Significant fines for public sector bodies show the danger of relying on HRMC’s guidance tool for IR35 status determinations.
Court cases have exposed the dangers of relying too heavily on HMRC’s check employment status for tax (CEST) tool to make IR35 status determinations.
The case of RALC Consulting Limited vs HMRC concluded in favour of the contractor because CEST guidance failed to take into account mutuality of obligation – one of the fundamentals of IR35.
Then the government’s Department for Work and Pensions (DWP) was left facing a hefty £87.9m fine for providing incorrect IR35 status determination for its contractors – even though it used CEST to help make those decisions.
The Home Office, labelled by HMRC as “careless” in their determinations, was fined £29.5m and had an additional £4m penalty suspended – providing it improves its performance in the future. And a £12.5m penalty was the outcome for the Ministry of Justice (MoJ) after it also got determinations wrong.
The total bill to pay for these three public sector bodies is a whopping £129.9m and while it’s uncertain how much the Home Office and MoJ utilised CEST to assess their contractors, it’s clear that they, and other organisations, need to do more in their approach to IR35 status determinations to make sure they get them right.
A tool for guidance
Markel consistently reminds its clients that the CEST tool is only for guidance and shouldn’t be relied on entirely when making IR35 status decisions. Cases like the ones mentioned demonstrate that it is not worth the potential financial loss.
The common issue with these cases is that they date back to decisions made in 2017, when the original IR35 rules reforms were introduced for the public sector only. There was no real process in place for determining IR35 status, even though it became the responsibility of end clients to make determinations for their contractors.
Not a great deal has changed now with the expansion of new IR35 rules to include larger private sector businesses – the process is still client-led and guidance on how a client should manage this is still limited.
Many of our clients are under the impression that if CEST is an HMRC tool it must always be right and can always be relied on without risk. The evidence in these cases unfortunately disproves this.
If in doubt, it is recommended that end clients get expert, professional advice and utilise the skills and knowledge or independent tax firms such as Markel to help determine status rather than rely entirely on the CEST tool.
Click here to learn more about IR35 and how to determine your IR35 status.