At iGo Recruitment, we are committed to keeping our healthcare professionals and employers informed about the latest developments that impact work, employment and wages. We want to bring to your attention the recent update to the HMRC Check Employment Status for Tax (CEST) tool, which is crucial for determining your IR35 status and to provide context for employers and employees, as well as to signpost to useful resources on the topic:
What is IR35?
IR35, also known as the off-payroll working rules, is a tax legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a personal service company (PSC), but who would be an employee if the intermediary was not used. The legislation ensures that such workers pay similar taxes to employees.
- The introduction of IR35 legislation significantly impacted the way contractors and healthcare employers operate. The ‘IR35’ rules were introduced April 2000 with the aim to prevent the exploitation of personal service companies (PSCs) for tax avoidance. Prior to this it was common place for contractors both in public and private sectors to provide their services through a personal service company (PSC).
- There were off-payroll reforms in 2017 and 2021:
- 2017 saw changes to place the responsibility for determining an employment status with end clients in the public sector, rather than the worker as it had been since 2000. This placed the burden on the fee payer i.e. the employer, as well as a potential fine should it be mis-classified.
- 2021 saw the same reforms applicable to the private sector with an exception where end clients who qualify for the small business exemption (‘Small Businesses’ as defined by s382 of the Companies Act 2006) or based wholly overseas would be excluded, meaning contractors retained responsibility for determining employment status.
Misclassification of IR35 status can have significant risks for both contractors and employers with financial penalties, reputational, legal and operational costs, distraction and challenges.
What workers need to know:
The HMRC has made some changes to the CEST tool, which is used to assess whether a contractor falls inside or outside of IR35. While the core logic of the tool remains unchanged, there are a few updates and adjustments in the user manual that you should be aware of:
- Updated Guidance: The CEST user manual has been enhanced to provide clearer guidance on financial risk, substitution, and control. It is essential to understand these factors as they play a significant role in determining your IR35 status and to answer them appropriately when using the CEST tool.
- Consistency with Case Law: Despite the updates, the CEST tool’s logic remains based on case law from November 2019. This means that while the tool has been cosmetically updated, the underlying principles guiding its decisions have not changed, there are further fields relating to other similar contracts, which may prove tricky for an employer to gather.
Why This Matters:
For healthcare workers, understanding your IR35 status is crucial as it affects your tax obligations and how you are paid. The updated CEST tool and its guidance can help you make informed decisions about your employment status and ensure compliance with HMRC regulations. It remains the end client who must determine the IR35 status and not the contractor.
What employers need to know:
With the changes to IR35 rules in 2017, the responsibility for determining IR35 status shifted to the end client, i.e., the healthcare employer in our sector. This change necessitates a thorough understanding of the legislation and robust processes to ensure compliance.
To navigate the complexities of IR35 and ensure compliance, healthcare employers should adopt best practices in recruitment to help mitigate issues in the future such as:
- Contract Terms: Clearly outlining the terms of engagement, including the determination of IR35 status.
- Warranties Provided by the PSC and suppliers: Ensure that the PSC, and any agency being used warrants compliance with all relevant legislation, including IR35.
- Termination Clauses: Including provisions for terminating the contract if the PSC fails to comply with IR35 or other legal requirements.
Stay Informed:
We encourage all our candidates and employers to review the updated CEST tool and familiarise themselves with the new guidance. Staying informed will help you navigate the complexities of IR35 and make the best decisions, as well as to be able to answer any questions posed by hiring teams, agencies and contractors ahead.
For more detailed information, you can read the full update on the GOV website: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm11000
Engaging with experienced recruitment agencies and legal advisors can help navigate the complexities of IR35 and ensure that contractors are correctly classified.
For more information on how iGo Recruitment can assist with navigating IR35 and ensuring compliance, please contact us https://igorec.co.uk/contact-us/