HMRC updates internal guidelines in midst of IR35 review

HMRC’s internal manual has been updated to include roughly 70 questions on employment status.

The guide was updated on 17 January, adding questions on worker engagement, contract details, payment arrangements, mutuality and more. The current list of questions can be found in HMRC’s online internal manual.

The manual updates have not directly fed into the CEST tool, but are part of the framework HMRC is using to determine a worker’s tax-related employment status.

“In our view, the updated CEST tool and the guidance it comes with is now more grounded in reality,” Amit Kapoor, Managing Director of consultancy firm Mindful Contract Solutions, said via email. “The clarity of the guidance and answer options provided in the tool is helpful and does serve to reduce uncertainty for a hirer filling a questionnaire.

“Also, the fact that the tool asks a holistic set of questions before announcing a decision is consistent with the approach courts have repeatedly advocated in IR35 cases.”

Initially created in March 2017, the CEST tool was updated in November 2019 ahead of the private sector IR35 launch in April. Both before and after the November update, CEST faced criticism from accountants, contractors and the private sector.

“CEST is the only tool that will produce an employment status result that HMRC will stand by—provided the information input is accurate and the tool is used in accordance with guidance,” said Susan Ball, RSM Employer Solutions Partner, in a statement

“This latest update to HMRC’s internal manual could prove very useful when trying to understand the types of questions which should be asked when making a status assessment and for both engagers and contractors preparing to use CEST.”

Curbing IR35’s potential impact

Recent months have seen HMRC issue new guidance on many areas of IR35; however, new research from Be Digital UK found that 40% of businesses are still considering phasing out contractors once IR35 legislation goes live.

While the government has launched a review into IR35 ahead of its April launch, there are a number of recruitment and consultancy firms that are calling for a delay.

The Recruitment & Employment Confederation (REC) released their letter to the Chancellor, where the professional body proposed a delay until 2021, citing both Brexit’s effect on the industry and the review’s publication in late March as reasons to hold the legislation.

As part of the letter’s statement, REC Chief Executive Neil Carberry supported the government in collaborating with the private sector.  “It’s absolutely right that everyone pays the right amount of tax, and by working with recruiters and other businesses closely, the government could ensure that this legislation works exactly as intended.

“But the extension of IR35 into the private sector, as it currently stands, will punish ethical businesses, harm workers and provide the environment for non-compliance to thrive.”

Despite the CEST updates and the ongoing IR35 review, Kapoor said he has not seen any indication that HMRC will pull back on IR35.

“In our view, the government tends to follow a demonise-legislate-tax approach for segments of society it wants to target,” he said. “The sound-bytes from the government suggest that contractor tax avoidance is seen as a societal imbalance that needs to be corrected.”

However, the government has not formally responded to the REC’s letter, and the formal review into IR35 is due to be published on 11 March. At this time, the CEST tool provides the most accurate guidance on what IR35 will look like, if it becomes legislation in April.

While the National Audit Office has released information confirming that the CEST tool does not consistently provide accurate results, HMRC has released guidance that it will stand by the result given, unless subsequent changes are made to either material or working arrangements. In that instance, HMRC recommends completing CEST again.