HMRC’s beleaguered Check Employment Status for Tax tool (CEST) has faced fresh criticism this week, in a press release by the national body for taxation in the UK, the Chartered Institute of Taxation (CIOT).
“HMRC’s Check Employment Status for Tax tool needs to be significantly improved if the rollout of the off-payroll working rules to the private sector is not to lead to uncertainty and protracted disputes over tax status between businesses and workers.” said the Institute, which has called for the tool to be updated and finished by October of this year.
The Off-Payroll rules will change the way IR35 is assessed in the private sector, with the end-clients that hire contract workers becoming responsible for assessing whether their freelancers should be subject to PAYE income tax implications and National Insurance or not.
For those who make their living contracting IR35 categorises them as ‘disguised employees’ and requires them to pay income tax and National Insurance contributions.
CEST is an integral part of HMRC’s Off-Payroll implementation strategy – the online tool is intended to make it easier for businesses unfamiliar with the complex IR35 rules to complete the tricky assessment. Without CEST, staffing companies across the country would need to study years’ worth of employment and tax tribunal case law in order to understand fully how the legal test for self-employment works, and how to compliantly apply it.
However, critics of the tool argue that the courts have consistently rejected taking a checklist approach to employment status decisions, instead favouring a “qualitative” approach that may apply more or less weight to certain factors depending on the individual case.
This makes it almost impossible for an algorithm-based tool such as CEST to achieve 100% accuracy. HMRC claim is it only offered as a guide to IR35 decision-making, whereas opponents of Off-Payroll have expressed concerns that businesses will be overly reliant on the tool, or will simply subject all contractors to PAYE, a situation referred to as “blanket” assessment.
The financial risk of these IR35 reforms is substantial to any contractor subject to them. The reforms mean that from April 2020, private sector organisations will be responsible for the tax implications of freelancers, instead of the freelancers themselves.
The CIOT’s recent comments come as the Government departments recent consultation on extending Off-Payroll into the private sector closed this week, with their specialist criticisms of CEST forming part of the professional body’s response to the Treasury.
Yesterday’s press release warned taxpayers and the Government about the critical need to improve CEST (which is still officially in its beta development stage): “The CIOT has previously raised concerns that CEST does not factor in all the criteria established by case law as needing to be considered before its algorithms reach a decision on whether IR35 applies; a view that is borne out by the cases that have been argued in the courts over the years on when IR35 applies and when it does not. Consequently, CEST does not always give an accurate employment status determination, and this does not instil confidence in those relying on CEST to help with status decisions.”
Colin Ben-Nathan, chair of the CIOT’s Employment Taxes Sub-committee, said: “If businesses are to make the correct decisions on whether the off-payroll rules apply then we think that the existing CEST will need to be significantly improved. And we also think that the improved version will need to be ready by October 2019 at the latest so that new and existing contracts can be reviewed by April 2020.
“Until CEST takes proper account of mutuality of obligation, multiple engagements, contractual benefits – such as holiday pay, maternity/paternity pay – and whether someone is in business on their own account, it is unlikely it will be able to reach the right decision on status. And this is important because otherwise the lack of confidence in CEST will increase disputes between businesses and contractors and so lead to significant time and effort having to be expended by businesses, contractors, HMRC and the courts in trying to resolve them.”
CEST has been subject to widespread criticism from key influencers in the independent contractor sector, including website ContractorCalculator.co.uk, who published a 31-page white paper on the tool entitled “CEST – Not Fit For Purpose” last Autumn. ContractorCalculator.co.uk’s CEO Dave Chaplin thinks the October deadline set by the CIOT for finishing CEST will be an insurmountable task for HMRC:
“From a software engineering perspective, HMRC has zero chance of meeting the CIOT proposed deadline, which is only four months away. A proper testing cycle, using independent testers, with the level of testing documentation and proof required to prove accuracy could alone take months.
“That would leave HMRC with a matter of weeks to somehow rebuild a system to accurately assess status. That’s insurmountable. The only logical option is to delay the legislation for at least another year.”
Colin Ben-Nathan continued: “We welcome the Government’s decision to exclude small private sector entities from the off-payroll working rules, although we would suggest the Government consider extending the exclusion to small public sector entities to ensure a level-playing field. However, we also suggest the Government considers how employee numbers are to be calculated in the small entity test, as a test based on a simple count of employee numbers (even if averaged across the year) may discriminate against businesses with predominantly part-time employees. It would be unfortunate if this affected the behaviour of some small businesses by discouraging them from taking on part-time employees in order to retain their ‘small’ status.
“We are very concerned by the proposal to transfer liability back to the first agency in the supply chain – and ultimately, where HMRC is unable to recover the liability from the first agency, the end client – where HMRC are unable to collect an outstanding liability from a defaulting party further down a supply chain.”
The decision from the key employment status case of Hall v Lorimer from 1994 sums up how difficult a task it is to create an automatic, algorithm-based employment status checker:
“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.”
The CIOT’s full response to the Off-Payroll consultation can be found here.
7th June 2019.