CEST claimed to be behind ‘absurd’ number of IR35 determinations in public sector
Recent Freedom of Information (FoI) requests that have shown that “inside IR35” determinations are “absurdly” high in the public sector highlight fundamental inaccuracies in HMRC’s Check Employment Status for Tax (CEST) tool, it has been claimed.
Responses to FoI requests made by ContractorCalculator.co.uk revealed this week showed that the Met Office has deemed 98% of its contractors “inside IR35”, and 87% of the Crown Commercial Service’s (CCS) contractors have been assessed the same way. This follows previous FoI requests that uncovered that 99% of Network Rail’s contractors and 98% of HS2’s contractors have been deemed subject to IR35.
Public authorities have been responsible for assessing their contractors’ IR35 positions since reforms to IR35 known as the Off-Payroll rules were introduced to the public sector in 2017. Concern has been raised that public authorities are struggling to make the highly complex assessments accurately, and the high “inside IR35” ratios revealed by recent FoI requests appear to confirm this – HMRC themselves estimate that two-thirds of contractors working through limited companies are genuinely self-employed and should thus fall outside of the rules.
In order to assist public sector end-clients with their responsibilities under Off-Payroll, HMRC launched an online tool, CEST, which attempts to calculate IR35 status on the basis of answers to an online questionnaire; however, the courts have repeatedly ruled against applying a “checklist” approach to determining employment status. In the key employment status case of Hall v Lorimer from 1994, the judge, Lord Nolan, ruled that:
“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of the evaluation of the overall effect of the detail, which is not necessarily the same as a sum total of the individual details. Not all details are equal weight or important in any given situation. The details may also vary in importance from one situation to another.”
Official HMRC guidance to the Off-Payroll rules does not go into detail on how to make IR35 assessments, but offers CEST as a tool “to help … find out if the Off-Payroll working rules apply”. If CEST gives an ambiguous result, a contract review service is also offered, yet this service only reviews the written contracts, which often do not reflect the true nature of the engagement.
Off-Payroll sparked chaos at the BBC following its introduction, prompting an inquiry by the National Audit Office which found that many contractors who had been previously categorised as self-employed as per existing BBC processes had been reclassified as “inside IR35” following the launch of CEST and its subsequent use by the BBC to assess employment status. Post-CEST, 92% of BBC freelancers were taxed as “deemed employees”. One anonymous female radio presenter told the Commons’ culture committee that she had attempted suicide after being pressured into setting up a limited company and then later falling foul of the Off-Payroll rules.
ContractorCalculator.co.uk’s FoI responses confirmed a lack of any internal guidelines or policies relating to Off-Payroll at the relevant public authorities, with the engagers instead relying on official HMRC guidance, which, claims ContractorCalculator.co.uk, implies that CEST is behind the spurious employment/self-employment ratios.
“It’s no coincidence that yet more public sector bodies, failing an absurdly high proportion of contractors, have acknowledged using CEST,” noted ContractorCalculator.co.uk CEO Dave Chaplin. “With CEST, HMRC has clearly fettered its discretion by releasing a tool that gives incorrect guidance, resulting in thousands of workers being wrongly classified and incorrectly taxed.”
CEST was subject to a critique in Tax Adviser magazine in March that identified several issues with the tool. Author Steve Wade, a Chartered Tax Advisor and associate partner at Ernst & Young, summarised that CEST “may be too simplistic, not focus on sector specific detail, for example, and not be able to reach a correct determination in all cases.”
CEST has also come under fire for not considering Mutuality of Obligation, one of the key employment status indicators. HMRC’s rationale was that Mutuality of Obligation exists in every contract, but this view has been criticised as over-simplistic: employment status determinations should consider the level of “mutuality of obligation”, and an obligation on the engager to provide work combined with an obligation on the worker to perform said duties is considered a strong indicator of employment.
Keith Gordon gave a neat analogy of Mutuality of Obligation in Lorraine Kelly’s recent IR35 case: a gardener can be told where to plant or when to prune but if asked to serve dinner, an employee would be unable to refuse but a self-employed worker could. Similarly, a passenger could control the route a taxi takes to a destination but there is no obligation on the self-employed taxi driver to take the fare.
ContractorCalculator.co.uk ran the details of Lorraine Kelly’s engagement with ITV, taken directly from the tribunal ruling, into CEST and received an “inside IR35” result, whereas Judge Jennifer Dean ruled her contract as “outside IR35” – a decision upon which hinged a potential tax liability of £1.2 million.
Met Office contractor Tony Elbourn won an employment tribunal case in October that proved his self-employed status, having previously been assessed as an employee by the Met Office using CEST without even referring to his written contract.
HMRC themselves admit CEST needs improvement – the current open consultation on expanding Off-Payroll into the private sector acknowledges: “There are currently concerns about CEST’s ability to take account of existing employment status for tax case law and the resulting possibility to not give an accurate employment status determination in some cases [and] reflect the complex nature of the private sector.”
Whether any improvements to CEST can deliver an accurate tool is debatable, given the nature of IR35 assessment. Clients are recommended to keep a full audit trail of how CEST assessments have been reached, and the current Off-Payroll consultation seeks to explore methods for contractors to appeal status decisions after Off-Payroll has been rolled-out into the private sector.
The danger is that, by pushing responsibility for making the impossibly complex assessments on to private sector end-clients, contracting itself is being put at risk. Companies may follow HSBC’s recent decision to stop engaging contractors altogether, insulating themselves from the risks of Off-Payroll but also denying themselves access to a unique pool of talent and experience. The CEST issue may, unfortunately, be a symptom of an ill-conceived policy, with scant hope of an effective remedy.
14th May 2019.