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IR35 reforms: Calls for inquiry into pre-launch tests of HMRC IR35 assessment tool

HM Revenue & Customs hits back at contractors who claim it failed to test its online IR35 status assessment tool rigorously enough in the run-up to its launch in March 2017, as calls for an inquiry into its dev and test procedures grow

Contracting groups are calling for an immediate inquiry into how rigorously HM Revenue & Customs (HMRC) tested its online IR35 assessment tool ahead of launch, after a Freedom of Information (FOI) request revealed that parts of the development process were not documented by the tax authority.

The Check Employment Status for Tax (CEST) tool, as it is known, was created by HMRC to help ease the administrative burden the IR35 tax avoidance reforms threatened to impose on public sector organisations once they assumed responsibility for determining how contractors should be taxed.

Before the reforms came into force in April 2017, it was up to contractors to self-declare whether or not they should be taxed in the same way as off-payroll workers (outside IR35) or as salaried employees, whereas now it is up to the organisation they engage with to make that call.

CEST is designed to help public sector organisations make these determinations by asking them to fill in a series of multiple-choice questions about the individual contractors they engage with, including details about their working practices and operations.

Concerns over the reliability of the results generated by CEST have dogged the tool since its launch in March 2017, with stakeholders describing it as “error-prone” and “unfit for purpose” after tests showed its results were out of step – in a quarter of instances – with UK employment law.

This, in turn, has prompted concerns that, as a result, some contractor engagements may have been incorrectly classified.

In the light of all this, tax advisory service ContractorCalculator submitted an FOI request to HMRC, asking for details of how CEST fared when tested against seven high-profile IR35 cases.

The organisation also requested copies of the questions used to test the tool during the process, as well as the answers submitted in response, to get a comprehensive overview of how CEST decided how contractors should be taxed in those cases.

In its response, shared in full with Computer Weekly, HMRC confirmed that the tool was tested during a workshop, attended by a mix of lawyers, tax experts and IT professionals, whose collective feedback and experience was used to inform the rules used by CEST in its determinations.

Read more about IR35

“The rules were then tested against live and settled cases,” the response stated. “The only documented output of the workshops is the set of rules used by the tool, and these are already in the public domain.

“Our records show that HMRC has used the CEST tool to test all the cases cited in the request, but we do not have a record of how each question was answered as part of that testing, only the end determination.”

This admission was seized upon by Dave Chaplin, CEO and founder of ContractorCalculator, as a matter of major concern. He said it suggests HMRC has no “detailed proof” that the answers produced by the CEST tool are accurate.

“I am incredulous that a fundamental piece of the CEST jigsaw is missing,” he said. “ For a tool of such importance, the lack of rigour involved in its testing methodology is astonishing.

“HMRC publicly claimed that the CEST tool gives the right result provided the correct answers are entered into the tool, but has chosen not to document any of those answers used during its testing process.

“HMRC has taken a slapdash approach to building a tool that is clearly not fit for purpose, has not been tested properly and is missing important case law.”

On these grounds, Chaplin is leading calls for an “immediate inquiry” into HMRC’s handling of the test and development of the CEST tool by the spending watchdogs at the Public Accounts Committee (PAC).

“By forcing false employment upon people, HMRC could now face tens of thousands of claims for tax refunds and we won’t know what the scale of this is likely to be until January 2019 next year,” he said. “Could this be HMRC’s PPI scandal?”

In a statement to Computer Weekly, HMRC hit back at Chaplin’s claims, saying that the tool was “rigorously tested” before launch.

“The Check Employment Status for Tax digital service was rigorously tested with HMRC’s lawyers against live and settled cases,” the HMRC spokesperson said. “It reflects employment status case law. The cases tested helped form the rules that underpin CEST, which are publicly available.”

A test of CEST

Research published in March 2018 by Qdos Contractor, to mark the first anniversary of the CEST tool going live, suggests contractors still have misgivings about its ability to accurately determine their IR35 tax status.

Of the 1,500 contractors who took part in its research, 81% said they would be put off working for a private sector recruitment agency or business that relied solely on CEST to ascertain how they should be taxed, should the reforms be extended beyond the public sector at a later date, as proposed

Qdos Contractor CEO Seb Maley said the FOI response raises questions about the reliability of the 400,000 or so IR35 declarations that the CEST tool is thought to have processed to-date, and highlights the need for a full investigation into the accuracy of the results it generates.

HMRC has repeatedly claimed that CEST is effective, despite many experts raising concerns that it is quite simply not fit for purpose,” said Maley. “Following these reports, how are public sector bodies meant to stand by, and contractors expected to accept the 400,000 answers it has given since April 2017?

“These reports strengthen the need for a thorough investigation into the accuracy of CEST. Additionally, our sector will expect answers as to why the tool looks to have been built in such a manner. If the boot was on the other foot, one would expect HMRC to leave no stone unturned.”

Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), said the results of the FOI request also call into question the government’s claims that IR35 compliance has improved in the public sector since the reforms were rolled out in April 2017.

“More numbers on the payroll is not indicative of compliance, just simply more people on the payroll with many being incorrectly placed there,” said Kermode.

Also, the fact that there is no appeals process in place for contractors to contest the results they receive from CEST means HMRC could face legal action, she added.

“People will not tolerate being treated in this way and it is only a matter of time before we see a legal challenge from someone who is being taxed as an employee but without any of the 84 statutory benefits and rights that accompany full-time employment,” said Kermode.

“HMRC does not even have a proper appeals process in place, so there is no redress for anyone who wishes to challenge the decision.”

With all this in mind, it is becoming increasingly clear that HMRC (and the government at large) needs to think long and hard about whether extending the reforms to the private sector is a path worth pursuing, she said.

“What ContractorCalculator has learned in its FOI request is alarming and, I would hope, one more reason to prompt HMRC to question any move to roll out the reforms and the tool to the private sector.”

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