HMRC respond to criticism of IR35 CEST tool

02 May 2018

We referred to an article on 1 May which indicated that public sector bodies are ignoring the results of the HMRC employment status for tax (CEST) tool. HMRC has answered questions regarding this at a Public Accounts Committee hearing.

Jon Thompson (Permanent Secretary at HMRC) and Jim Harra (Second Permanent Secretary at HMRC) were both in attendance as witnesses at the hearing.

BBC pay was one of the first areas discussed and the fact that Lord Hall (Director-General of the BBC) recently gave evidence and talked about some of the challenges that the BBC has had with personal service companies. One of which is the CEST test which Lord Hall said, “… has caused a good deal of confusion for individuals and a great deal of anger among our frontline presenters…In some cases, it has also caused some hardship.”

The Chair of the meeting said that the Committee had also received considerable evidence from others about the CEST test and asked the witnesses whether they accepted Lord Hall’s description of this test as ‘not fit for purpose’?

Jon Thompson did not agree with this description and went on to say that the ‘check your employment status for tax’ tool is an online tool that has been used 750,000 times by citizens across the UK and that 60% of the outcome are self-employed and 40% are employed.

“We think it provides a reasonable guide…In relation to the taxpayer concerned - the BBC - I think that is a regrettable comment given that our customer compliance manager has been working with HMRC for some time to ensure compliance in the BBC, and has been providing it with help and guidance…I would not agree with the Director-General, no.”

The Chair referred to ‘contract calculator’ (featured in the aforementioned article) and that they have found that the CEST calculator has made incorrect assessments by not applying IR35 in some cases.

Jim Harra responded saying that CEST has been designed to comply with the case law on establishing employment status and that it has been extensively tested.

“The results that it gives are as good as the data that are input into it. We did a lot of work last year with public sector engagers to make sure that they used the tool effectively so that it would give them the right answers. It is ultimately a guide, and there is further, more detailed guidance that people can turn to if it doesn’t help them, but we believe that in 85% of cases it gives a response that the engager can use and that we stand by. In the further 15% of cases, they do have to either look at further guidance or get assistance from us to arrive at their decision. While we continue to work on it and improve it, we think that it is a perfectly good tool and it supports IR35 compliance.”

The Chair asked how HMRC assess whether correct data has been put in as it could be a genuine mistake?

Jim Harra confirmed that is something HMRC would do through its employer compliance checks.

“For example, last year, public sector engagers were required to make their own determinations of whether the companies they were contracting with were caught by IR35. They use the CEST tool to do that. We can come along later and audit their compliance with their employer obligations, including the obligation to administer IR35 and deduct tax, and we will check whether they have used the tool correctly and made the correct assessments. For example, in some organisations, the contract says certain things but in practice, other things happen and the contract does not reflect the real nature of the relationship between the engager and the worker.

In those circumstances, we expect them to use the reality. That is the kind of thing that we would check...”

Jim Harra also confirmed that HMRC has standing time to pay arrangements for the collection of debt, and that applies equally to debt in these cases. Where someone had a large unexpected tax bill that they did not have the means to pay straight away, HMRC would aim to agree a payment plan with them so that they could pay it over a period of time.

Jon Thompson stated that “We strike an agreement with 96% of those who ask for time to pay.”

The discussion on this particular topic ended with Jon Thompson saying:Let me put it clearly. We believe that we have invested significant resources to provide guidance and support specifically to the BBC throughout 2017-18 through their customer compliance manager. That is our position.”

The full script of the hearing is available on the UK Parliamentary website.

The CIPP run a half day course on employment status and employment intermediaries which explains how to assess employment status, the financial risk of getting it wrong and the IR35 process changes for the public sector.