Renewed concerns about the effectiveness of HM Revenue & Customs’ (HMRC) much-maligned IR35 tax status checker tool have been raised following the disclosure that in nearly one in five uses it failed to provide a response.
According to data published by HMRC on 10 December 2020, the tool was used a total of 975,416 times during the 12 months to 24 November 2020 to determine the IR35 tax status of contractors, ahead of a reform of the tax avoidance regulations coming into force in the private sector in April 2021.
The Check Employment Status for Tax (CEST) tool poses a series of questions to users about the nature of the work they do and how it is carried out to assess whether their engagements should fall within the scope of the IR35 off-payroll legislation.
In 52% of cases (505,598 uses), the answers received concluded that the person or engagement being assessed using the tool should be classified as working outside the IR35 rules, while 29% (281,099) were confirmed as falling inside.
However, in 19% of cases (188,719) the tool was unable to return a conclusive response during this time period, prompting further concerns about the tool’s suitability given that the number of people relying on it in the coming months is likely to surge.
This is because when the reforms come into play, medium-to-large private sector organisations will assume responsibility for determining how the contractors they engage with should be taxed, depending on whether the work they do means they are caught inside or outside the IR35 legislation.
Presently it is down to the contractors to assess for themselves whether they are inside or outside the IR35 legislation, based on the work they do and how it is performed.
HMRC has previously raised concerns that this system is open to abuse by contractors who may deliberately misclassify themselves as working outside IR35 to minimise their employment tax liabilities. This is because an inside IR35 determination means they are liable to pay the same Pay As You Earn (PAYE) and national insurance contributions as a permanent employee would.
CEST was introduced by HMRC to help public sector organisations prepare for the onset of a similar set of reforms to the public sector in April 2017, but concerns about the accuracy of the results it turns out have dogged it since launch, prompting HMRC to repeatedly and vehemently defend the tool.
In instances where CEST is unable to reach a conclusive determination, users are advised to recheck their responses to the questions it poses and advised to contact HMRC directly to query its response, but contractor tax consultancy Qdos’s Seb Maley said this system is not good enough.
“It’s worrying enough that CEST has been used nearly one million times in the past year, but that it hasn’t been able to make up its mind a staggering 188,000 times is frightening. To make matters worse, people are then expected to work it out themselves by checking the complex employment status manual or get in touch with HMRC, whose own tool couldn’t help them in the first place,” he said.
“It’s staggering that CEST allows so many contractors and businesses to be left in limbo. These are decisions that carry with them tens, sometimes even hundreds, of thousands of pounds in tax liability.”
And with the April 2020 start date for the private sector IR35 reforms looming large, the situation does not bode well for a smooth and successful implementation of the new-look rules.
“This data is gathered from the latest version of CEST, which as we approach IR35 reform clearly isn’t up to scratch,” said Maley.
“Aside from being indecisive, the tool isn’t aligned with IR35 case law and has even been dismissed in court. Fortunately, CEST isn’t mandatory, which is why I urge businesses to consider alternative ways to assess status that will provide a well-informed answer 100% of the time.”
Computer Weekly contacted HMRC for a response to this story, and was provided with the following statement from a spokesperson for the government tax collection agency.
“CEST produces a determination in the vast majority of cases and HMRC stand behind every result it gives, provided the information is accurate and it is used in accordance with our guidance,” the spokesperson statement reads.
“To reach a conclusive result in a greater proportion of cases we would need to add in more complex questions, which would add difficulty for the majority of users. In more finely balanced cases, CEST is expected to provide an undetermined outcome and HMRC has provided detailed guidance and dedicated support to help customers make status decisions.”