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Tax check tool CEST is the pits, say UK contractor consultancies as latest HMRC usage stats are published

IR35 status of 1 in 5 cases still undetermined by 'fundamentally flawed' app

The UK tax collector’s controversial Check Employment Status Tool used by contractors to determine their IR35 status returned inconclusive responses for one in five of the million plus times it was called upon in 16 months.

As confirmed by the latest statistics from Her Majesty’s Revenue and Customs department today, CEST was deployed 1,018,250 times between November 2019 and May 2021: almost half of the delivered results show the freelancers were deemed to be operating inside IR35, a little over 300,000 were outside, and in 210,100 cases it was inconclusive.

Specialist tax contractor Qdos said the findings were shocking. “I’m astonished that the government still stands by an IR35 tool that hasn’t been able to make up its mind over 210,000 times,” said CEO Seb Maley.

“Here we have proof that CEST has left hundreds of thousands of contractors and businesses in limbo, unsure of whether a contract belongs inside or outside of IR35. It should be the final nail in the coffin for this fundamentally flawed tool.”

Maley questioned if HMRC has the resources to offer support to contractors scratching their head about their IR35 status, saying the undetermined results cause "confusion, delay, and in many cases, non-compliance".

IR35 tax reform was introduced to the private sector in April for medium to large firms. It was designed to crack down on off-payroll working and reduce tax avoidance. Contractors that are "deemed employees" by HMRC need to pay income tax and National Insurance Contributors like any full-time employee but they are not entitled to other benefits, such as holiday or sick pay. In some cases contractors say they are about 25 per cent worse off each month.

CEST was launched in 2017 when IR35 legislation was introduced to the public sector, and it was tweaked in 2019. It has been repeatedly criticised over its accuracy though HMRC has always defended it.

The latest data on CEST released by HMRC today is not markedly different to the last set in December when 188,719 of its 975,416 inputs delivered in a year came back as undetermined. Clearly though, fewer contractors are using CEST.

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 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.

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.

Dave Chaplin, CEO of IR35 Shield, a compliance solution, and Contractor Calculator, said the usage figures also included potential multiple interactions by the same person as freelancers dabbled with the tool.

He criticised CEST, saying it was “not aligned with the case law, omits mutuality of obligation, and puts far too much emphasis on the right of substitution, which will skew the data heavily towards more outside determinations – which may not be supported by the evidence, or be defendable at a tax tribunal.

“It’s interesting to see that in 20 per cent of cases it cannot give an answer – we are yet to see any advisors or judges simply shrug their shoulders 1 in 5 times.  We must remember that HMRC Counsel argued in a preliminary tax tribunal that CEST was irrelevant.  We suggest people take heed to the observations of their own counsel.”

Chaplin pointed out CEST's use is not mandatory - contractors are obviously voting with their feet and using it less and less. ®

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