Government's IR35 tool unable to determine employment status in a fifth of cases, figures show

Experts urge businesses to double check results as April rollout of private sector off-payroll rule changes approaches

The government’s tool for helping businesses determine workers’ employment status was unable to say if individuals would be caught by the changes to IR35 rules in nearly a fifth of cases this year, government figures have shown.

Figures on the use of the check employment status for tax (CEST) tool, released by HMRC, revealed that, in the 12 months to November, the tool was unable to make a determination in 19 per cent of cases, which critics have said show the tool isn’t fit for purpose.

Seb Maley, chief executive of Qdos, said the figures were “damning”. “This data is gathered from the latest version of CEST, which as we approach IR35 reform clearly isn’t up to scratch,” he said.

Maley added that while use of the tool wasn’t mandatory, it still left many employers confused and “in limbo”, forced to consult the complex employment status guidance or contact HMRC to help get determinations for their off-payroll workers. “These are decisions that carry with them tens, sometimes even hundreds of thousands of pounds in tax liability,” he said.

Under IR35 off-payroll rules, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid the same tax regardless of whether they were an employee or contractor.

Changes to the rules – which would shift the responsibility for deciding how contractors should be taxed on to the employing businesses – were due to come into force in the private sector this year, 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 coronavirus pandemic; however, the new rollout date of April 2021 is fast approaching.

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 per cent) of cases were determined to be ‘outside’ IR35 – meaning workers did not have to be taxed as employees.

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

Matt Fryer, group compliance director at Brookson Legal, said he was concerned the majority of cases put through the tool came back as outside IR35, and urged employers to double check their results. “The risk is those 52 per cent that are outside, and to what extent is that information entered accurate?” Fryer said.

He added that the tool missed one of the key tests for determining whether a worker was caught by the IR35 rule – whether or not there was a mutual obligation between the parties to provide and accept work, a key indication that the relationship is similar to employment. “Every single one of those [outside IR35] results could swing the other way” once this factor was considered, Fryer said.

And Julian Ball, legal director at PayStream, said it was difficult for an online tool like CEST to always give a binary answer, and there would always be borderline cases where more information or context was required. “HMRC has said it will stand behind the CEST results, and it is probably reluctant to commit to an answer where, when you drill down into the detail, they may be incorrect,” he said.

“CEST works well where there are very clear-cut cases. But even then it does not save the reason a question was answered in a certain way or how the decision was reached, which leaves a person using CEST open to challenge in the future,” said Ball, adding that employers looking for more certainty and an audit trail to prove reasonable care was taken should engage an IR35 specialist.

An HMRC spokesperson said: “CEST produces a determination in the vast majority of cases and HMRC stands behind every result it gives, provided the information is accurate and it is used in accordance with our guidance.

“To reach a conclusive result in a greater proportion of cases we would need to add in more complex questions, which would add difficulty for the majority of users. In more finely balanced cases, CEST is expected to provide an undetermined outcome and HMRC has provided detailed guidance and dedicated support to help customers make status decisions.”