Dave Chaplin’s investigation into HMRC’s online Employment Status tool and its use by Public Sector Bodies reveals many contractors are being wrongly taxed.
We have previously pointed out that HMRC’s online Check Employment Status Tool (CEST) is critically flawed. Based on our own review of the IR35 cases, and many years of modelling, we might expect to see around 30% of the people taking the test ending up “caught” by the HMRC’s online tool as having employed status. And, to an extent, this is borne out by the Freedom of Information data that HMRC has finally released to us, showing:
- 54% where it says IR35 status (employee) not in point
- 31% where IR35 does apply
- 15% where “inconclusive”
But these overall figures hide the reasons why CEST gives these results, which we would argue are somewhat meaningless. Many of the pass results will be from asking 2 questions about substitution. No judge would ever make a ruling based on asking just two questions.
More worrying is that Public Sector Bodies have been applying blanket assessments to their contractors and re-categorising them all as employees, subject to PAYE and NICs, when even the CEST Tool says they were not employed. We are seeing results ignored even if it says “IR35 does not apply”, because firms are concerned about their own risks of future tax liability
We know that blanket assessments were imposed within the NHS and Ministry of Defence (MoD) as well as on other key projects and now those bodies face considerable litigation risk, we believe, because many contractors have been wrongly classified, despite CEST’s advice. There appears to be widespread motivation by the PSBs to be seen to not facilitate perceived “Tax avoidance”. So even if they have contractors operating outside IR35 and they get a “pass” from CEST, they are moving them over to PAYE because they are more concerned about their own reputational risk, knowing that HMRC is unlikely to criticise PSBs for deducting too much tax.
PSBs will also probably be aware that the CEST tool is not reliable, which is something we have been saying since it was first released. Though hirers and agencies are effectively coerced into using the tool by HMRC, they know that an outside IR35 evaluation from CEST still poses significant tax risk. The disparity between the number of contractors who are told IR35 does not apply by CEST and those who are taxed as being outside of IR35 is no coincidence. Concern about the reliability of CEST is such that the ICAEW has written to the Financial Secretary to the Treasury, pointing out that even HMRC admits that CEST does not cover all scenarios, including the “mutuality of obligations master and servant test”.
HMRC maintains that the reforms have helped improve compliance with IR35. However, if CEST’s assessment figures are anything to go by, the taxman’s increased tax yield is merely a result of rising non-compliance – this time among hirers and agencies.