Although the court ruled in favour of HMRC, which was appealing the Upper Tribunal’s decision that Adams was not an employee under the IR35 rules, it declined to rule as to whether Adams was an employee for tax purposes under IR35. Instead, its ruling focused on whether the tribunal’s decision had been reached on the correct basis. In determining that the Upper Tribunal had not applied the employment status test correctly, the Court of Appeal held that the case should be re-heard by the tribunal to determine Adams’ employment tax status.
The IR35 rules require that employment taxes be paid by people who provide services to a business through a PSC or other intermediary if that person would otherwise have been regarded as an employee for tax purposes of the engaging business. From 6 April 2021, engaging businesses became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' National Insurance contributions for contractors falling within the scope of the rules. Previously, where a private sector business engaged a contractor through a PSC, liability to decide whether IR35 applied and to pay any employment taxes rested with the PSC.
Simmons said that it was “interesting that the court appeared to indicate that the IR35 employment status test may be overly complex, noting that it would be ‘desirable if, there were one clear test or approach to determining whether a person was an employee’”.
“It is hoped that this decision may provide further impetus for the government to review the employment tax status test and introduce a replacement that is easier for businesses and contractors to understand and apply with certainty,” she said. “The more complex the test, the greater the compliance burden on business when applying the rules. This increasing compliance burden, coupled with the tax risks for a business if they make an incorrect IR35 status determination, may result in more businesses refusing to engage with contractors through PSCs, which may exacerbate existing challenges across labour supply chains.”