Contractor tax experts draw up CEST advice for clients’ New Year IR35 tests

Contractor accountants are using 2019’s last working days to write damage limitation-style advice for end-users who are gearing up to use CEST in the first week of January 2020.

One such accountant, Orange Genie, is putting “health warnings” into CEST guidance that it is drawing up for those engagers who are “insisting” on using the HMRC tool in the New Year.

Those warnings mean CEST is still seen as an unsound means to test contractors’ IR35 status, despite HMRC’s 40-strong component update and its clarification about its wording.

'The real issue'

In fact, asked about whether he regards the HMRC update or clarification as an improvement, WTT Consulting’s head of tax Tom Wallace – formerly of the Revenue, responded:

“The real issue is that HMRC, and by extension CEST, still assumes that a Mutuality of Obligation exists in any contract, so it fails to test sufficiently the kind of MOO that exists. 

“This is despite the now mounting body of case law that shows this assumption is incorrect,” he said. “And therefore HMRC’s view, and therefore the tool, is flawed.”

'Overly reliant'

Tasked with writing guidance for clients set to use CEST, Orange Genie’s head of operations Helen Christopher agrees that Mutuality not featuring in CEST is its key shortcoming.

“The revised CEST appears improved in terms of asking more questions around Control and not shutting you down straight after the Substitution question, but in reality, it is still overly reliant on substitution and [crucially it] does not apply MOO.”

Status expert Rebecca Seeley Harris confirmed that HMRC’s tool is not asking questions “in the spirit of what the courts are trying to achieve with the test of Mutuality.”

She is more sympathetic to the tax department, however, and admits that unlike “most” tax and IR35 advisers, she agrees with HMRC that MOO is, in fact, incorporated into CEST.

'Very narrow interpretation'

That still doesn’t mean she would endorse it to end-users, some of whom social media posts indicate perceive the tool as the quickest, easiest and cheapest way to get compliant for April 2020.

“I agree with HMRC…that Mutuality is in CEST but, and it’s a big ‘but,’ HMRC have a very narrow interpretation of what MOO is,” says Harris, the founder of Re Legal Consulting.

“What needs to be established is whether there are any continuing obligations outside of the contract period. That’s the question that needs to be asked [by CEST].

“HMRC should definitely clarify this point and, although the whole point of law is that there are always two opposing arguments, HMRC’s argument is really pushing the boundaries of what is reasonable.”

'Only if HMRC acts can CEST be trusted'

Similarly, at WTT, Mr Wallace believes that despite providing an update, and a clarification, the onus is still on the Revenue to come forward with more should it want its tool to be trusted.

“Only once HMRC acknowledge and reflect this [that it assumes MOO exists] in the questions can CEST be relied on to give accurate determinations”, the adviser said.

If the agency does address the MOO issue (it tried back in July in a paper, which members of the IR35 Forum criticised), then HMRC could confidently say it backs the results, he added.

'January is going to be busy'

At least that would provide the certainty that clients -- and their advisers -- are currently without and it should result in advisers' ‘health warnings’ in CEST guidance being unnecessary.

Readying her guidance for the first working week after Christmas, Orange Genie’s Ms Christopher reflected: “We have been working with a mixture of end-clients, a handful [of whom] still believe this [the April 6th commencement date] may not happen and are pinning their hopes on a review in early 2020

“I don’t think they are right. And my experience is that the larger the end-client; and more well-known the brand, the more likely they are to be cautious.

“Medium-sized businesses are much more open to making changes to working practices and trying to continue working with contractors outside IR35. January is going to be busy. [Many businesses] are now switching off [but not before they are] asking for help in the first week of the New Year.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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