HMRC refutes claims of CEST inaccuracies
The taxman’s troubled online IR35 status checker, CEST, has come under further fire this week, as ContractorCalculator.co.uk published a statement on Tuesday claiming that CEST has “undergone no formal testing since its release almost two years ago”.
The CEST tool was released alongside changes to IR35 in 2017 that made public sector clients responsible for IR35 determinations instead of contractors themselves, and is intended to provide clients, newly responsible for making the complex assessments, with a straightforward way to check if the determinations they are making are accurate. It has, however, faced continual criticism over its accuracy – last year, for example, Jolyon Maugham QC dismissed the tool as trying to achieve an “impossibly difficult” task.
In response to a Freedom of Information (FoI) request submitted by ContractorCalculator.co.uk, HMRC stated that “No further documentation has been created since April 2018 where CEST has been subsequently tested against court cases”: ContractorCalculator.co.uk claims that the implication is therefore that no formal testing has taken place since the initial testing period. HMRC and the Treasury have repeatedly claimed that the tool is under continual review.
On Tuesday, responding to an enquiry about the claims by Recruiter magazine, HMRC issued updated CEST guidance stating “The Check Employment Status for Tax (CEST) digital service was rigorously tested during development in conjunction with HMRC’s lawyers against live and settled cases and reflects employment status case law”.
In a statement to Recruiter, HMRC said: “[CEST’s] use is advisory and not mandatory, but we are confident in CEST’s accuracy and stand by its output when it is completed in line with our guidance.
“GDS Standards assessments are only required for transactional services, which allow users to exchange information, goods or services. As CEST is a tool for guidance purposes, not a transactional service, a GDS assessment was not appropriate.”
ContractorCalculator.co.uk had previously submitted a Freedom of Information request in April 2018 requesting details of the case law used in CEST’s testing. They were told that “CEST was developed in a workshop where officials, lawyers and IT professionals developed the set of rules that under-pin the tool”, however “the only documented output is the agreed set of rules”: they apparently did not make any record of the development process at all. ContractorCalculator.co.uk CEO Dave Chaplin said at the time: “For a tool of such importance, the supposed lack of rigour involved in its testing methodology is astonishing, … When I led teams developing online banking software, if we’d gone into a room and emerged claiming that the software all appeared to work fine, without any documentation to prove it, we would have been fired.
“We examined the CEST programming code last year and published the results online. Our findings proved that CEST is structurally flawed, and that HMRC would need to start from scratch to have any hope of achieving accuracy.
“You have to ask yourself why HMRC has chosen not to be transparent with this crucial part of the testing of the tool. It’s absurd that there is supposedly no detailed documented evidence of formal testing of the tool. Has HMRC shredded any evidence to cover up CEST’s shortcomings?”
Although HMRC couldn’t supply any details of CEST’s development under the FoI request, they did offer, on a “discretionary” basis, a list of 24 key employment status court cases. ContractorCalculator.co.uk then ran the details and decisions of the 24 cases through CEST with the help of legal employment status experts, and allege that CEST was correct in only 58% of the cases. HMRC claim a 92% success rate for the same data.
We reported in December that IR35 forum minutes from July suggested one of the most important IR35 indicators was not being considered by CEST and was instead being automatically included in every CEST calculation, heavily weighting results towards employment and indicating a fundamental lack of understanding in the method of determining IR35 status by HMRC. Minutes from the subsequent meeting of the forum in August suggested that the error had been picked up, but rather than reprogramming CEST, HMRC intended to add a simple note to the tool’s landing page.
A guidance note published alongside the 2018 Autumn Budget last October said that HMRC will “identify improvements to CEST”, implying that the Government agree that it is currently inaccurate.
CEST has also been identified to be at the heart of a long-running BBC pay dispute, triggered by the introduction of the IR35 Off-Payroll rules in 2017. At the latest hearing of the Commons’ Public Accounts Committee into the BBC and Service Companies, BBC director general Lord Hall seemed to imply that CEST had cast doubt on their previously uncontroversial methodology, developed in partnership with Deloitte: “From 2017 onwards, we were surprised by the way the outcomes of the tests that we had been applying perfectly legitimately and properly before were suddenly changed by CEST”. BBC deputy director Anne Bulford said at the hearing: “We have used the guidance, as we understood it over these years; radio industry guidelines were used; the test that we developed from 2013 was used; and then, when we applied the CEST, these employment statuses shifted and that is what caused the problem”. The BBC estimate 800 individuals to be at risk of retrospective employment taxation.
With the extension of Off-Payroll to the private sector in April 2020 looming, CEST’s inaccuracies could lead to a dramatic increase in erroneous IR35 assessments when private sector clients find themselves suddenly responsible for assessing thousands of contractors’ IR35 statuses. Whilst, by HMRC’s own admission, CEST cannot replace a structured legal review of contracts and working practices, the danger is that clients will rely on CEST too much. This problem could be exacerbated by HMRC’s recent admission that they will accept “blanket” contract reviews where multiple contractors on the same terms and conditions can be treated as identical for employment status purposes. Industry bodies and taxation experts are calling on the Government to review CEST urgently and provide both public sector and private sector clients with extensive guidance on how to make IR35 assessments correctly.
7th February 2019.
Sources:
https://www.contractorcalculator.co.uk/hmrc_still_conducted_formal_testing_cest_547410_news.aspx
https://www.recruiter.co.uk/news/2019/02/hmrc-refutes-contractorcalculator-claims-cest-inaccuracies
https://www.contractorcalculator.co.uk/bbc_chiefs_pin_problems_cest_547210_news.aspx
https://www.contractorcalculator.co.uk/cest_exposed_hopelessly_unreliable_hmrcs_foi_543610_news.aspx
https://www.contractorcalculator.co.uk/docs/20180425FOI201800667-CESTCases.pdf
