In April 2021, the off-payroll working legislation (“OPW”), or “IR35 reforms”, rolled out to the private sector, affecting all private sector haulage and delivery firms who hire workers operating via their own limited companies, sometimes referred to as a personal service company, or PSC for short.
Under the new legislative regime, firms should conduct status determinations on a case-by-case basis and identify PSC-based workers who are “Inside IR35”, meaning that the nature of the engagement between the worker and the firm is deemed employment. Where the relationship is deemed employment, taxes must be deducted and paid at source. Failure to do so risks future tax bills, interest, and maybe even penalties.
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Check Employment Status for Tax (CEST)
HMRC released a simple and free online guidance-only tool called Check Employment Status for Tax (CEST) to try and assist firms with their IR35 compliance.
But, users should be mindful that there are flaws within the tool and that it hasn’t been updated to align with the binding law published by the Court of Appeal in April 2022.
The primary risk for firms relying on CEST determinations occurs where it states “Outside IR35”. The danger arises because the CEST rules engine most likely won’t have considered the answers to all questions, thereby failing to adhere to reasonable care. HMRC’s guidance even describes a lack of reasonable care as “failing to take account of all relevant evidence.” CEST hasn’t.
In 99% of cases where CEST concludes “outside IR35”, CEST has not conducted a proper determination. Suppose you tell CEST the worker can substitute or that there is hardly any control over them, or lots of financial risk. In that case, it will ignore all further information, concluding that IR35 does not apply using a single-factor determination.
How can firms hire contractors “Outside IR35”?
To operate “Outside IR35”, the driver usually must own their vehicle solely for their business. This status area is man-with-a-van territory but with a haulage lorry instead. Where the business owner provides substantial equipment, it is unlikely to be deemed employment.
Where the firm provides a vehicle, and the driver solely works for the firm, for fixed hours per week, with a delivery schedule handed to them to implement, it’s likely to be a slam dunk “Inside IR35”.
Historically, some firms have sought to use the “armies-of-lawyers” approach to draft contracts that seek to circumvent employment status being met, both for rights and tax, often by inserting a substitution clause. These clauses attempt to negate the requirement for personal service necessary for an employment relationship. But, unexercised rights of substitution do not work.
In rights cases, the courts can set unrealistic clauses aside using the principles established by the Supreme Court where written agreements do not reflect reality. In tax cases, suspect substitution clauses are side-stepped where the dominant purpose of the agreement is one “of services” rather than “for services”. Suffice to say, an unexercised and impractical substitution clause isn’t worth a row of beans, unless the hiring firm is agnostic about who does the driving and can provide evidence that substitutions have occurred.
With financial risk and substitution dealt with, this leaves us with control. CEST doesn’t take a nuanced approach to control and sets the bar much higher than needed to demonstrate “Outside IR35”. But, CEST is HMRC’s position, despite the Court of Appeal stating that the extent of control should be considered when making full determinations.
If you are going to rely on the near absence of control, the firm and worker would need no fixed hours per week, no obligation to accept delivery jobs, and complete freedom over how they went about the delivery, preferably being paid a fixed fee. In addition, the worker would ideally need to demonstrate they had other clients, even competitors to the firm, for whom they also carried out deliveries.
Emerging case law
Will the emerging case law help firms hire “Outside IR35”?
An employment rights case involving Amazon UK Services Limited and 1,400 drivers is in an early stage of tribunal proceedings, with a preliminary hearing decision published on 21 March 2023. The case involves drivers working for logistics companies which Amazon uses for parcel deliveries. Whilst the case could take years to final judgment, substantial arguments are likely to be considered even at the next stage, which may be helpful for driving firms.
A tax status case, Commissioners for His Majesty’s Revenue and Customs (Respondent) v Professional Game Match Officials Ltd (Appellant), is being heard by the Supreme Court in June 2023, where HMRC are seeking to claim that part-time football referees should be taxed like employees. The results of this decision may have a bearing on engagements structured on an ad-hoc type basis with no ongoing obligation to accept the work offered. The referees model is not dissimilar to job-by-job models used in the haulage industry.
For now, it would be prudent for haulage firms to take expert advice and perhaps even seek clearance from HMRC where the status of engagements is uncertain.
Author: Dave Chaplin is CEO of IR35 compliance firm IR35 Shield and author of IR35 & Off-Payroll Explained
