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HM Revenue & Customs (HMRC) has confirmed that the much-criticised Check Employment for Tax Status (CEST) tool will undergo enhancements to ensure it is fit for purpose ahead of the IR35 reforms being extended to the private sector in April 2020.
Little is known about the exact nature of the enhancements the tax agency is planning, or when contractors and their engagers are likely to see the fruits of HMRC’s labours.
The lack of clarity on the latter point has caused stakeholders to fear that the private sector could suffer a repeat of the issues that blighted the public sector roll-out of the same reforms in April 2017.
CEST was introduced by HMRC in March 2017 to help public sector organisations grapple with determining the tax status of the contractors they engage, which they had never previously been responsible for.
Under the IR35 reforms, from April 2017, public sector organisations took over this responsibility from the contractors they engaged, who had previously been expected to self-declare their tax status.
As a result, it was down to the public sector to determine whether or not the contractors they engaged should be taxed in the same way as salaried workers (inside IR35) or off-payroll (outside IR35), based on the nature of the work they did, with optional assistance from CEST.
The fact that CEST – and the final guidance on how public sector organisations should implement the reforms – emerged just over a month before the IR35 reforms were due to come into force on 6 April 2017 proved problematic for some organisations.
In fact, the late-in-the-day appearance of both CEST and the guidance were cited as causal factors in various reports circulating at the time about public sector organisations rushing to make rash, blanket determinations about the tax status of their contractors to meet the April 2017 compliance deadline.
According to the guidance, when implementing the reforms, public sector organisations were expected to decide the tax status of all their contractors on a case-by-case basis, but numerous anecdotal and confirmed accounts emerged at the time suggesting that more broad-stroke methods were being used by some.
This, in turn, was linked to mass walkouts in some parts of the public sector, as contractors complained that this had led to some of the nuances of their engagements being overlooked or glossed over, ultimately contributing to their tax status being misclassified.
As outlined by Computer Weekly at the time, this led to an exodus of IT contractors working in parts of the Ministry of Defence, the Home Office, and even HMRC itself, who claimed their engagements had been erroneously reclassified as inside IR35.
A test of CEST
The lateness of its release is not the only criticism levelled at CEST, as the tool has repeatedly been criticised since launch as being unfit for purpose, error-prone and for the results it returns being out of step with employment case law.
According to Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), the problem with CEST is that HMRC is trying to apply tick-box-like thinking to an often complicated, layered and nuanced decision-making process.
“The [IR35] tribunals talk about painting a picture before a decision is made,” said Chamberlain in response to a question posed by Computer Weekly at a recent IR35 panel debate organised by employee engagement app maker Perkbox. “They look at all the working practices, and factor all these different things in, with some weighing more than others [in terms of importance], depending on how they see it.
“Then they stand back and look at the picture and say, on balance, what do we think the view is here? Does this look more like employment or self-employment for tax purposes? And you can’t do that with CEST because it is a tick-box exercise.”
And although using CEST is not mandatory for determining how contractors should be taxed, organisations are strongly encouraged to use it because HMRC has repeatedly said that it will stand by the results the tool returns, as long as users have submitted accurate information into it.
That is, of course, if users receive a conclusive result from CEST, which is not necessarily a given, said Chamberlain. “The problem is that 15% of the time, the tool will say it can’t tell, so that’s obviously less than ideal,” he added.
Questions have also been raised about the impartiality of the results CEST turns out, given that HMRC has publicly stated in the past that, through the reforms, it hopes to generate up to £3bn for the Treasury by the 2023-24 financial year that would previously have been lost to tax avoidance.
On this point, Paul Jennings, a partner at law firm Bates Wells Braithwaite and fellow Perkbox panel participant, said: “It is produced by HMRC, or in close affiliation with HMRC, and they obviously have a policy of generating as much tax as they can, so that causes some scepticism [about its results], but there are significant gaps in the tool.
“It requires a lot of development and a lot of work. If you are an organisation, you would be far better off getting the opinion of a specialist employment or tax lawyer or accountant [on IR35] and I think the tool is fallible and quite partial.”
Pushing for change
The fact that CEST has been weighed and found wanting by public sector organisations is one thing, but the private sector is a far larger in terms of the sheer number of organisations, and diverse in terms of what they do.
This has led to concerns since the private sector IR35 roll-out was first confirmed back in October 2018 that CEST might be ill-equipped to cope with what the private sector would throw at it in its current form.
In two separate communications, seen by Computer Weekly, from HMRC and The Treasury, respectively, to Dave Chaplin, CEO of IR35 consultancy Contractor Calculator, both parties confirm that CEST will be subject to improvements before the private sector roll-out starts.
The communications were in response to an open letter sent by Chaplin to the chancellor, Philip Hammond, in which he likened HMRC’s refusal to acknowledge CEST’s alleged shortcomings to climate change denial.
“HMRC is undertaking a programme of work with stakeholders to enhance CEST and ensure it is fit for purpose for all sectors,” says the Treasury letters.
The HMRC letter, meanwhile, goes into a little more detail, stating that CEST will be subjected to “language and presentation” improvements, and will eventually feature “in-built guidance” to make it easier to use.
Both missives stop short of confirming exactly when the reworked tool will make its debut, although the Treasury letter says it will be “well ahead” of the private sector extension.
However, Computer Weekly understands that a March 2020 roll-out date for the reworked CEST tool is being mooted in contracting circles, which the Institute of Chartered Accountants in England and Wales (ICAEW) fears would give private sector organisations too little time to prepare.
In a communication shared with its members in May 2019, the ICAEW said HMRC is working to a March 2020 go-live date for the tool, before going on to outline its misgivings about the move.
“We are aware that the CEST tool is being updated, and ICAEW has worked closely with HMRC on this project,” the document states. “We understand that the updated version of the tool is due to be released in March 2020.
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“This [March 2020 date] is too close to the start date and does not give businesses adequate time to review the employment status of the individuals they engage.
“As a result, some contracts will be put on hold pending the release of CEST, which will negatively impact on the productivity of UK business and there will be a commercial advantage to small engagers who will not require use of CEST.”
Computer Weekly contacted HMRC for clarification on the release schedule for CEST, and was told it has not confirmed a March 2020 release date for the tool.
“We are working with stakeholders to ensure that CEST meets the needs of the larger and more diverse private sector ahead of reform,” the HMRC spokesperson added. “CEST is a tool for use alongside a range of other support and guidance. Enhancements will be tested with stakeholders and users and rolled out before April 2020.”
Although HMRC has neither confirmed nor denied a March 2020 release date for CEST, the Chartered Institute for Taxation claims the private sector will need access to the reworked tool at least six months before the reforms come into play.
“In our view, an improved CEST tool needs to be available by October 2019 at the latest,” the organisation said in its response to the recent IR35 private sector consultation. “HMRC guidance should also be available in good time and, ideally, published at least in draft alongside the draft Finance Bill legislation.”
It goes on to say that the success of the IR35 private sector reforms hinges on the ability of businesses, agencies and professional service companies to be “confidently assured” that any decisions they make on the tax status of the contractors they employ can be relied upon.
“For most businesses, this is likely to mean they need to be able to rely on the output from HMRC’s CEST tool,” the organisation said. But, as a flurry of past court cases have shown, this is not always possible.
The institute continued: “These cases are examples of where HMRC’s views [from its] employment tool do not reflect the decisions made by the courts, and this will not instil confidence in those relying on CEST to help with status decisions. And, ultimately, this will increase the number of cases where status is ‘in dispute’.”
CEST: A case for sooner rather than later
Speaking to Computer Weekly, Seb Maley, CEO of tax consultancy Qdos Contractor, said a March 2020 release date would also leave “next to no time” for further adjustment to be made to the tool should issues arise once it starts being put through its paces by the private sector.
“HMRC certainly has a lot of work to do in order to make sure CEST is capable of delivering accurate IR35 advice in time for the roll-out of the private sector reform,” said Maley. “In its current state, the tool ignores key aspects of the legislation and cannot be relied upon in an IR35 court case.
“If this ‘enhanced’ version of CEST is released only a month before the arrival of further reform, as is being speculated, it leaves next to no time for any feedback or adjustments.”
The draft legislation for the expansion of the IR35 reforms to the private sector is due to land in July 2019, and Contractor Calculator’s Chaplin told Computer Weekly that large swathes of the private sector are already taking steps to prepare for the changes.
“We are in the early stages where clients are choosing vendors to help them do the assessments and get their house in order, and all looking to start assessing and doing things in August,” he said. “If firms wait until January or later in the new year to start preparing for this, that is when the major problems will start. The sensible ones are all lining up to decide what they want to do now.”
Chaplin has repeatedly spoken out in recent years about the government’s handling of the IR35 reforms, and has previously aired misgivings about the rigor of the test and development processes for CEST ahead of its launch.
In response to the open letter to the chancellor, in which HMRC flagged “language and presentation” as two areas where it will focus its improvement work for CEST, Chaplin said he is not convinced that those changes alone will be sufficient to address the fundamental problems with the tool.
“If they don’t change the underlying logic and the semantics of the algorithm, it’s the same logic that is currently not working, so it will continue to give the wrong answers,” he said.
But, at the same time, if HMRC were to make changes to the tool along those lines, it could leave the organisation exposed to legal challenges from the thousands of public sector contractors whose engagements, CEST has concluded, should be deemed inside IR35.
“If they change the logic, and they fix it and start introducing the areas of law that are missing, particularly around mutuality of obligation, what happens to all those 800,000 tests that have already been done and all those people who were misclassified?” said Chaplin.
“They will have a massive class action lawsuit on their hands, and they don’t want that, so they are between a rock and a hard place.”