Key takeaways

• Rules known as "IR35" require medium and large companies that engage PSC contractors to determine their tax treatment based on a hypothetical analysis: if the individual providing the services would be an employee had they been engaged personally by the client, they are "inside" IR35 and payments made to the PSC are subject to deductions for income tax and NICs, much like an employee. If the individual would be self-employed for tax purposes if they had been engaged directly, then they are "outside" IR35, and no tax or NICs deductions are required from payments made to the PSC.
• One way of analysing the hypothetical status of the contractor is to use HMRC's CEST tool, which provides HMRC's view of an individual's hypothetical status for IR35 purposes based on a questionnaire (save in a minority of cases where it indicates that their status is undetermined). That tool is also available for directly-engaged contractors (i.e., those not engaged via a PSC).  Its use is not mandatory in either situation.
• HMRC requires large businesses that take a position that differs from HMRC's known position on any tax matter and would result in a tax advantage of more than GBP 5 million to notify HMRC under the uncertain tax treatment rules introduced in April 2022.
• For these purposes, a large business is one with turnover exceeding GBP 200 million or a balance sheet total exceeding GBP 200 million.
• HMRC has updated its guidance to state that, whilst CEST is not mandatory, if a business uses CEST, the answer it gives represents HMRC's known position relating to the tax treatment of contractors where the result is not stated to be undetermined and the information provided is accurate.  
• This means that large businesses that use CEST, and that engage a significant number of directly-engaged or PSC contractors such that the difference between being taxed as an employee and being taxed as self-employed exceeds GBP 5 million in a 12-month financial year, will need to notify HMRC if they take the view that those PSC contractors are outside IR35 when CEST indicates that they are inside. This may discourage large businesses from using CEST, but even if they do not use it, they would still need to notify HMRC if they were taking a position contrary to HMRC's stated position, such as set out in the Employment Status Manual.
• Where the result of CEST is 'Unable to Determine', HMRC expects businesses to review its guidance on the principles for determining the status of a contractor and a notification could still be required if the business takes a different position from HMRC's published guidance.
• Businesses caught by this requirement can choose whether to seek an exemption from the formal filing by providing the relevant information to HMRC or to submit a formal notification.
• For monthly payroll returns, the deadline for the notification is on or before the date that the last return is required to be made during the financial year in question.
• Penalties for failure to report start at GBP 5,000 for a first failure where the company has not had a notification penalty for PAYE in the previous 3 financial years, rising to GBP 25,000 and GBP 50,000 for further failures in relation to PAYE.