In 2019 the NHS received a £4.3 million tax bill after HMRC decided it had set its contractors’ IR35 status incorrectly, even though CEST - HMRC's own IR35 status assessment tool - was used to make the assessments in question.
NHS digital changed their approach to IR35 assessments in January 2019, after which there have been no further reported challenges by HMRC.
Compliance experts throughout the contracting industry have maintained since its launch in 2017 that CEST cannot be relied on, as it ignores some case law and often gives incorrect results. However, many clients have seen it as a “safer” option, due in large part to HMRC’s promise to “stand by” decisions made by CEST.
It should now be clear to everyone that this promise is no more reliable than CEST itself.
This is not the first time HMRC has disregarded the results of CEST
HMRC have also tried, unsuccessfully, to get evidence based on CEST omitted from consideration in an ongoing IR35 tribunal case on the grounds that it was “irrelevant”.
Speaking in the case of RALC Consulting Ltd vs HMRC, their legal representatives argued “The form, content and application of CEST to the appellant’s arrangements is irrelevant to the issues to be determined by the tribunal; namely whether the hypothetical contracts between Mr Alcock and the clients would have been contracts of service.”
If you’re wondering what the tool is for if it’s not intended to decide IR35 status, you’re not alone.
This is not the first time a high-profile client has paid a huge tax bill after using CEST
The BBC’s IR35 issues have been well documented already, but it’s worth noting here that their use of CEST resulted in 92% of their contractors being deemed to be “employed for tax purposes” and they paid £8.3M on account between April and September 2017 to cover tax that HMRC believed should have been paid. It’s also worth noting that the cost of their contingent workforce rose by £3.2M in 2018-19.
What should your clients learn from this?
It’s easy to be wise with hindsight, and it’s no surprise that NHS Digital have now changed their approach to IR35 assessments. Hopefully, your clients can learn from this mistake before they find themselves with a huge tax bill. As this incident demonstrates, it’s not enough to follow government guidance and advice, and most clients will need expert help to prepare for their new responsibilities.
We strongly recommend engaging a compliance expert who can assess the situation and help implement the necessary processes to ensure they assess IR35 status correctly, which will allow them to mitigate the risk while maintaining their access to the talent and skills they need.
How Orange Genie Compliance can help
Orange Genie Compliance will assess your clients’ current position, including the size and make-up of their contingent workforce, the contractual arrangements in the supply chain and the working practices in place. They will then make bespoke recommendations based on their findings, and help your client implement the necessary processes to minimise risk and cost while ensuring continued supply.