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HM Revenue & Customs (HMRC) has been called to account for why its online IR35 status checker tool remains unable to decide how hundreds of thousands of contractors should be taxed, several months after the roll-out of the IR35 reforms to the private sector.
The HMRC Check Employment Status for Tax (CEST) tool is designed for use by end-user organisations that need to individually assess the IR35 status of the contractors they engage by asking a series of questions about their working patterns and behaviours.
According to data published by HMRC earlier in June, over the course of an 18-month period from November 2019 onwards, the tool failed to determine how contractors should be taxed in more than 210,000 cases.
Depending on the answers input by the end-user organisation, the tool will should generate a result that confirms whether the contractor should be taxed in the same way as a permanent employee (inside IR35) or as an off-payroll worker (outside IR35).
The tool has been subject to repeated criticism since the tax collection made it available to contractors and end-user organisations ahead of the roll-out of the public sector IR35 reforms in April 2017, with complaints suggesting the tool is “error-prone” and “unfit for the purpose”.
In November 2019, it emerged that NHS Digital has received a £4.3m IR35-related tax bill after using CEST to assess the its contractors, with reports around this time also suggesting the tool lacked the functionality needed to accurately assess the tax status of contractors.
HMRC has always staunchly defended the tool against all criticism, and repeatedly stated that it stands behind “every result it gives” provided the data fed into the tool is accurate and in accordance with its guidance.
A revamped version of the tool was released in November 2019, and HMRC published data on 24 June 2021 that confirmed CEST was used a total of 1,653,672 times between when the reworked version went live and 31 May 2021.
Perhaps unsurprisingly, the data shows that usage of CEST began to ramp up ahead of the original April 2020 rollout date of the IR35 reforms to the private sector, with 233,748 and 229,177 instances of usage during February 2020 and March 2020, respectively.
The onset of the Covid-19 coronavirus pandemic prompted the UK government to delay the onset of the IR35 reforms to the private sector by 12 months, resulting in usage of CEST peaking in March 2021 with 233,133 organisations making use of it.
The data can also be drilled down further to highlight instances where CEST users have included contractors who provide their services via their own limited companies, known as intermediaries.
What are the IR35 reforms?
The IR35 off-payroll working rules were introduced at the turn of the millennium to ensure contractors that provide services through intermediaries, such as limited companies or personal service companies (PSCs), are paying the correct amount of tax based on the work they do and how it is performed.
When the rules were first introduced, it was the intermediary’s responsibility to decide whether the nature of the work the contractor did for their end-client meant they should be taxed in the same way as a permanent employee (inside IR35) or as an off-payroll worker (outside IR35).
An inside-IR35 designation means that if the contractor were providing their services directly to the client (and not through an intermediary), they would be considered an employee, and so must pay the same income tax and NICs that a salaried worker would.
On an inside-IR35 engagement, the intermediary would be responsible for ensuring the correct income tax and NICs were deducted from the contractor’s gross pay. The intermediary would also be liable to pay employers’ NI.
In recent years, the government has set about revamping the way the IR35 rules work on the basis that letting contractors decide how they should be taxed – and leaving it up to them to ensure the correct employment taxes are paid – is a system that is open to abuse.
In April 2017, HMRC introduced changes in the public sector so that responsibility for deciding how contractors should be taxed shifted away from intermediaries and onto the end-clients that engaged them. The same changes came into effect for all medium to large companies in the private sector from 6 April 2021.
This data shows that 1,018,250 workers identified as providing services through an intermediary used CEST between 25 November 2019 and 31 May 2021, and in around half of these cases (499,974) their engagements were classified as being outside IR35. Furthermore, 308,176 were categorised as being inside IR35, and the remaining 210,100 were labelled “undetermined”.
This echoes a trend highlighted six months ago when HMRC published a similar set of data about the results generated by CEST that showed that it failed to generate a definitive response in nearly one in five cases.
Seb Maley, CEO of IR35 compliance firm Qdos, said that the fact that CEST remains unable to reach a decision in more than 210,000 cases is concerning.
“I’m astonished that the government still stands by an IR35 tool that hasn’t been able to make up its mind over 210,000 times. Here we have proof that CEST has left hundreds of thousands of contractors and businesses in limbo, unsure of whether a contract belongs inside or outside of IR35. It should be the final nail in the coffin for this fundamentally flawed tool,” said Maley.
“I’m interested to find out what has happened to these engagements. Have HMRC got the resource – not to mention expertise – to offer support on this scale? I doubt it. The staggering number of undetermined results leads to confusion, delay and – in many cases – non-compliance.”
On this point, HMRC has rolled out a number of auxiliary services to underpin CEST in recent months to support organisations as they have grappled with the onset of the private sector IR35 reforms.
These include the introduction of direct webchat support while using CEST, as well as a dedicated helpline that people can use to get help with specific problems while using the tool.
Commenting on the same HMRC data, Dave Chaplin, CEO of contracting authority ContractorCalculator, said it is important to remember the figures published by HMRC will include instances where people have experimented with the tool multiple times, so should not be interpreted as “actual determinations of individual engagements”.
Even so, there remain multiple issues with how CEST works that still need to be ironed out, he added: “The tool is not aligned with the case law, omits mutuality of obligation, and puts far too much emphasis on the right of substitution, which will skew the data heavily towards more outside determinations – which may not be supported by the evidence, or be defendable at a tax tribunal.
“It’s interesting to see that in 20% of cases it cannot give an answer – we are yet to see any advisers or judges simply shrug their shoulders 1 in 5 times. We must remember that HMRC counsel argued in a preliminary tax tribunal that CEST was irrelevant. We suggest people pay heed to the observations of their own counsel,” added Chaplin.
Computer Weekly put the comments of Maley and Chaplin to HMRC and received the following statement through from a department spokesperson: “In the vast majority of cases, the free CEST tool will determine the worker’s employment status for tax and National Insurance Contributions. In the minority of more finely balanced cases, CEST will give an undetermined outcome.
“To reach a view in all cases, HMRC would need to add more complex questions, increasing the burden of using the tool for the majority of users,” the spokesperson said.
Read more about the IR35 reforms
- Private and public sector organisations that fail to take reasonable care when carrying out IR35 status determinations risk alienating their contractors and suffering reputational damage, according to research by contractor-focused online accountancy firm inniAccounts.
- The UK government is facing renewed calls to urgently push through regulation for umbrella companies, following the submission of a draft policy document by a former Office of Tax Simplification adviser that details steps that could be taken to expedite the process.
Read more on IT legislation and regulation
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