HMRC online IR35 checker remains inaccurate

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HMRC online IR35 checker remains inaccurate

As most contractors will know, determining one’s IR35 status can be a tricky process.  When the Government recently moved the burden of IR35 assessments to the HR departments of public sector bodies and away from their contractors through the introduction of the Off-Payroll rules, they were essentially asking people who had never even heard of IR35 before to suddenly become experts and handle IR35 assessments in bulk.

This is no small ask, and the consensus amongst experts and industry bodies is that the roll-out was rushed and lacked enough official guidance for clients to be able to make accurate IR35 determinations.  HMRC did, however, launch a handy online IR35 status checker called CEST, which is designed to serve as a guide for anybody wishing to learn more about an individual’s IR35 status, whether that be a contractor, or a befuddled personnel clerk at a hospital who hires them.

One would expect that the Government’s official department in charge of tax collection would itself have a fairly decent understanding of the IR35 criteria, but it would appear that the team behind the CEST tool did not, given some glaring mistakes in its underlying method.

One of the top three IR35 criteria that has been developed by the Employment and Tax Tribunals over the past 40 years is called Mutuality of Obligation (MoO).  It’s an elaborate name for whether the client can request the contractor to work even if the initial objective of the contract is complete or suspended/cancelled.  If, for example, a contractor embarks on a 12 month contract to migrate a software system but finishes early, if the client can then move them onto other projects to take advantage of the remaining contractual term, a “mutuality of obligation” exists that strongly indicates an employment relationship.

Factors that would indicate a lack Mutuality of Obligation include:

  • Contractual right to terminate contract should the contractor’s service no longer be required
  • Mutual right to terminate contract early (preferably without notice period)
  • A fixed-term or price-basis contract rather than an ongoing arrangement
  • Contractor obliged to take time off without pay if client organisation undergoes period of shutdown

Simple, right?  Well not apparently simple enough for the eggheads at HMRC, who neglected to include Mutuality of Obligation in the CEST tool altogether.  That’s right, one of the most important IR35 status indicators is not considered at all by the online tool.

And this is not the only complaint – there have been many anecdotal reports of false-positives, i.e. CEST returning an “inside IR35” result for data that clearly suggests an “outside IR35” relationship.  The Chartered Institute of Taxation cited this is a key concern in their response to the recent Government consultation on migrating Off-Payroll to the private sector.

HMRC IR35 forum minutes from July initially suggested an incredibly weak understanding of MoO by HMRC: they thought the mere existence of a contract was enough to establish MoO.  That HMRC’s own understanding of the IR35 criteria is so poor speaks volumes about the complexity of IR35 assessment and the fairness in expecting individual taxpayers (or HR departments) to get their heads around it.

Minutes from the same IR35 forum from August indicate that HMRC is now aware that the lack of consideration of Mutuality of Obligation by CEST is affecting the tool’s accuracy, but instead of reprogramming CEST, they seem to suggest adding a simple note about MoO to the tool’s landing page.  A guidance note published alongside the 2018 Autumn Budget said that HMRC will “identify improvements to CEST”, but as yet the tool remains, by the Government’s own admission, broken.

Until such “improvements” are made, to anyone using the CEST tool, caveat usor.

13th December 2018.

Sources:

https://www.contractorcalculator.co.uk/hmrc_plans_attempt_fix_cest_545610_news.aspx

https://www.contractorcalculator.co.uk/hmrc_mutuality_obligation_incorrectly_defines_moo_542710_news.aspx

https://www.contractoruk.com/ir35/mutuality_no_longer_relevant_ir35.html

https://www.tax.org.uk/sites/default/files/180807%20Off-payroll%20working%20in%20the%20private%20sector%20-%20CIOT%20comments.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/753655/IR_35_Forum_Minutes_-_30_August_2018.pdf