In an attempt to reduce uncertainty and assist businesses when making determinations, HMRC developed the ‘Check Employment Status for Tax (CEST)’ online tool. Although useful, the tool has been widely criticised for its inability to provide a response in certain circumstances. Despite efforts to introduce improvements, CEST fails to provide an outcome in approximately 15% of cases, according to Penny Simmons, Legal Director at law firm Pinsent Masons.
Widespread changes to the UK’s IR35 off-payroll working rules came into force on 6 April 2021, and despite a 12-month delay to implementation, detailed HM Revenue and Customs (HMRC) guidance and subsequent amendments to the legislation, areas of uncertainty remain.
“The new rules made no changes to the employment tax status test, which determines if a PSC contractor falls inside IR35. However, the test is complicated and can lead to uncertainties regarding whether IR35 applies to a contractor,” wrote Simmons in a recent report.
Is there a single test for IR35 status?
Simmons says the challenge with IR35 status is that there is no single test to determine employment for tax purposes and the concept has been developed through caselaw. Simmons says it is necessary to consider a range of factors, including whether the PSC contractor can provide a substitute, the level of control that the client exerts over the individual and whether mutuality of obligation exists between the parties.
However, given that HMRC has confirmed that it will stand by a CEST result if the information provided is true and accurate, using the tool may ultimately reduce the risk of an HMRC enquiry and also satisfy the requirement to take reasonable care when making status determinations. On balance, using CEST in combination with exercising judgement in complex cases, may be preferable to reduce risks.
“Determining whether a contract for services is outside the scope of IR35 may give rise to difficult and protracted negotiations between the parties, resulting in contractual protections and indemnities safeguarding one party against the risk that HMRC ultimately disagrees with the decision. Tax insurance policies are also increasingly being explored as an option to manage these risks,” wrote Simmons.
HMRC’s IR35 tool leaves 210,000 contractors ‘in limbo’
New data has come out that exposes the flaws of HMRC’s Check Employment Status for Tax (CEST) tool, used by businesses to determine the IR35 status of contractors.
The figures (available here) show that between 25th November 2019 and 31 May 2021, CEST was used 1,018,250 times, delivering the following results:
– 499,974 were deemed outside IR35
– 308,176 were deemed inside IR35
“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,” said Qdos CEO, Seb Maley.
“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 IR35. It should be the final nail in the coffin for this fundamentally flawed tool.
“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.
“It’s important businesses realise that CEST is not mandatory. And not only is it indecisive, its flawed logic – which isn’t aligned with IR35 case law – and lightweight nature means the decisions it does make should be checked by an expert,” said Maley.
HMRC has published its latest CEST use figures, but some question if these numbers actually say anything or get to the crux of the issue of the tool: its certainty.
One such person is Dave Chaplin, CEO of IR35 Shield and ContractorCalculator: “These figures indicate CEST usage, which will also include multiple interactions by the same person as people experiment with the tool.”
“The figures are not actual determinations of individual engagements. 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 advisors 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,” said Chaplin.