13th August 2018
Regular readers of the 6CATS International blog will know that we’ve written about the many ways in which agencies placing contractors internationally can find themselves unwittingly falling foul of tax compliance laws. A recent news story from the UK highlights just how easily this can happen.
CEST test incorrectly classifies half of contractors for IR35
In the UK, the government’s HM Revenue and Customs (HMRC) has a strict definition of a self-employed worker. If an individual doesn’t fit that classification, they are deemed to fall under IR35 rules, which means they are then liable to pay higher tax and national insurance contributions. The rule is designed to combat tax avoidance by establishing the employment relationships between contractors and clients. HMRC has an official testing tool called CEST (Check Employment Status for Tax), which has been used by professionals, employers and agencies as a reliable way to check if individuals are correctly classified as either an employee or self-employed and, therefore, that they are paying the correct tax. However, an investigation over 14 months found that the tool incorrectly categorised workers in almost half of cases. Given that the test is officially provided by HMRC, users have expected it to be reliable and its inaccuracy has come as a shock.
As a result, there’s a risk that many contractors in the UK have incorrectly paid tax at a higher rate as if they were employed, but without receiving any of the benefits such as holiday and sick pay. Contractor Calculator, which undertook the investigation, estimates that contractors could have overpaid around £200m in tax as a result of the blunder.
This will no doubt cause concern for many agencies as it shows how easy it is to get things wrong. The risk is even higher for agencies who are placing professionals in different countries because they need to ensure that the workers are compliant with complex international tax rules. For this reason, it’s important to get expert advice in order to be ensure that contractors are properly assessed and advised on their status.
Expert advice is vital
With global authorities stepping up their efforts to ensure that workers are paying the full amount of tax that they are liable for, it is crucial for agencies to ensure that the contractors they place are compliant with the tax rules in the country in which they operate. In order to be absolutely sure, we strongly advise recruiters to partner with an international contractor management company.
Contact the team today to find out more.