IR35 from 6 April 2021 – Status Assessments has been saved
IR35 from 6 April 2021 – Status Assessments
This article shares our experience on the challenging technical and practical aspects of making employment status assessments, a key requirement for end clients using off payroll labour operating via Personal Service Companies following the changes to the IR35 rules from 6 April 2021. We share some of the most common questions asked by clients and provide our experience and recommendations on a number of challenging areas.
Determining who holds the obligation to undertake the employment status assessment
One of the key challenges organisations need to contend with as part of the introduction of the IR35 rules is whether they are receiving the “personal service” of the worker, or whether they are instead procuring a “fully contracted out service” (sometimes referred to as an “outsourced service”). This is likely to be reasonably straightforward for temporary labour supplied to work solely within a function of an organisation’s business by a traditional employment agency; in this case the receiving organisation in almost all cases should be the end client per the rules, and have the obligation to make the status assessment.
However, where supply chains are more complex and multiple suppliers (who are not traditional employment agencies) combine on projects, or provide services to each other which are very labour centric, or perhaps operate as part of a Joint Venture arrangement, the question can be more complex. The principles surrounding this area are currently untested by the courts, and the initial available guidance provided by HMRC ahead of the IR35 changes from 6 April 2021 is reasonably limited.
Our experience: We recommend that organisations carefully consider the hallmarks of a “personal service” in contrast to a “fully contracted out service”, and develop a relevant methodology containing any sector/role specific nuances against which to assess supplier contracts.
In conjunction with our legal team, we have built up a breadth of experience in reviewing contracts across a range of industries and have gathered additional insight to supplement the publicly available guidance on this point. We have also supported organisations in introducing operational processes, including triage mechanisms to enable non-tax specialist stakeholders to identify those arrangements presenting greater risk. Training workshops and “how to” guides for stakeholders can also be of benefit and help to mitigate risk where non-tax specialists are involved in the process. We can also assist organisations in reviewing contracts from a legal perspective, so as to ensure any obligations and risks are appropriately covered between suppliers.
Unintentional misinterpretation of the meaning of status assessment questions and the multi-choice responses
Employment status is an inherently complex area with principles grounded in evolving case law. For example, the way in which a tax specialist would interpret a question included in an employment status assessment may be entirely different from the way in which a non-tax specialist would interpret the same question and could result in very different outcomes. We recommend that organisations ensure sufficient education is provided to those completing status assessment questionnaires where non-tax specialists are involved in the process, with sufficient tax specialist review also being factored in. It is unrealistic to expect non-tax specialists to complete status assessments accurately without appropriate support and guidance and it is likely to result in tax risk and wider implications further down the line.
Our experience: we have designed bespoke training workshops and “how to” guides for stakeholders, who will be responsible for completing or reviewing status assessments to help mitigate the risk of misinterpretation. We have seen a number of organisations introduce some form of continuous quality monitoring process over status assessment completion, as well as ensuring the provision of ongoing support to those responsible for undertaking status assessments.
This is in part because this is a complex area and because existing processes will need to stand the test of time, but also because of developments in this area. For example, any changes to HMRC’s CEST and broader tax case law developments will need to be considered with reference to the organisation’s status assessment process, so that this can be updated as necessary to help prevent increased exposure to risk developing over time.
Status assessment tools which provide an ‘undetermined’ or ‘risk assessed’ outcome
Employment status can be complex and whilst some cases may be reasonably ‘clear cut’, it will be more difficult to reach a reasoned conclusion on others. By its nature, the full range of nuanced individual case circumstances is almost impossible to codify within a status assessment tool. HMRC’s CEST tool will provide an ‘undetermined’ outcome where those cases need more detailed focus and some other tools will present this outcome in a slightly different way, for example by stating an outcome alongside a degree of certainty.
For complex cases where outcomes are undetermined (or subject to an above-acceptable level of risk), it is important to recognise that full reliance cannot be placed on the output of a status tool (CEST or an alternative) and that further individual case review will be required as part of a process; for example, using further targeted questions and tie-breakers may allow the organisation to reach a reasoned conclusion for those cases. The alternative to resolving undetermined cases quickly is to take a more conservative policy decision that such cases will be treated as ‘inside IR35’, but this may of course have wider implications, such as resourcing competitiveness. More information is included below on how we have supported clients in resolving undetermined cases.
Our experience: We have assisted a wide range of clients with performing status assessments across populations of different sizes and differing levels of complexity. This has included supporting organisations in triaging large populations of contractors into more “straightforward” cases where a decision can be reached quickly and “complex” cases, which are higher risk and require more time and attention. In the latter, we have used a specific methodology coupled with our deep understanding of the HMRC CEST logic and tax tribunal case law to resolve those cases efficiently, working collaboratively with client stakeholders to agree risk parameters and reach conclusions as part of the process.
Developing a process for managing the “Business as Usual” contractor population
Now that the extended IR35 rules are live, the focus has moved away from an initial review of the full contractor population and towards the importance of developing and executing a robust “business as usual” process, i.e. how an IR35 process will operate effectively in their contractor resourcing landscape for new contractor hires after the rules have been introduced.
For organisations which continue to engage contractors via PSCs, ensuring that the “business as usual” process is fit for purpose is a key step. We recommend mapping out the wider resourcing process and documenting how and where the IR35 compliance obligations fit within this. In some cases, there may be a short process, involving only the hiring manager and an agency, but others could involve a more complex structure, including an internal resourcing team, managed service provider, vendor management system and agency suppliers.
It is likely that for IR35 “business as usual” will broadly consist of two processes. Firstly, a process will be needed for roles which have already been assessed (as part of the incumbent review in the lead up to the implementation date or subsequently) and where the organisation is already advertising the role as being ‘inside’ or ‘outside’ the IR35 regime. Secondly, a process will be required for new roles, which will need to be pre-assessed prior to the role being advertised and priced.
In cases where a role has already been assessed and individual contractors are being ‘matched’ to the role, the client will need to retain appropriate records to demonstrate that the individual is being engaged to perform the identical role type. For large populations, where contractor on-boarding processes remain within the organisation, workflow case management tools containing a role library can store previous status positions and be a helpful feature in a future on-boarding process. Such solutions can also enable the organisation to follow a consistent approach to making its assessment of new roles, by introducing template questionnaires, standardised communications and Status Determination Statements. They can also provide a framework to manage the process.
Our experience: we have assisted clients with developing a process to manage their “business as usual” contractor population, helping them to navigate the complexities arising from the various sources of information and different stakeholders involved in the process. We have also developed our IR35 Workflow Tool , which has been designed to provide an operational management solution to support organisations in dealing with their contractor population at scale. Further details of the IR35 Workflow Tool can be found here.
Common questions on performing status assessments
Should we use CEST or an alternate status assessment tool?
CEST is a single tool designed to cover a wide range of industries and engagement scenarios. Based on our conversations with clients to date, the majority are able to reach a definitive ‘employed’ or ‘self-employed’ outcome for a significant proportion of their population when using HMRC’s CEST tool.
HMRC will honour a ‘self-employed’ output from CEST without further enquiry, assuming the inputs are correct. It is within HMRC’s gift to provide this guarantee, and determining status by any other means will be subject to the risk that HMRC could challenge the outcome, meaning that time and resource might have to be expended in defending the position taken.
A cost effective approach to minimising risk would be to use CEST for all cases where it provides a definitive answer, and to consider the more complex ‘undetermined’ cases by asking additional targeted questions. This should minimise costs and deliver higher levels of assurance than simply applying an automated solution to resolve all cases automatically. If you wish to use an automated solution other than CEST to resolve all cases, we would recommend you seek to understand the underlying logic and evaluate the differences from CEST. This will help you better understand the reasoning for the conclusions reached in advance of any potential HMRC scrutiny.
There are certain industries and professions which have more specific employment status rules where specific guidance has been issued by HMRC (examples include TV and film production and some healthcare professional roles) and where using CEST is less likely to be an appropriate alternative. A bespoke questionnaire may need to be developed to take into account those nuances and provide a stronger foundation for assessment in these cases.
Finally, another possible option for managing employment status tax risk is to insure against the risk with an appropriate insurance policy. If this is a route you do consider, we would strongly recommend that you check the terms of cover including whether all cases are covered or only those with a reasonable filing position; whether the insurance provider will want to control any negotiations with HMRC; and whether the cover extends to any tax and National Insurance due, or only to costs incurred in defending a position.
Many organisations have expressed a reluctance to insure against tax risk, instead taking a policy decision to focus on building tax governance and controls to manage tax risk. We would also stress that insuring against tax risk will not be seen by HMRC as an alternative to a robust system of tax governance and controls and should not be used as such.
How can you help us resolve undetermined cases?
CEST cases which produce an undetermined answer are usually more complex and require independent consideration of the precise facts and the application of experience and judgement. As CEST is the most widely used status assessment tool, we have reviewed the underlying logic and the relevant tax tribunal case law and developed a process which identifies the areas which are most important to a case outcome. For any undetermined cases, this allows us to conclude on the additional steps needed to determine the position, with supporting data, in the most efficient way.
This also saves time as we can concentrate our review on exploring aspects of the case that will have a material impact on the status outcome. For example, assume that CEST delivers an undetermined outcome for a knowledge-based consultant with low financial risk and a medium level of control. In this case, as we know that the degree of control is more likely to be relevant than the degree of financial risk, our approach would focus on gaining a better understanding of the extent to which the framework of control manifests itself in practice. Our experience and knowledge of CEST allows us to identify this type of focus in a variety of scenarios. Building tie-breaker information to sit alongside the core technical status principles can also be informative and useful to support the conclusion reached.
Who within an organisation is typically undertaking status assessments?
A range of stakeholders may be involved, depending on the process and the size of the challenge, i.e. how many contractors and/or roles need to be assessed. From our perspective, the most successful and efficient processes leverage tax and legal expertise at the outset, to define the contractor population and set the approach. This includes developing appropriate tax policy positions and the provision of appropriate support and education to those completing the assessments.
In our experience, misinterpretation of questions by those involved in completing status assessments is one of the most common pitfalls. Often the status assessment is completed by hiring managers, who have clear visibility over the contractors’ day-to-day working arrangements, but may not have the knowledge or experience to respond to the questions raised. We can also help to design appropriate review processes, particularly in respect of complex cases.
How do we anticipate HMRC will review this area in the future and how should we prepare?
We anticipate IR35 compliance is likely to be a focus for HMRC in any post 6 April 2021 Employer Compliance Review or Business Risk Review. To be prepared for this, an organisation should consider being able to articulate its approach in a number of key areas, including:
- What status assessment tool/questionnaire was used and how the logic delivered an outcome.
- What support has been provided to non-tax specialists involved in the employment status assessment process.
- How outcomes for cases that were deemed to be outside IR35 were reached.
- How outcomes for CEST ‘undetermined’ cases or the equivalent risk-rated alternative tool measures were reached.
- Whether any interpretation or policy positions was taken on key tests, such as a possible right of substitution.
In some cases, tax stakeholders who own the HMRC relationship may not have led the project or have visibility across all aspects. We would recommend in those cases that appropriate information is obtained from the project team in order to be able to articulate the organisation’s approach, either to HMRC on a review, or as part of Senior Accounting Officer governance requirements. Where a project team disbands following implementation, an alternative route to maintaining visibility over the process would be to perform a post- implementation compliance review.
What evidence should we keep to support our status assessment outcomes?
We recommend that at a minimum, for each case, a record is kept of the status assessment questions, answers and final case outcome. For complex cases which require further work in respect of undetermined cases, or, where a contractual review is required to substantiate the facts and circumstances, we strongly recommend that such documents are stored alongside the case record in order to document the review fully. Any professional advice taken should also be documented as part of the record.
What does our Status Determination Statement need to show?
Per HMRC guidance, for the Status Determination Statement (SDS) to be valid the client must:
- state in the SDS whether or not the worker would be an employee or office holder for tax and NIC purposes if they were directly engaged by the client.
- provide their reasons for coming to that conclusion.
- have taken reasonable care in coming to their conclusion
In respect of providing reasons for coming to the conclusion, we would anticipate that some explanation linked to the strength (e.g. high, medium or low) of each employment status indicator reviewed would be an appropriate level of detail. In respect of large populations, we have supported clients by automating SDS outputs linked to the underlying CEST logic to ensure an appropriate weight of rationale is given to each factor and a balanced conclusion reached.
How can Deloitte support on status assessment work?
We have supported clients in a number of ways in respect of their employment-status assessment projects, including:
- Helping set project foundations and strategies for clients to implement with in-house teams;
- Running large scale status assessment projects end- to-end, including ongoing project management;
- Providing specialist technical support on individual cases;
- Performing outsourced CEST processing and SDS creation;
- Providing support with designing bespoke employment status questionnaires;
- Deployment of support to resolve complex and undetermined cases;
- Evaluation of resourcing landscapes for “business as usual”;
- Deployment of workflow case management technology for “business as usual”; and
- Tax litigation support.