (188,719), the tool was unable to return a conclusive response.
Problems Back In 2018
The CERT tax tool had similar problems back in August 2018 when it was found to be getting the wrong result in almost half of cases.
What Does This Mean For Your Business?
If HRMRC itself cannot reliably use its own tax calculation tool to give an answer to users in 20 per cent of cases, =many people will feel very frustrated at its apparent unreliability and if the official tool cannot help, what chance would many contractors have themselves of working it out by having to study complicated tax rules and regulations? This news comes at a bad time for already hard-hit medium-to-larger private sector organisations that will soon have the responsibility for correctly determining the tax status of contractors shifted onto them, and who may need help (such as using the CERT tool) in doing this. HMRC, however, does advise those who are not able to get a decision via the tool to contact them for help, but it is important for contractors to know where they are as soon as possible as regards their tax status to avoid potentially facing a large tax liability due to wrong decisions or delays caused by indecision or inconclusive results.
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