Thinking of engaging a contractor or consultant beyond April 2020 – here’s what you need to know…

Wed 30 Oct 2019

We are now less than six months away from the introduction of the new off payroll “IR35” legislation, and even with the postponement of the 6 November budget, there is no sign of any delay.

Therefore, it is imperative that medium and large sized organisations plan their controls and processes now to ensure they are ready for the new rules, especially given that decisions are being made now on engaging contractors who are likely to still be in place post April 2020.

What should organisations be doing now?

Organisations should be having conversations both internally and with advisers to help plan and prepare for the changes.

The key steps are:

1. Establish the key stakeholders, their roles and responsibilities;

2. Understand what population of contractor requires consideration and how the organisation would like to engage such services in the future (i.e. would they like more employees in certain areas, more interim support, more contracted out services etc);

3. Consider the communication approaches to internal stakeholders and contractors given that it is an area causing concern and anxiety, given the potential change to tax / NIC treatment of payments contractors may receive post April 2020; and

4. Review written documents, governance and working practices. It will be important these steps commence before Christmas and are well on the way to being completed by January / February 2020.

Why is this so important?

HMRC recently issued a policy paper briefing to remind organisations of the changes and the impact:

• HMRC estimates that, outside of the public sector, only one in 10 people who should be paying tax under the current off-payroll working rules are doing so correctly.

• It has been estimated that this reform will generate approx. £3 billion for HMRC, over the next 4 years.

• HMRC have announced that they will only use information from status decisions resulting from these changes, to open a new enquiry into an individual’s personal service company for earlier years if there is reason to suspect fraud or criminal behaviour.

• HMRC will be putting in place various measures to help businesses and other organisations get the status of the contractors they engage right. This includes one-to-one support for 2,000 of the UK’s biggest employers and direct communication to around 15,000 medium-sized businesses. This is supported by workshops, guidance, online learning, round tables and an enhanced online tool that will help them make the right decisions.

• HMRC will launch an enhanced version of the CEST tool before the end of the year.

Additionally, there are some recent updates on HMRC’s approach to status, including the appeal made by Christa Ackroyd Media Limited and within the NHS Digital Annual Report and Accounts (2018-19), which we outline below and that will give reason to plan carefully for the April 2020 changes:

Christa Ackroyd Media Ltd v HMRC (Appeal)

Further to our previous article in this case, the Upper Tax Tribunal has upheld the decision from the first tier tribunal that sufficient control existed in the engagement between the BBC and Christa Ackroyd Media Ltd, to deem this an employment relationship under the IR35 legislation.

The findings from this appeal, demonstrate the importance of two key factors when determining whether an individual is employed for tax purposes:

1. Control proved to be a key determining factor. The UTT determined that the BBC had a high degree of control over how the programmes presented by Ms Ackroyd were undertaken. Although Ms Ackroyd was expected to and did drive change in the BBC show ‘Look North’, including making editorial contributions, the ultimate decision as to how the programme might be changed lay with the BBC.

2. Mutuality of obligation, currently not reflected in HMRC’s CEST tool, also proved a deciding factor in this case. As Ms Ackroyd was contractually obliged to perform a minimum of 225 days of service as a journalist for “Look North” BBC Yorkshire, and was required by the BBC to be available at 6.30pm.

NHS Digital Annual Report and Accounts

Within their published accounts, it is noted that despite using HMRC’s CEST Tool, HMRC challenged the organisation’s approach to off payroll assessment and reporting leaving the organisation with a liability in excess of £4m. Given this, it has now taken action to enhance processes by using more stringent testing of employment status (via external support) rather than depending on HMRC’s CEST assessment approach due to the significant liability this has left the organisation with.

This demonstrates the importance of being proactive with assessments and ensuring a robust, well defined process is in place to manage the risk accordingly, with external support used where appropriate.

Our view

It is welcomed that HMRC are investing in measures to support businesses to navigate this area of complexity, and we await the introduction of the enhanced version of the CEST tool.

However, we are concerned about the delay in these announcements given the close proximity to the implementation date, and the fact that for many organisations with engagements likely to go beyond April 2020, we are already operating within the new rules!

As we do not know how the CEST tool will be improved, we are unable to comment on its effectiveness. In its current form, the CEST tool is widely seen as ineffective as it does not consider important factors derived from key case law decisions, i.e. mutuality of obligation and the intention of contracts from the outset of the engagements.

At Mazars we are currently helping organisations prepare for the new rules by:

• Providing bespoke advice to clients in various sectors;

• Offering technological solutions to allow engagers to identify the suppliers affected by the new legislation; and

• Providing an opinion on a contractor’s employment status, using factors established from case law (including control, substitution, mutuality of obligation and financial risk).

By assisting our clients with this preparation, we are helping them demonstrate that reasonable care has been taken in making employment status decisions, particularly important for organisations which fall within the Senior Accounting Officer (SAO) regime.

Further, medium and large organisations in the private sector should take note of the two key factors highlighted above in the Christa Ackroyd case to ensure they are correctly considered when performing status determinations for engagements which are likely to extend beyond April 2020.

It is crucial to show reasonable care has been taken when making such determinations, and given the complex nature of the various tests used, getting appropriate support and ensuring internal stakeholders are clear on their responsibilities is crucial. This message is certainly reinforced by the experience NHS Digital has had in policing this risk since it was brought into legislation for the first time in 2017 for the public sector.

Next steps

We are happy to discuss this with you in more detail and have a wide range of experience in helping organisations with this complex area of tax risk. Please do get in touch with the Employment Tax team to discuss in more detail.