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HMRC's defence of IR35 online status checker tool likened to 'climate change denial'

In an open letter addressed to chancellor Philip Hammond and HMRC's CEO Jon Thompson, the tax collection agency's defence of its IR35 online status checker tool, CEST, is likened to climate change denial, as calls grow for it to be scrapped

HMRC’s ongoing defence of its much criticised online IR35 status checker tool has been likened to climate change denial in a strongly worded letter to chancellor Philip Hammond.

The four-page missive, penned by Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, accuses Hammond and HMRC CEO John Thompson of “refusing” to acknowledge the “hundreds of thousands” of grievances raised by users of the Check Employment Status for Tax (CEST) tool.

“You have brazenly disregarded the mounting evidence of CEST’s inadequacies while failing to provide anything credible to substantiate your own claims [that it works],” writes Chaplin.

“Your public defence of CEST is akin to climate change denial. The evidence is indisputable and right before your eyes, yet you refuse to acknowledge it.”

The tool was introduced by HMRC to help public sector organisations determine the tax status of contractors, after a rework of the IR35 tax avoidance regulations in April 2017. 

Previously, it was up to the contractors to self-declare whether they should be taxed in the same way as salaried workers (inside IR35) or off-payroll (outside IR35) employees, while the reforms made public sector organisations accountable for making such decisions.

The government has previously claimed that the move has generated £550m in additional tax revenue for the Treasury that would have previously have been lost to tax avoidance.

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Indeed, Chaplin’s letter claims the emergence of CEST has coincided with a “sharp uptick” in the number of contractors having their public sector engagements classified as “inside IR35”, which he goes on to suggest points to shortcomings in its determination criteria.

“Is it not conceivable that CEST, a tool which attempts to determine employment status based on answers to a maximum of 16 questions, and as few as four, is pushing unfeasibly high numbers of contractors inside IR35,” the letter states.

“Though you [HMRC] have continued to reiterate that ‘when used correctly’, CEST will provide the right outcome, we are still awaiting evidence of this supposed accuracy.”

To back this point, Chaplin shares data he has accrued through a series of freedom of information (FOI) requests, which suggests that more than 98% of the contractor engagements processed by CEST in 2018 by HS2 and Network Rail returned an inside IR35 ruling.

Furthermore, between April 2017 and January 2019, 98% of contractors working for the Met Office were also determined to be working inside IR35, and – during the same time period – so too were 87% of the contractors that work the Crown Commercial Service (CCS).

“By your [HMRC] own estimates, roughly a third of contractors are within scope of the rules. Why do the figures obtained from Network Rail, HS2, the Met Office and CCS contrast so sharply? The answer is CEST,” writes Chaplin.

HMRC’s response

Computer Weekly shared a copy of the letter with HMRC, who hit back at Chaplin’s insinuation that the results of CEST are unfairly weighted towards classifying contractors as inside IR35.

“CEST was rigorously tested against known case law and settled cases. It is accurate, and HMRC stands by the result if the tool is used correctly,” an HMRC spokesperson said in a statement. “CEST is not biased towards an employment outcome, and in the last 12 months over 50% of determinations, it has provided have been for self-employment or outside the off-payroll rules – this is in line with our expectations for the service.

“HMRC estimates only about a third of individuals working through their own company fall within the rules and should be taxed as employees. However, numbers will vary greatly between roles and sectors,” the statement concluded. 

CEST has been repeatedly slammed since launch, with critics claiming its results are “error-prone”, unreliable and inconsistent with employment case law.

Back in April 2018, Chaplin led calls for the Public Accounts Committee (PAC) inquiry into HMRC’s handling of the test and development of CEST, in response to another FOI request that sought information on how rigorously the tool was put through its paces ahead of launch.

Chaplin signs off the letter by repeating his call for an independent inquiry into CEST’s inner workings, before demanding the tool be recalled from use before HMRC presses ahead with its plans to extend the IR35 reforms to the private sector in April 2020.

“Proposals to introduce the off-payroll rules to the private sector with a compliance process underpinned by CEST will only amplify the chaos. This is why we are campaigning for a halt to the plans until you can prove the private sector is not at risk,” he said.

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