Back in March 2017, the Association of Taxation Technicians (ATT) expressed its concerns about how organisations in the public sector – the NHS in particular – were to manage IR35 status decisions for their considerable contractor workforces. One fear that was reiterated was the prospect of ‘arbitrary, inaccurate, and unfair’ determinations that could prove damaging to contracting – no matter where in the supply chain you sat. This was exacerbated by the industry-wide criticism of HMRC’s Check Employment Status for Tax (CEST) tool, which was released hastily and without proper testing. It’s now surfaced in a report that NHS Digital has been hit with a £4.3m tax bill as a direct result of the IR35 status determinations the organisation carried out using CEST.
NHS Digital stung by HMRC after using CEST tool for IR35 tests
The report detailing NHS Digital’s 2018-2019 annual accounts specifies that the taxman’s very own CEST tool was used to assess any contractors engaged that year – the decisions for which have landed the department an astronomical tax bill. The £4.3m owed sum includes interest and penalties for the period spanning from 1st April 2017 to 31st December 2018.
NHS Digital’s report reads:
“We continue to improve our assurance processes to ensure we categorise all engagements in line with best practice. Up to December 2018, we assessed all contractors using the toolkit supplied by HMRC. From January 2019, we are now making an initial assessment internally. Any contractors considered to be outside of scope are then being reassessed by an external provider.”
“Following the implementation of the new rules for IR35 introduced for the public sector in April 2017, we undertook a considered assessment of the status for each individual contractor which we believed met the HMRC requirement. However, HMRC has challenged our assessment.”
This about-turn by the taxman legitimises the chorus of concern to which CEST was launched while reinforcing speculation that HMRC doesn’t fully understand its legislation. The taxman has also previously pledged, while in vehement defence of its tool, to honour any IR35 status determination results produced by CEST – albeit with a caveat added post-publication that HMRC can be let off the hook if the result is believed to be inaccurate.
NHS Digital feared mass exodus of talent due to IR35
Dr Iain Campbell, Secretary General of the Independent Health Professionals Association (IHPA), spoke to Larsen Howie on the impact IR35 has had on the public sector. He also addressed the trend of blanket determinations that have marred contracting for corporations like the BBC and NHS in recent years.
“Immediately following the [IR35] reforms, the significant private sector IT market was still subject to the old Chapter 8 rules and exerted a protective effect on contractors working for NHS Digital - few would want to work inside IR35,” Dr Campbell said. “NHS Digital feared the exodus of talent from the public sector. This was less notable throughout the rest of the health market as the private healthcare market is comparatively small leading to fewer issues with private-sector competition in maintaining blankets.”
“We started to hear that some IT contractors at NHS Digital had been allowed outside the reforms shortly after our judicial review of NHS Improvement (who regulate NHS Digital) when we forced NHSI to concede that their ban on working via PSC was unlawful in May/June 2017,” he continued. “It seems this may have created some wiggle room for IT contractors for a time. Unfortunately, reading between the lines, NHS Digital appears to have obeisantly capitulated to HMRC and added an extra hurdle for workers to be deemed outside IR35. This is slightly better than the rampant unlawful blanket approach taken by most of the rest of the public sector, although I suspect we’ll see this change after rollout.”
NHS Digital should’ve avoided CEST and decided to ‘seek professional tax advice from a human’
Dr Campbell also spoke out about the unreliability of CEST, and how important it is to get ‘human’ IR35 and tax advice.
“I would also highlight that as CEST is a mechanistic approach of a type oft criticised in the case law, and omits key employment status case law tests, the approach adopted to NHS Digital will still lead to injustice,” he said. “CEST is the wrong approach and is biased towards finding people within the scope of the legislation. NHS Digital have defensively decided only to seek professional tax advice from a human for a smaller subset, to avoid false employment it should be paying for such tailored advice in every single engagement.”
“If the latter is the case, then the Government would be well warned not to overlook the global world in which we live. Just as ONS data shows 11,000 self-employed doctors fled our shores following the public sector reforms, much-needed talent in IT, banking, and finance will do the same. Plus, with Brexit looming large on the horizon these ill-advised reforms could not have come at a worse time.”
CEST isn’t best – invest in an IR35 contract review
While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are just as valid. We've written before on all the reasons to avoid using CEST.
There’s an argument to opt for a ‘manual’ contract review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed. A contract or working practices review carried out by an IR35 specialist may take longer to receive your determination from, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from our Head of Tax, ex-Qdos IR35 specialist Andy Vessey ATT, should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.