Contractors who believe they have suffered unjust tax treatment at the hands of HMRC’s Check Employment Status for Tax (CEST) tool are being encouraged to take action after the taxman conceded that the tool needs fixing.
Though it largely suppressed the widespread criticism of CEST within its summary of Off-Payroll consultation responses, HMRC has announced that the tool will be amended before the rules are extended into the private sector.
In doing so, the taxman has acknowledged inadvertently that the tool is unfit for purpose in its current format, calling further into question every assessment conducted up to this point.
“HMRC cannot finally admit that CEST is not fit for purpose and expect people to turn a blind eye to the hundreds of thousands of assessments that have already been conducted,” comments ContractorCalculator CEO, Dave Chaplin. “We believe contractors who were assessed using CEST should consider seeking a formal review, before appealing their wrongly deducted tax.”
What have the market experts said?
HMRC’s admission comes following an overwhelming rejection of CEST among experts in response to the Off-Payroll working in the private sector consultation. Respondents called on HMRC to either amend or withdraw CEST, stating that it is not fit for purpose in its current format, particularly considering the wide range of industries within the private sector.
KPMG and the Chartered Institute of Taxation (CIOT) cited the Jensal and MDCM tribunal cases as instances demonstrating that HMRC and CEST’s approach isn’t fully aligned with IR35. CIOT went on to stress concern that CEST was creating ‘false positives’ in adjudicating cases as caught by IR35.
KPMG added: “If HMRC is being defeated in court, and its view of IR35 is the foundation of the CEST tool, then there must be a question as to whether the tool is accurate currently.”
CEST’s failure to consider mutuality of obligation (MOO), based on HMRC’s assumption that MOO is present in all contractual engagements, was shown to be ill-judged in the aforementioned tribunal cases, and was flagged up by a large portion of respondents.
“HMRC’s assumption that there will always be MOO where a contract exists, or will exist, does not appear to be consistent with the tests developed by the Courts,” commented the Association of Taxation Technicians (ATT).
Leading QC Jolyon Maugham, said, while speaking at a Select Committee hearing on BBC pay, where it was revealed that CEST had failed 97% of BBC broadcasters who had used the tool :
“In two years’ time, this Committee is going to be looking at a different question, which is whether the BBC and the NHS were right to force everybody to be taxed as employees in circumstances where the case law has shown after the fact that very often those people were properly taxed as self-employed.”
Jason Piper, senior manager of Tax and Business Law at the Association of Chartered Certified Accountants (ACCA), agrees that CEST has no backing in law: “If the tool says you are caught, it’s hard to see how you could give any legal weight to it. I would advise contractors who have failed HMRC’s tool to double check their status with another compliance solution.”
What has ContractorCalculator’s CEST investigation found?
Experts’ concerns have not only been vindicated by tribunal rulings, but by the findings of an 18-month investigation into CEST by ContractorCalculator. Responding to a Freedom of Information (FOI) request by ContractorCalculator, HMRC conceded that it held no detailed testing evidence to support its claims regarding CEST’s accuracy.
Instead, the taxman provided a list of 24 employment status cases which it claimed CEST was tested against. However, having conducted a rigorous re-testing against these cases, ContractorCalculator found that the tool returned a flawed assessment in 42% of instances.
During the investigation it was also revealed that CEST never received a formal service assessment by Government Digital Services (GDS), while former HMRC tax inspector, Philip Manley, told ContractorCalculator that the use of CEST doesn’t constitute ‘reasonable care’, as required by the Off-Payroll legislation.
What has HMRC said?
The disapproval of CEST has been too strong to ignore, though in response HMRC has notably downplayed the extent of the criticism. In its summary of consultation responses, the taxman noted:
“A number of respondents expressed concern about the compatibility of CEST determinations with recent tribunal decisions, suggesting that the tool would require refinement and improvement if it was to be used for the private sector.”
The comment glosses over the fact that HMRC is failing to address properly CEST’s omission of MOO, as well as the fact that its – and consequently CEST’s – approach to IR35 has been shown to be flawed in recent tribunal hearings.
In announcing its next steps, HMRC has chosen its words very carefully: “HMRC will continue to work with stakeholders to improve the CEST digital service. Enhancements to CEST will be introduced in advance of the new rules coming into force.”
Chaplin remains unconvinced: “Although the wording attempts to imply otherwise, HMRC has conceded here that CEST is not fit for purpose, or else there would be no need for further changes.
“If your leg is broken, and every doctor you speak to says it is broken, you go to hospital to get it fixed, you don’t announce that you are going to ‘enhance’ and ‘improve’ your leg.”
CEST will create ‘nightmare’ for private sector
Given CEST’s brief yet contentious history, and the overwhelming body of evidence showing that it is not fit for purpose, a lot of questions remain over exactly what ‘enhancements’ HMRC is anticipating. The taxman also faces an uphill task convincing the market that any amended version of CEST is trustworthy.
“Considering its reputation, I don’t see how CEST can possibly gain the trust of the private sector, particularly if HMRC continues to ignore case law” comments Chaplin. “Will CEST still represent a flawed HMRC interpretation of the law, or will it reflect what the courts and Judges say?
“If it turns out to be the former, it will be a nightmare for any private sector firm that agrees to use CEST. Far from simplifying the compliance process, the tool will give rise to countless legal challenges from contractors. Firms have a huge task ahead of them to put out the fire caused by an Off-Payroll extension. With CEST, the taxman is arming them with a child’s water pistol.”
Chaplin concludes: “CEST has already forced thousands into false employment, and we strongly urge those affected to take action. By pledging to fix a tool which is structurally flawed within a limited timeframe, HMRC is only setting itself up for an even greater fall.”