RTimages - Fotolia
A former HM Revenue & Customs (HMRC) tax inspector claims that the online IR35 status checker tool may breach the government’s own rules on ensuring “reasonable care” is taken when determining how contractors should be taxed.
Philip Manley, who now heads up the tax resolution team at consultancy Dow Schofield Watts, said HMRC’s Check Employment Status for Tax (CEST) tool allegedly fails on several fronts to meet the reasonable care requirement, outlined in the IR35 off-payroll working rules.
“There is no legal definition of reasonable care, but an examination of case law history, along with an analysis of HMRC’s own guidance, shows that HMRC’s Check Employment Status for Tax tool falls a long way short of fulfilling this requirement,” said Manley.
“As a result, CEST is unable to provide tax certainty, and use of the tool in assessing a contractor’s employment status cannot be considered compliant with the legislation.”
Martyn Valentine, director of employment legal firm The Law Place, said the scope of CEST is too narrow, and the way it works is completely out of step with important aspects of employment case law. He advised organisations to use it with caution.
“Its flawed processes, failure to consider all aspects of an individual’s working practices, and the complete omission of important aspects of employment case law are all decisive factors demonstrating why any assessment conducted by CEST could not be considered legally binding,” he said.
“No tool used to assess employment status can be legally binding without primary legislation – and should be considered only advisory at best. However, making an employment status decision based on CEST would be tantamount to negligence, as it would fail to comply with the requirement to take ‘reasonable care’.”
As a result, contractors dissatisfied with the results received through CEST should cite the off-payroll legislation’s reasonable care clause when challenging the determinations they receive from their engagers, Manley and Valentine advise.
Their claims appear in a whitepaper, co-authored by ContractorCalculator CEO Dave Chaplin, on all the alleged ways that CEST has been weighed and found wanting from a functionality, accuracy and legal standpoint since its launch in March 2017.
The tool is designed to help public sector organisations determine whether the contractors they employ should be taxed as salaried employees (inside IR35) or classified as being off-payroll workers (outside IR35) by answering a series of 16 questions about the individuals concerned.
HMRC has repeatedly spoken out in defence of the tool, which has attracted widespread criticism from contracting stakeholders since its introduction, including claims that the results it returns are unreliable and legally inconsistent.
In April 2018, senior figures from HMRC were quizzed by the Public Accounts Committee (PAC) about the tool’s suitability after BBC director general Lord Hall described it as “not fit for purpose” during a hearing with the committee on IR35-related matters just days before.
In response, Jim Harra, second permanent secretary of HMRC, told the PAC that the results thrown up by CEST were “as good as the data fed into it”.
“We did a lot of work last year with public sector engagers to make sure they used the tool effectively to make sure it gives them the right answers,” he said. “It is ultimately a guide, but we believe in 85% of cases it gives a response that the engager can use and we stand by.
“In a further 15% of cases, they do have to either look at further guidance or get assistance from us to arrive at their decision. But as we continue to work on it and improve it, it is a perfectly good tool and supports IR35 compliance.”
Computer Weekly shared the whitepaper in full with HMRC, and asked for a response to Manley and Valentine’s assessment of CEST. A spokesperson responded: “HMRC developed the Check Employment Status for Tax (CEST) service to help individuals and businesses decide employment status alongside more detailed guidance, helping customers comply with their tax obligations.
“Use of the CEST service is advisory, it is not mandatory. If CEST is completed correctly and in line with our guidance, it will produce accurate results which HMRC will stand by.”
Controversy over CEST continues
The contention over CEST come as the government prepares to close its three-month consultation on extending the IR35 reforms to the private sector on Friday 10 August.
The controversial proposal has met opposition from various quarters, including representatives from the contractor community, recruitment consultancies and freelance-focused trade bodies.
The Association of Independent Professionals and the Self-Employed (IPSE) recently aired concerns to Computer Weekly about the economic fallout that could occur if the government decides to press ahead with the move against the backdrop of Brexit.
Andy Chamberlain, deputy director of policy at IPSE, said the high level of criticism directed at CEST since its introduction should compel the government to reassess whether it really is fit for purpose.
“CEST has been heavily criticised for as long as it has been in place, and the criticisms are ubiquitous enough to say there is a lack of public confidence in using that tool, and yet that is the very tool most businesses use,” Chamberlain told Computer Weekly.
“We think the government has to look at this tool and review it and see if it can bring it more into line with case law, which it currently is not.”
Read more about IR35
- As the government prepares to close its consultation on extending the IR35 reforms to the private sector, IPSE airs concerns over the economic impact the move could have, as talk of a “no deal” Brexit for the UK continues.
- Research suggests IT contractors are resigned to the IR35 reforms being implemented in the private sector, and many fear an announcement to that effect will come this year.
But ContractorCalculator's Chaplin is unconvinced that the government would be willing to do anything of the sort, because it would effectively be an admission that the tool is not up to the job of accurately determining the tax status of every single contractor in the UK.
He pointed out that CEST’s determinations are based on the responses given by contractors’ hiring managers to just 16 questions, which is nowhere near enough to establish the true nature of the individuals’ working relationship with the organisations they engage with.
“I’ve built one of these, and I’ve looked at the problem for nine years, and while we think we’re pretty good at assessing the IT and engineering guys, to cover all the BBC presenters, the social workers, the nurses and doctors and everybody else, it just isn’t do-able in a single tool,” he said. “And you certainly can’t do it with 16 questions.
“During a recent BBC [IR35-related] tribunal, it took nine days and 3,500 pages of evidence to determine an outcome, so is the government saying the judge should just have flipped open a laptop and answered 16 questions on CEST instead? That says it all, really.”
Read more on IT for government and public sector
IR35 reforms: PAC report blames HMRC for ‘widespread non-compliance’ in public sector
IR35: NAO slams HMRC’s ‘haphazard’ roll-out of off-payroll reforms to public sector
IR35: Impact survey suggests downturn in use of HMRC CEST tool by enterprises
Defra and MoJ hit with £120m IR35 tax bill despite using HMRC guidance