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HM Revenue & Customs (HMRC) has rolled out the final version of its much-maligned IR35 tax status checker tool, but stakeholders claim it is still missing vital functionality.
The tax collection agency is known to have been working on an updated version of its online Check Employment Status for Tax (CEST) tool in anticipation of the IR35 tax avoidance reforms coming into play in the private sector from 6 April 2020.
From this date, medium-to-large private sector organisations will be responsible for deciding if the contractors they engage with should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).
Previously, it was down to contractors to decide whether they should be taxed, based on the work they do, with an outside IR35 designation enabling them to minimise their employment tax liabilities, from a national insurance and pay-as-you-earn (PAYE) perspective.
Similar reforms to the way public sector organisations engage contractors came into force in April 2017, and – in the process – absolved contractors from the responsibility of having to self-declare their own tax status.
HMRC introduced CEST ahead of the public sector reforms coming into play, as a means of alleviating the administrative burden organisations would face as they worked to classify the tax status of every contractor they engage with.
Ever since its introduction, HMRC has repeatedly defended CEST against claims the results it returns are “error-prone” and “inaccurate”.
A reworked version of CEST made its debut on 25 November 2019, with HMRC stating in the release notes the latest version had been updated to accommodate end-clients who may not know the worker they are assessing the IR35 status of.
However, contracting stakeholders claim the updated tool still needs additional work to ensure it is up to the job of providing private sector organisations with an accurate read on how the contractors they engage should be taxed.
Specifically, it is claimed the tool still fails to take into account mutuality of obligation (MOO) as a factor, despite this regularly cropping up as a major point of contention during IR35 tribunals and appeals.
For a contractor to be classified as outside IR35, a low-level of MOO needs to exist between them and the organisation they engage with, meaning they are under no obligation to pay the contractor if there is no work available for them to do.
For this reason, CEST remains “fundamentally flawed”, said Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, to the extent that users cannot claim to have met their obligations to take “reasonable care” when classifying the tax status of the contractors they engage with if they choose to use it.
“Therefore, any promise [from HMRC] to ‘stand by the result’ [of CEST] is simply worthless and has no basis in law. We are also yet to see an insurer who will back the results of the tool,” he told Computer Weekly.
Chaplin’s misgivings around the lack of MOO were also shared by Seb Maley, CEO of contractor tax consultancy QDos, who said the fact CEST still fails to take it into account means user organisations cannot put their trust in the results it returns.
“CEST still isn’t fit for purpose. With IR35 reform only a few months away, recruitment agencies and end-clients shouldn’t rely on it to deliver accurate information regarding a contractor’s IR35 status,” he said.
“From the wording of the questions to the tool’s reliance on the right of substitution when providing an answer, CEST poses a risk, not just to contractors, but to the agencies and end-clients that choose to use it.”
With five months to go until the reforms come into play, there is speculation HMRC might be planning further changes to the tool.
Read more about IR35 and CEST
- 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.
- 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.
- NHS Digital is still weighing whether or not to appeal against an IR35-related £4.3m bill handed to it by HM Revenue and Customs (HMRC), over claims it misclassified the tax status of its contractors.
However, Computer Weekly confirmed with HMRC the updated tool is the one contractors and users were “promised” would surface ahead of the April 2020 private sector reforms coming into force.
In response to the criticism levelled at the rejigged version of CEST, an HMRC spokesperson said the organisation has worked with more than 300 stakeholders to inform the design of the tool and make it “clearer, reduce user error and consider more detailed information”.
“It is accurate and HMRC will stand by the results, provided the information input is accurate and is used in accordance with our guidance,” the HMRC spokesperson said.
Furthermore, despite accusations to the contrary, the tool has been “rigorously” put through its paces against settled cases by HMRC officials and external parties, the spokesperson added, and MOO has been factored into how it works.
“It is assumed that someone using the tool will have already established mutuality of obligation, which is necessary for a contract to exist, otherwise there would be no need to use CEST to determine the status of the existing or hypothetical contract,” the spokesperson continued.
However, Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA), described HMRC’s reasoning on the matter as “over-simplistic”.
“HMRC believes MOO always applies by virtue of work being done in exchange for payment, which is over-simplistic, and in fact MOO is far more nuanced,” she told Computer Weekly.
“In simplest terms, it should be thought of whether there is an ongoing indefinite obligation for the client to offer work, and also whether there is an ongoing obligation for the personal services company worker to complete that work.”
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