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.
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.”
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.”