UK Government’s IR35 tool unable to determine employment status in a fifth of cases

Experts are urging businesses and contractors to scrutinize IR35 determination results produced by the Government’s CEST tool.

In an attempt to streamline the introduction of their legislation amendments in the private sector, the Government produced its own, free-to-use, determination tool – CEST.

Designed to help businesses conclude a contract’s status in relation to the new rules, the CEST tool uses a series of questions, scenarios, and statements to qualify aspects of an assignment. The objective – to provide reliable justification for a contract’s terms being deemed inside or outside IR35.

However, it is becoming all too apparent that the CEST tool is far from consistent or conclusive. A recent study demonstrates that in nearly a 5th of observed cases the CEST tool was unable to conclude a definitive inside or outside status, based on existing contract terms.

Confidence is waning

Figures on the use of the CEST tool released by HMRC reveal that in the 12 months to November, the tool was unable to make a determination in 19% of cases, which critics and industry experts say deems the tool unsuitable for its purpose.

With millions of pounds of tax liability at stake, these inadequacies are concerning at best. The UK’s temporary workforce (and its supply chain) are placing heavy reliance on CEST’s reliability and accuracy – after all, someone in the chain will be liable for inaccurate determinations.

Under IR35 off payroll-rules, if a contractor is deemed to carry out similar (or the same work) as a permanent staff member they will no longer be able to operate via their limited company. Instead, they would need to be in a fully employed position and their employer is required to deduct income tax and national insurance contributions in a PAYE format. The legislation was introduced to ensure workers undertaking similar roles fall under the same tax structure – eliminating the ability to have some control over deductions by operating via a Ltd. company or PSC.

Changes to the rules – which would shift the responsibility for deciding how contractors should be taxed to the end client/businesses engaging with the contractor’s services – were due to come into force in the private sector in April 2020, bringing it in line with the public sector. This was pushed back a year to avoid adding to the burden on employers caused by the COVID-19 pandemic, however, the new roll-out date of April 2021 is fast approaching.

The Stats Thus Far

HMRC introduced the CEST service in 2017 to help employers and workers to determine how the work being done should be dealt with for tax purposes, and in November 2019, HMRC launched an enhanced version of the tool.

Data from HMRC showed that between 25 November 2019 and 24 November 2020, the CEST tool was used 975,416 times. More than half (52%) of cases were determined to be ‘outside’ IR35 – meaning workers did not have to be taxed as employees.

Less than a third (29%) fell within the tax rule, and in 188,719 instances the tool was unable to give a determination.        

Critics would also say that every one of the 52% of outside determinations could be swung by one of the main shortcomings of the CEST tool, its lack of mutuality of obligation between the parties to provide and accept work. This main shortfall of the tool could be costly to a lot of people.

It seems CEST can work well when the case is clear-cut, but even then it does not publicize how the decision was reached, which can leave the person using the tool open for a challenge in the future.

Employers looking for more certainty, insurance, and an audit trail to prove reasonable care was taken during the process should engage an IR35 specialist.  After carrying out extensive research we have found Optimus Shield to be the most user-friendly and accurate for determination purposes. 

Let’s chat.

We would urge all of our contractors and agencies to approach CEST determinations cautiously, challenges are accepted (and expected) and if you feel a second opinion may be warranted please let us know, we would be happy to point you in the right direction.

If you have any concerns or questions regarding your contract’s IR35 Status or in relation to an existing CEST determination please contact us, we would be happy to share our knowledge with you. 

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