Government’s IR35 tool can’t return a result nearly 20 per cent of the time
Figures published by the tax watchdog have revealed that its own IR35 tool – Check Employment Status for Tax (CEST) – was unable to deliver a determination for nearly 1 in 5 users in the past year, amounting to over 188,000 indeterminate answers.
The data has renewed concerns among critics about the effectiveness and accuracy of CEST, which has been described as “frightening”, with experts saying that it leaves businesses and contractors in “limbo.”
CEST was used by contractors and businesses 975,416 times between November 2019 and November 2020. Of those, 52 per cent of cases (505,598) were deemed to be outside IR35 and 29 per cent were found to be inside IR35 (281,099).
But in 19 per cent of cases (188,791), CEST was unable to return a result. When this happened, users were told to check the information they had input, refer to the Employment Status Manual and given HMRC’s contact details.
CEST ‘unable to make up its mind’ in 188,791 cases
Seb Maley, CEO at Qdos, said: “These figures are damning. 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. It’s alarming 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.”
HMRC introduced CEST ahead of IR35 reform in the public sector in 2017. The IR35 tool, which was designed to alleviate the administrative burden on organisations engaging with contractors, has been heavily criticised as being fundamentally flawed by IR35 specialists.
The tax office released an updated version of CEST in November last year. However, experts claimed that it still needed work, because it fails to properly take into account Mutuality of Obligation (MoO) as a factor. MoO, incidentally, is considered as one of the three key IR35 status tests, alongside Personal Service and Control.
IPSE‘s Andy Chamberlain told The Register: “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.”
Experts urge businesses to avoid HMRC’s IR35 tool
Qdos CEO, Seb Maley added: “This data is gathered from the latest version of CEST, which as we approach IR35 reform clearly isn’t up to scratch. 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 per cent of the time.”
A spokesperson for HMRC told Contractor Weekly: “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.
“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.”
No surprise CEST is defective, the IR35 law itself is defective. The governments Jesse Norman (Financial secretary to the Treasury) has admitted pushing it through despite knowing it was technically flawed.
“This is totally unacceptable, in the minds of myself and the members of this committe. This level of how you are operating… the government as a whole, and HMRC is unacceptable.”
– Lord Bridges (House of Lords Finance Bill sub-commitee) to Jesse Norman regarding IR35 reform
10th December, 2020
Surely if CEST is unable to determine 100% outside then the determination is inside IR35
It works well for the public sector why the issue with private clients – surely this is just people trying to ‘bend the rules’
Yes and those “bending the rules” are the treasury. Or does the law state all service sector work should default to inside IR35 no rights employment?
That’s a bit like defaulting to a guilty verdict in criminal law when there’s no evidence.
And public sector projects have been decimated since 2017, only the ones with huge budgets to hire the eye wateringly expensive outsourcers can proceed (see Moonshot £100 billion). IR35 has been an abject failure in the public sector.
Anyone for a customs system?
To know more
“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.”
So there you have it by their own admission – more complex questions are needed. This tool was supposed to make it easier.
I’m a EU resident and I receive my pension from UK. I also have some investments in UK. As an EU resident I must close my accounts in UK. If however obtain a UK residency I can keep my investments. I’m a pensioner, I do not work and I live in Greece. To overcome the problem I was thinking to form a company with min requirements and obtain a mailing address. Could you please advise whether this is feasible.? Perhaps a holding company? Do you know if this will suffice for obtaining a residency?
Why not register your accounts at a serviced address in UK?
UK citizens living in EU are having thier UK bank accounts closed right now for lack of a UK address.
For them residency isn’t the issue it’s the address. I don’t know if your EU residency would make a difference but tme’s running out though.
My wife is a director of her own limited company, she is a consultant.
If she had to go IR35, could she use her own company to be the umbrella company to pay her PAYE?
Thank you
Chris
Yes you can continue to use your ltd company to process IR35 contract payments. The difference being contract fees would all (-5% expenses) be used to pay the directors wages.
Whether it’s worth continuing to run a company like this now you are a no rights employee is a different matter. Administrating accounts, VAT, payroll, insurance etc and associated overheads of running a company might make an umbrella more attractive, check the fees.
If you continue to have other non-IR35 contracts then keeping a ltd company to process both might make sense.
Also being forced to go IR35 means taking on extra costs which is good leverage for a substantial rate rise to compensate, a standard practice.