In April 2021, the off-payroll working legislation (“OPW”), or “IR35 reforms”, rolled out to the private sector. The IR35 rules mean that if the worker is “Inside IR35”, then payments made to their limited company must be treated as employment income, just like a salary. The updated rules introduced specific changes, including the Status Determination Statement (“SDS”) and debt transfer provisions. Hence, the tax liability ultimately sticks with the client if the rest of the supply chain can’t pay the tax bill.
Many status determinations are made using HMRC’s Check Employment Status for Tax (CEST) tool, and its faults have been well documented. The unreliable CEST tool and legislative flaws have created scenarios where opportunists can play, and agencies must be careful.
What is a Status Determination Statement?
The Status Determination Statement (“SDS”) is intended to help combat misclassification of status due to non-compliant blanket or role-based assessments and ensure that any recruitment agency in the supply chain pays the correct tax if the engagement is “Inside IR35”.
Crucially, to qualify as an actual SDS, the following legislative requirements must be met:
(1) It must contain the conclusion on the deemed status of the worker.
(2) The client must have taken ‘reasonable care’ in arriving at its conclusion.
(3) It must explain the reasons for the conclusion.
If all three requirements are met, and if the SDS is passed from the client to the worker, then the agency assumes liability for the tax and not the client. However, the new debt transfer provisions enable HMRC to collect the tax liability from the client if the agency doesn’t or cannot pay the tax bill.
But, beware of the “void SDS” – which is where the opportunistic loophole sits.
When the status determination statement (SDS) is “void”
If the client issues a statement to the worker but fails to take reasonable care in coming to the conclusion, or fails to explain the reasons for the determination, then the statement is not a valid SDS. It’s not even an “invalid SDS”, either. It just isn’t an SDS. The best way of describing it would be to say it is a “void SDS”.
When the SDS is void, the legislative trigger that makes the agency liable for the taxes isn’t pulled, and the client remains liable to deduct and pay the taxes.
The effect of a void SDS is the same for no SDS or a valid SDS that isn’t passed to the worker. In all of those three instances, a dodgy umbrella can play games. Agencies need to beware.
Beware of the opportunistic umbrella scheme
Suppose an agency tells a worker that the role is “Inside IR35”, and no status determination statement (SDS) is issued, and then decides to pay the money gross to an umbrella. Not hard to imagine, considering the entire industry appears to be dangerously using the phrase “Inside IR35” to mean “this is a payroll-only gig.”
With no SDS, suppose the umbrella now pays part or all the money to the contractors’ personal service company (“PSC”). Well, the words “Inside IR35” brought the legislation into play, as did the passing of the money to the limited company. The client is now unknowingly building up tax risk under the OPW rules. The agency may have committed an offence under the Criminal Finances Act 2017 for failing to prevent tax evasion.
A dodgy umbrella can also run the same trick if an SDS is not given to the worker, regardless of whether it is valid.
For purported SDSs passed to the umbrella, the umbrella could decide that the conclusion is wrong, create it’s own credible looking “Outside IR35” assessment, and then pay gross. Unfortunately, the clients’ conclusion on status in the SDS is not legally binding on the agency or the umbrella.
In all these instances, if HMRC investigates, the agency or umbrella is initially liable for the tax, but under the debt transfer rules, the debt will transfer back up to the agency, and if they cannot pay, the client will end up with the tax bill.
Secure the supply chains
Providing a valid and accurate status determination statement is essential for hiring organisations to meet their statutory obligations and mitigate any financial risk.
Clients should issue a robust and valid SDS when contractors with limited companies are hired. Agencies should also demonstrably secure the supply chain to ensure payment of the correct tax.
That leaves one part of the puzzle: issuing a robust SDS.
Does CEST issue a valid or void SDS?
Now, let’s discuss HMRC’s Check Employment Status for Tax (CEST) tool. CEST is a free online guidance-only service designed to help organisations determine whether a worker should be classified as an employee or self-employed for tax purposes.
CEST was first released in February 2017, and its underlying decision engine was last updated on 24 October 2019. Despite promises made by HMRC to Parliament to keep it updated with the case law, since the last CEST update, eighteen IR35 tax tribunal decisions have been published, but the underlying CEST engine has not been updated once.
The failure to deliver on the maintenance promise is worrying, especially given the seminal decision of CRC v Atholl House Productions Ltd [2022] EWCA Civ 501 (“Atholl House”), published by the Court of Appeal on 26 April 2022. The Atholl House decision set precedent for many now-binding legal principles to determine tax status. The tribunal rejected submissions from HMRC which proved beyond doubt that their longstanding “policy view” on status matters, upon which CEST was built, was fundamentally wrong.
The main CEST fault is that in most cases where CEST concludes “outside IR35”, CEST has not conducted a multi-factorial determination. If CEST is told that a substitute can be made or that there is hardly any control, the tool will ignore all further information given, having already concluded IR35 does not apply. This is contrary to binding law, making the determinations wholly unsafe, and arguably anyone using it with this knowledge fails to jump over the reasonable care hurdle.
That aside, the printable output from CEST does not explain the reasons for the determination, which should have regard to the working conditions and the contracts. The CEST one-liner of “Your answers told us you have accepted or would accept a substitute. This suggests the worker is working on a business-to-business basis” will never meet the statutory requirement of explaining the reasons for the conclusion.
With the above in mind, ask yourself whether CEST produces a reliable output which can be relied on or whether it is broken and produces void outputs, creating nothing other than risk for firms and agencies that rely on it.
