HMRC’s employment status tool under fire
In April of this year, IR35 legislation added another layer of complexity by introducing a set of ‘off-payroll’ rules for the public sector. For those contractors providing their services to public sector bodies, they have been relieved from deciding their employment status which becomes the responsibility of the government organisation itself. To help them do this, HMRC designed an online tool, Employment Status Service (ESS), which evolved into Check Employment Status for Tax (CEST). Whilst end users are not compelled to use CEST, HMRC will stand by the results of the test unless a compliance check finds information isn’t accurate or arrangements have been contrived to produce a particular outcome.
The early questions in the test concentrate on the two key areas of employment status, personal service and control. Positive answers to these questions will bring the test to an abrupt end and the contractor will be deemed to be outside of IR35. However, where the picture is unclear, then the user will be taken deeper into the test to answer questions regarding financial risk and integration before producing a decision on the contractors’ status. Even then, the result may be inconclusive.
CEST has received a fair amount of criticism, and rightly so, chiefly in respect of HMRC’s disregard for case law, which forms the back bone of employment status, and forming the questions borne out of their own skewed interpretations. For example, with regard to the question, ‘If the worker’s business sent someone else to do the work (substitution) and they met all the necessary criteria, would the end client ever reject them?’, HMRC set out five criteria one of which is the worker not being from a pool or bank of workers regularly engaged by the end client. Substitution only requires the contractor to be responsible for engaging and paying the replacement worker.
Mutuality of obligation (MOO), a key test as to whether or not an employment relationship exists, is conspicuous by its absence from CEST. However, this is hardly surprising given HMRC’s attitude that MOO is present in all public sector engagements, something that Mark Frampton, HMRC policy advisor on IR35, actually told an audience of NHS Trustees in September 2017!
Yet, the online test includes a question regarding employee-type benefits, a minor test which even according to HMRC’s own guidance states “Entitlement to Statutory Sick Pay, Statutory Maternity Pay and pension rights are consequences of employment and are not indicators of employment.”
Jim Harra, HMRC’s Tax Assurance Commissioner and Director General for Customer Strategy and Tax Design, recently stated that contractors were wrongly classifying themselves outside of IR35 in 90% of cases and, by doing so, have denied the UK hundreds of millions of pounds for vital services. Yet, in 2015, the Treasury’s second evaluation of tax arrangements in the public sector found 95% of government departments were ensuring that freelancers provided satisfactory evidence that they were meeting their tax obligations. Mr Harra also went on to deny that the new rules would result in contractors abandoning the public sector en masse. This despite the fact that virtually all contractors working on HMRC’s Making Tax Digital programme downed tools when told by HMRC that they were now caught by IR35 because of the new rules.
So how often has the online tool been used? According to the minutes of the IR35 Forum in July 2017, CEST had been used 450,000 times and reached a determination 85% of the time. More recent figures obtained by ContractorCalculator under a Freedom of Information Act request showed that usage of the online tool had dropped from over 160,000 in March 2017 down to just over 40,000 in October 2017, with 40,000 uses per month now a steady average.
But what does the future hold? Many believe that CEST will be rolled out to the private sector before long and there is good reason for this. Whilst it will aid HMRC’s compliance, simplification will dictate that a two-tiered IR35 system is unsustainable. Furthermore, there are strong rumours afoot that the Chancellor is set to make some announcement to this effect in the Autumn Budget next week. Only time will tell, but it doesn’t look like CEST will disappear anytime soon.