When HMRC introduced changes to IR35 legislation last April, it also introduced a tool for employers to help when determining the IR35 status of a contractor, named Check Employment Status for Tax (CEST). Over the past year, this tool has come under a lot of scrutiny by employers and contractors alike, who deem it to be inadequate and incorrect when checking a status.
One of the main reasons that CEST has been met with such animosity from the contracting world is its failure to consider Mutuality of Obligation (MOO), which was confirmed in a recent paper published by HMRC. This has led many to question whether the proposed extension of IR35 into the private sector is currently viable due to the inconsistent nature of HMRC’s position when it comes to MOO. This is bolstered by the fact that HMRC has only won one of four IR35 cases in 2018 due to the incorrect assessment of a contractors IR35 status.
What is mutuality of obligation?
Mutuality of obligation (MOO) is one of three main factors used to determine IR35 status, it is defined as an employer’s obligation to provide work for an employee and pay for said work, whilst the employee is obligated to carry out the work given. It is considered in the contracting industry, that when MOO isn’t present within a contract, it falls outside of the scope of IR35.
HMRC however feels the provision of services in exchange for payment is sufficient to create mutual obligations between the parties. In contrast to judges in IR35 cases they do not see the relevance of ongoing mutuality of obligations.
Reassessment of IR35 status
When it comes to CEST, should HMRC choose to admit the tool failings with regards to IR35, this could ultimately have significant consequences for the tax body, as it would mean that an estimated 750,000 contractors would be eligible for reassessment of status. Put into perspective, this could potentially mean that contractors would be entitled to substantial rebates if found to be contracting under the wrong status.
A consultation into off-payroll working in the private sector ended on 10th August, and therefore we await a decision by HMRC as to when IR35 will be extended. However, many bodies including the IR35 Forum have warned the government that issues with CEST will become all the most obvious once it is used to analyse the private sector, due to the complex nature of engagements this sector poses.
Are you still unsure of IR35 and how it impacts you? Get in touch with our team today to discuss your contracts.