No IR35 tax risk for agencies when using HMRC's tool


A former HMRC inspector has claimed that recruitment and employment agencies will bear no tax risk as long as their client uses HMRC’s CEST tool when assessing a contractor’s IR35 status.

Philip Manley, former-HMRC inspector and current tax partner at Dow Schofield Watts made the argument in ContractorCalculator and The Law Place’s 18-month investigation into the tax law changes.

Manley explained that agencies may have no tax risk for processing off-payroll contractors using Personal Service Company’s (PSC) if the client has used CEST to assess their status.

Under IR35 legislation, the recruitment, hiring or employment agency is usually liable for a contract hire’s tax risk.

However, ContractorCalculator’s investigation has found that there are a couple of instances whereby the agency would not be liable.

In both these instances, if the agency asks for a reason for a tax status decision or the agency can show that the client has not demonstrated reasonable care in reaching that tax decision, ContractorCalculator claim that the agency can overrule the client’s decision without any liability.

David Chaplin, Founder and CEO at ContractorCalculator explained that this has the potential to be good news for agencies if they want to override a client's tax decision - without even having to inform the client at all.

He said: “The agency could then inform HMRC that it decided IR35 did not apply and that the hirer failed to take reasonable care and consequently made an incorrect decision, relieving the agency of any liability.'

Previously, many agencies were worried that IR35 liability would fall on them. Official guidance from a leading tax specialist on this said: "The recent reform to IR35 within the public sector means that agencies supplying contractors to the public sector are financially liable for the tax status if, after an enquiry, HMRC considers that the agency did not pay the contractor correctly."

On top of this fear, over 85% of recruiters gave negative feedback on HMRC's self-assessment CEST tool in a study last year - showing many were fearful that the tool used to assess this liability was not accurate enough.

CEST is an online tool by HMRC used to determine the IR35 status of an off-payroll contractor. It has been widely criticised by contractors, agencies and contracting authorities.

Source - Recruitment Grapevine

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