HMRC’s IR35 tool under fire as NHS fined £4.3m

NHS Digital hit with tax bill after using HMRC’s controversial IR35 tool

Further questions have been asked about the accuracy of HMRC’s IR35 tool, CEST, after NHS Digital was handed a £4.3m tax bill for getting the IR35 status of its contractors wrong while using the taxman’s technology to administer the rules. 

According to NHS Digital’s recently published Annual Report and Accounts document, HMRC found that this department of the healthcare service had incorrectly placed contractors engaged from 1st April 2017 to 31st December 2018 outside IR35. As a result, NHS Digital is expected to pay HMRC £4.3m in unpaid tax, interest and penalties. 

“Biased” CEST is “incapable”

Given NHS Digital stated it had used “the toolkit supplied by HMRC”, referring to CEST, a number of IR35 specialists have said this is another sign that the taxman’s tool simply isn’t up to scratch. For example, Qdos CEO, Seb Maley, told Contractor Weekly that CEST is “incapable of delivering reliable answers regarding a contractor’s IR35 status.”

Meanwhile, founder of Contractor Calculator, Dave Chaplin was also critical of HMRC’s tool and said: “Firms simply cannot rely on CEST as protection against their tax risk”, before describing it “as useful as a chocolate fireguard.”

Mr Chaplin then explained that many of CEST’s problems stem from the fact that it relies on the right a contractor has to provide a substitute when deciding if an engagement belongs inside or outside IR35: “It does not ask any questions after that (substitution), meaning it hands out determinations that have been made in a manner contrary to how the courts look at these cases.”

NHS Digital now uses external provider

NHS Digital stated that in January 2019 it changed the way it determines IR35 status, with the public sector body now “making an initial assessment internally” with any contractors considered to be outside the scope of IR35 then reassessed by an external provider.

There is no indication that HMRC is scrutinising these assessments, which came as no surprise to Qdos CEO, Mr Maley: “This demonstrates the importance of independent IR35 assessments carried out by parties with no financial interest in the outcome of the decision. 

“It also shines an unfavourable light on CEST. Upon its release in 2017, the tool had a number of obvious flaws. Still, more than two years on, for a business to rely on it solely when determining IR35 status poses a huge risk – not just to the company’s liability, but to contractors too.”

HMRC does not stand by CEST

NHS Digital did explain in its accounts that it “undertook a considered assessment of the status for each individual contractor which we believed met the HMRC requirements.” 

However, case-by-case determinations weren’t enough to ensure NHS Digital’s IR35 compliance. And in this scenario, HMRC chose not to stand by results provided by CEST presumably because it believes incorrect information was punched into the tool. As HMRC explains in its online CEST guidance: “HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate.”

According to Computer Weekly, NHS Digital is considering appealing HMRC’s decision.