IR35: Tax dangers for accountancy firms

IR35: Tax dangers for accountancy firms

Michael Paulin, tax barrister and founder of Wolf IR35 Legal Services

With the new IR35 changes due to come into effect on 6 April 2021 – also known as the ‘off-payroll’ rules – accountants will no doubt be receiving questions from their clients around how they should now assess tax statuses of their independent contractors – a responsibility that previously belonged to self-employed individuals but will now rest with the businesses making use of their services.

Under these new ‘off-payroll’ rules, tax compliance responsibilities will shift solely to the end client, creating huge potential liability for the client that previously did not exist. End clients will also be required to carry out Status Determination Statements (SDS) on the contractors they use. This procedure determines whether they are genuinely self-employed, under the contractual arrangements in question, or if can they be considered a full employee.

Many accountants will be rather well-versed in IR35 matters. However, the proposed legislation isn’t as simple as it seems on the surface. The government has provided tools and guidance around IR35, but whether the tools and guidance can be properly relied upon is another matter altogether. As such, accountants will need to have a full understanding, not only of the incoming requirements, but also challenges with the existing system as proposed by the government that may affect who they turn to for support and guidance.

Issues with the UK government’s ‘CEST’ tool

To help accountants and their clients have a smooth transition into taking on increased tax assessment responsibility, HMRC created the Check Employment Status for Tax (CEST) tool, which will allow hirers, agencies and contractors that work through limited companies, partnerships, or unincorporated associations, to check whether the IR35 rules apply to the freelancers they use.

Though intended to provide support, practical examination of the CEST tool raises legitimate questions to its efficacy as, in many cases, it has proven to be unable to make relevant determinations.

“Our team has undertaken a lengthy structural and technological analysis of CEST, a process that has generated over 50,000 PDFs and more than 17GB of data,” says Nick Gilbey, CTO at Wolf IR35 Legal Services.

“We have been surprised by the number times that CEST gives ‘Unable to make a determination’ as a result. This can and does occur even where Counsel has formulated answers that would typically place a contractor inside the off-payroll rules.”

Accountants and their clients will face another headache when it comes to employing multiple contractors simultaneously, as the CEST tool does not allow for structured and holistic assessments across the business. Status assessments must be carried out individually – on a contractor-by-contractor basis. This poses challenges for accounting firms that support medium and large businesses – as the greater number of independent contractors will subsequently equate to an increased workload. The tool frankly isn’t fit for purpose for businesses of a certain size.

With the UK’s GDP falling by 11.3 percent in 2020 – the largest fall in output for 300 years – the reality is that businesses need a flexible source of labour now more than ever. The changes, and the government’s limited support, is making this difficult to sustain.

Some are taking a ”roles-based” assessment approach, but because it is not roles that are under assessment, this concept has no real basis in law and is thus ill-advised. The vital question to answer is whether, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client. Getting an accurate answer to this requires a multi-faceted approach that the CEST tool’s room-by-room based diagrammatic process struggles to process.

Solutions to these challenges

There are various steps that accountants can take to ensure that they and their clients are fully prepared to handle the transition to the new legislation in April:

  • Accountants should review their clients’ reliance on independent contractors at the earliest possible stage. Doing this early will give them a grasp of the coming workload so they can prepare.
  • Once the overall volume of independent contractors has been reviewed, it is crucial that accountants use this data to forecast the number of contractors that their clients will be using in both Q2 and Q3 of 2021. This is also a great moment to review their clients’ contractual arrangements for both quarters.
  • Another important aspect to consider is the provision of insurance. This is because, with the new rules, businesses face greater liability for tax mishandlings – CEST does not provide any protections. So, in the case that HMRC takes the view that, in fact, the answers that were provided were incorrect and that, as a consequence of the contractor being inside IR35, the PAYE and NI liabilities are due from the end client.
  • Lastly, accountants advising their clients should provide an underwritten product that insures against the legal costs of any such risk. It is hoped that this will give their clients a peace of mind as they are guided through the new regulatory landscape.

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