The HMRC questioned on the CEST while the tax status of 210,000 entrepreneurs remains “undetermined”


HM Revenue & Customs (HMRC) has been called upon to explain why its online IR35 status checker remains unable to decide how hundreds of thousands of contractors should be taxed, months after the rollout of IR35 reforms in the private sector .

The HMRC Check Employment Status for Tax (CEST) tool is designed for use by end user organizations who need to individually assess the IR35 status of the entrepreneurs they hire by asking a series of questions about their work habits and behaviours.

According to data released by HMRC earlier in June, in an 18-month period from November 2019, the tool failed to determine how contractors should be taxed in over 210,000 cases.

Based on the responses entered by the end user organization, the tool should generate a result that confirms whether the contractor should be taxed in the same way as a permanent employee (inside IR35) or as a self-employed person (outside IR35).

The tool has come under repeated criticism since tax collection made it available to entrepreneurs and end-user organizations before the roll-out of the IR35 public sector reforms in April 2017, with complaints suggesting that the tool is “error-prone” and “unsuitable for use”.

In November 2019, it emerged that NHS Digital had received a £ 4.3million IR35-related tax bill after using the CEST to assess its subcontractors, with reports also suggesting at that time that the The tool did not have the functionalities necessary to accurately assess the tax status of subcontractors. .

HMRC has always strongly defended the tool against all criticism and has repeatedly stated that it supports “every result it gives” provided the data entered into the tool is accurate and within its guidelines.

A revised version of the tool was released in November 2019, and HMRC released data on June 24, 2021 which confirmed that CEST was used a total of 1,653,672 times between the release of the reworked version and May 31, 2021.

Unsurprisingly, the data shows that CEST use began to ramp up ahead of the initial April 2020 rollout date of the IR35 reforms in the private sector, with 233,748 and 229,177 use cases in February 2020 and March 2020, respectively.

The onset of the Covid-19 coronavirus pandemic prompted the UK government to delay the start of IR35 reforms in the private sector by 12 months, leading to a peak in CEST use in March 2021 with 233,133 organizations using it.

The data can also be deepened to highlight instances where CEST users have included entrepreneurs who provide their services through their own limited companies, known as intermediaries.

These data show that 1,018,250 workers identified as providing services through an intermediary used CEST between November 25, 2019 and May 31, 2021, and in about half of these cases (499,974) their commitments were classified as being out. IR35. Additionally, 308,176 were classified as being inside IR35, and the remaining 210,100 were labeled “undetermined”.

This echoes a trend highlighted six months ago when HMRC released a similar set of CEST-generated outcome data that showed it had failed to generate a definitive answer in nearly d ‘one in five.

Seb Maley, CEO of IR35 compliance firm Qdos, said that the fact that CEST remains unable to make a decision in more than 210,000 cases is concerning.

“I am surprised that the government still maintains an IR35 tool that could not be decided more than 210,000 times. Here we have proof that CEST has left hundreds of thousands of entrepreneurs and businesses in limbo, unsure whether a contract belongs inside or outside IR35. It should be the last nail in the coffin of this fundamentally flawed tool, ”Maley said.

“I am curious to know what happened to these commitments. Does HMRC have the resources – let alone the expertise – to offer support on this scale? I doubt. The sheer number of indeterminate results leads to confusion, delays and, in many cases, non-compliance. “

On this point, HMRC has deployed a number of ancillary services to support CEST in recent months to support organizations struggling with the start of IR35 private sector reforms.

These include the introduction of direct online chat support when using CEST, as well as a dedicated helpline that users can use to get help with specific issues while using CEST. the use of the tool.

Commenting on the same data from HMRC, Dave Chaplin, CEO of contracting authority ContractorCalculator, said it’s important to remember that figures released by HMRC will include instances where people have experimented with the tool multiple times, and therefore should not be interpreted as “actual determinations of individual commitments”.

Even so, there are still many issues with the operation of CEST that still need to be resolved, he added: “The tool is not aligned with case law, omits reciprocity of obligations and puts too much emphasis on ’emphasis on the right of substitution, which will strongly skew the data towards more external determinations – which may not be supported by evidence or be defensible in a tax court.

“It’s interesting that in 20% of cases he can’t give an answer – we haven’t yet seen any advisers or judges just shrug their shoulders 1 in 5 times. We have to remember that the lawyer de HMRC argued in a preliminary tax court that the CEST was irrelevant. We suggest that people pay attention to the comments of their own lawyer, ”added Chaplin.

Computer Weekly forwarded Maley and Chaplin’s comments to HMRC and received the following statement from a spokesperson for the department: “In the vast majority of cases, the free CEST tool will determine the worker’s employment status for workers. taxes and national insurance contributions. In the minority of more finely balanced cases, the CEST will give an indeterminate result.

“To get a view in all cases, HMRC would have to add more complex questions, which would increase the load of using the tool for the majority of users,” the spokesperson said.

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