News: 1607693404

UK.gov's controversial tool used by contractors to determine their tax liability under IR35 legislation is still proving less than reliable just months before tax reforms are introduced to the [1]private sector .

According to Her Maj's Revenue and Customs (HMRC) latest [2]usage data , the Check Employment Status for Tax (CEST) was used 975,416 times between 25 November 2019 and the 24th of last month.

The breakdown shows that a little more half of cases (52 per cent or 505,598) were deemed to be outside of IR35, 29 per cent (281,099) were determined to be inside and 19 per cent (188,719) were undetermined, meaning the tool was unable to provide a definitive answer.

What is IR35?

IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The new rules require assessing whether the contractors meet HMRC's definition of self-employment – criticised by many techie contractors as being variable and difficult to comply with. The controversial Check Employment Status For Tax (CEST) tool provided by the taxman for the purpose has also been criticised by freelancers for giving different results at different times, being susceptible to being "gamed", and for excluding "mutuality of obligation" – the concept that the company is obliged to provide work and the contractor to accept it (which would make them more of an employee).

Critics say that being inside IR35 is essentially "no-rights employment", meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason. On the other hand, some have argued, many are using self-employed tax schemes to avoid tax attracted by their hardworking co-workers.

The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area has been [3]described as an "utter shambles."

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

"These figures are damning," said Seb Maley, CEO at contractor tax and insurance advisor Qdos. "It's worrying enough that CEST has been used nearly 1m times in the past year, but that it hasn't been able to make up its mind a staggering 188,000 times is frightening."

CEST was created in March 2017 as the government tried to clamp down on off-payroll working rules in the public sector. It has been criticised as being [4]inaccurate , with contracting groups saying it can provide flawed assessments.

HMRC has always stood its ground, claiming the tool was "rigorously tested" by in-house lawyers during the development stage against both live and settled cases. It was effective, the tax collector claimed.

Maley said that "to make matters worse", contractors that received an unclear determination of their IR35 liability are then forced to check HMRC's "complex employment status manual" or contact the department "whose tool couldn't help them in the first place."

"It's staggering that CEST allows so many contractors and businesses to be left in limbo. These are decisions that cary with them tens, sometimes even hundreds of thousands of pounds in tax liability."

Dave Chaplin, CEO at [5]IR35 Shield , which provides its own assessment tool for contractors - and so has some skin in the game - told us that CEST was still throwing up inaccuracies and proving to be "very controversial" among contractors.

"It's the clients that hold the tax risk, the last thing they want is uncertainty on the balance sheet, thinking things might be OK when they might not be."

Ahead of last April's planned IR35 introduction in the private sector, plenty of businesses, including many in the banking sector, tried to remove themselves from any potential liability by placing blanket bans on employing contractors that work through their own personal service companies, telling those workers to go via an agency's payroll.

But after the [6]delay , others [7]including Fujitsu, Deutsche Bank, Capgemini, National Grid, Bupa, Jaguar Land Rover and Morrisons had reverted back to working with and paying contractors in the way they always had.

Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), told The Register:

"From declining numbers to tumbling earnings, 2020 has been a year of troubling firsts for the contracting sector. What is no surprise, however, is that HMRC’s badly designed CEST tool continues to malfunction.

"The CEST tool is fundamentally flawed: it does not accurately capture IR35 status, largely because it does not consider mutuality of obligation, which is one of the key tests in the case law. The news the tool cannot even come to a conclusion in 1 out of 5 cases shows just how hard it is to grapple with IR35 status," he added.

Chamerlain said that "forging ahead" with the scheduled implementation of IR35 tax reforms in Britain next year would be "an act of economic self-harm in the midst of the biggest recession in recent history".

A spokesman for HMRC sent us a statement:

"CEST produces a determination in the vast majority of cases and HMRC stands behind every result it gives, provided the information is accurate and it is used in accordance with our guidance.

"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." ®

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[1] https://www.theregister.com/2018/05/18/hmrc_consultation_offpayroll_working_private_sector/

[2] https://www.gov.uk/government/publications/check-employment-status-for-tax-cest-2019-enhancement/check-employment-status-for-tax-cest-usage-data#cest-users

[3] https://www.theregister.com/2017/01/25/gov_advising_it_contractors_to_hike_fees_by_20_per_cent_to_avoid_ir35_exodus/

[4] https://www.theregister.com/2018/07/10/hmrc_sets_out_its_stall_for_ignoring_moo_in_cest/

[5] https://www.ir35shield.co.uk/

[6] https://www.theregister.com/2020/03/17/uk_ir35_tax_reform_postponed/

[7] https://www.theregister.com/2020/05/04/contractors_take_advantage_of_ir35_delay/

[8] https://whitepapers.theregister.com/