In a press release from the Chartered Institute of Taxation (CIOT) yesterday, there was a strong call for HMRC to reassess its Check Employment Status Test (CEST) tool before April 2020. It was also highlighted that the complexity of IR35 could see genuine contractors suffering should the legislation be misunderstood by end clients, the argument being that even HMRC themselves can’t seem to make a correct determination.
This criticism comes off the back of the CIOT submitting recommendations in response to HMRC’s IR35 consultation document and is particularly potent after a string of high-profile IR35 case defeats for the taxman, including those of Lorraine Kelly and Kaye Adams. With so many misfires already, it’s difficult to know whether HMRC understands its own legislation.
You can read the CIOT’s full comments here, or read on for a summary.
CIOT on the CEST tool
The CEST tool was launched in April 2017 (at the same time as the off-payroll working rules were introduced for the public sector) to help businesses and workers decide the employment status of their engagement.
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, warns the CIOT.
Colin Ben-Nathan, Chair of CIOT’s Employment Taxes Sub-committee, states:
“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.”
CIOT on small business exemption from the off-payroll rules
The consultation on how to extend the off-payroll rules from the public sector to the private sector includes the Government’s proposals to exempt small entities from the off-payroll rules and proposals to transfer liability for PAYE and NICs to first agents or the end client where an agent further down a supply chain defaults on paying this liability.
Colin Ben-Nathan continues:
“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 CIOT says that where the first agency/end client has used all reasonable endeavours to ensure the integrity of the supply chain but, for some reason, HMRC are unable to recover the PAYE and NICs, it is not fair and proportionate for the liability to simply be transferred to the first agency/end client. If the Government was to adopt this approach it would also create an uneven playing field relative to the position for agency workers where liability for PAYE is only transferred in very narrowly defined circumstances. At the very least, a power to transfer liability should be tempered with a defence of reasonable care, says the CIOT.
Concluding statements on IR35 recommendations
In its submission to HMRC, the CIOT recommends that a review is undertaken of the off-payroll rules by HMRC in, say, mid-2022, after a full tax year (2020/21) of operating the new rules in the private sector and with the submission deadline (31 January 2022) for self-assessment returns for that year having passed. This would provide the opportunity to assess what is working well, what is working less well and whether or not changes are needed to ensure that the process works as effectively and efficiently as it can for businesses, contractors, agencies and indeed HMRC.
We too looked at whether CEST is fit for purpose, as well as scrutinised whether or not HMRC could correctly determine whether a contractor is inside or outside IR35 themselves. Their incompetence has been exposed time and time again, from cornerstone cases like Jensal Software (which was defended and won by Andy himself) to the judge’s remarks that Lorraine Kelly’s case wasn’t even borderline - she was clearly self-employed.
The recent spate of high-profile investigations may have been intended as a proverbial ‘head on a spike’, but with every lost case, the Treasury seems more desperate to prove that the legislation is viable. Instead of admitting fault with and amending IR35 and the CEST tool, the taxman instead continues to charge mulishly forward, leaving a trail of unnecessary stress and wasted public money in its wake.