Tool for IR35 status determination failing in a fifth of cases

Out-Law News | 07 Jan 2021 | 11:32 am |

Chris Thomas tells HRNews that HMRC’s CEST tool is not enough in complex or marginal cases

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  • Transcript

    The new IR35 regime will hit the private sector in April and, it seems, the government’s tool for helping businesses determine workers’ employment status is unable to say if contractors would be caught by the changes in nearly a fifth of cases, which is not a great result. That is according to the latest data published by HMRC on the use of the 'Check Employment Status for Tax' tool –CEST - for the 12 months to November 2020. People Management reports the news and argues the tool is unfit for purpose and 'urges businesses to double check results as April rollout of private sector off-payroll rule changes approaches'.

    As for the tool itself, it poses a series of questions to users about the nature of the work they do and how it is carried out to assess whether their engagements should fall within the scope of the IR35 off-payroll legislation. The Revenue’s data shows in 52% of cases the answers received concluded that the individual fell outside IR35, while 29% fell inside. In 19% of cases the tool was unable to return a conclusive response. Not surprisingly, given the vast number of people and businesses that will be relying on it in the coming months, that outcome is a worry and, depending on which articles you read, you may or may not be persuaded to use it. So what’s our take on this? I phoned tax specialist Chris Thomas to find out:

    Chris Thomas: "What these figures reveal is that CEST was unable to actually make a determination in 19% of cases, so almost one in five. Now, obviously that's quite a high figure and that's quite a lot of contractors, potentially, and that has led to claims from certain quarters that CEST isn't fit for purpose, it isn't working, it isn't good enoughin which there's possibly some truth in that but I would say a couple of things. First of all, we've known for some time that that CEST didn't reach a determination in a significant percentage of cases although this is slightly higher than we thought, but not massively. Also I think it highlights a wider point which is the complexity of what it is that we're actually trying to assess here. This is quite a nuanced area, often, and very fact sensitive, and it's not surprising, I think, that when you try to distil that into a fairly simple test that you find a significant proportion of cases can't actually come to a clear binary answer. I think the other thing we need to remember here is that HMRC have, of course, said that they will stand behind the results of CEST and I suspect that there's a reluctance, perhaps, on their part to commit todoing thatin a case where, actually, that might be the wrong answer because when you really drill down into the fact pattern you discover that perhaps some of what's been put into it isn't quite right, or actually it doesn't capture all of the relevant factors because it's a more complicated case. So I think our view is, and kind of always has been really, that CEST is okay insofar as it goes, but  it probably isn't enough on its own for the more complicated or marginal cases. So I thinkbusinesses might want to consider other forms of risk assessment, whether that be materials that their advisors can provide, or indeed, actually look at doing an actual assessment for them in particular cases,  or whether it be one of the proprietary tools of which there's various available on the market, or indeed, and this is quite a key point, that when you're completing CEST it is actually quite important to read, and I know no one wants to do this, but to actually read the accompanying HMRC guidance to understand the context for this and where HMRC is coming from and the way they interpret this, and I think that's quite important because some of these questions, you could ask them sort of in a bit of a vacuum, and think oh wellthis is the answer, but actually if you understand really the context for why that question is being asked it will helpto answer it more accurately, perhaps, and it is quite important that whoever is completing these CESTassessments doesunderstand the underlying issues and, of course, that they have gathered the right information from the business in the first place because what comes out is only as good as what goes in. So this is not some kind of tick box exercise that can be done by junior admin staff, you know, it doesneed to be properly engaged with.One alternative approach, and we have seen some businesses doing this, is to actually outsource determinations completely so thatone of the third party providers just deals with it all and that can be the right solution for some businesses but,I think, from our experience we would just give a note of caution which is to careful in the sense that you can outsource financial exposure to a point but what you can't outsourcethe whole of your legal responsibility to HMRC because, ultimately, it's your responsibility to get this right and there will be reputationalissues and risk issues in the relationship with HMRC that go beyond the actual tax in any particular case. I would also say be very clearwith the provider as to who is responsible for what, what risk is being borne by whom if this goes wrong if the assessment comes to one conclusion, and things like what's going to happen if there are contractual disputes with HMRC and who is going to manage that because in our experience these are all areas where it can get a bit tricky. So it does it was kind of improperly thinking about before you go into that."

    IR35 is just one of a number of issues that our tax team has covered in recent weeks for HRNews. You can find all of them on the Outlaw website.