HMRC promises ‘enhanced’ version of IR35 tool to reassure private sector firms

Employers will have to categorise their contractors for tax purposes next year – but many are concerned official support is still lacking

An ‘enhanced’ version of the official ‘check employment status for tax’ (CEST) tool will be launched before the end of the year, the government has said – an announcement that has been broadly welcomed by employers and specialists ahead of the implementation of private sector IR35 legislation in 2020.

The news came in a briefing paper published by HMRC reminding businesses of new IR35 rules, which will place the responsibility for categorising contractors’ tax status – and deducting tax for those who are not deemed self-employed – on the company hiring them.

HMRC said it had worked with more than 300 stakeholders to make the updated tool “clearer, reduce user error and consider more detailed information”, but stressed that it still stood by the results that were currently being generated by CEST users despite criticism from contractor groups.

Many employer groups have raised concerns that major problems with the initial tool have not yet been fixed.

Under IR35, contractors whose relationship with a company resembles that of an employee’s are required to have the same taxes deducted from their earnings as an employee. The rule was designed to ensure that workers who carry out similar jobs pay broadly the same level of income tax and national insurance contributions.

Initially, contractors were required to declare whether they were affected by the legislation, but in 2017 the rules were changed for the public sector to put that responsibility on the organisations working with the contractors. 

HMRC released the CEST tool to help employers make the right categorisations, but the tool was widely criticised for not covering the entire range of legal tests as to whether a contractor is an employee, and for its occasional inability to provide a definitive answer.

Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed, said he was not confident the update would do enough to solve the problems in the current CEST tool.

He told People Management one of the key tests missing in the initial tool – whether there was any ‘mutual obligation’ between client and contractor to provide and carry out work – was likely to still be missing in the update.

He said: “HMRC admits that in 15 per cent of cases [the current tool] cannot even provide a determination. The tool comes out with incorrect determinations – or does not produce a judgement at all – because it does not account for mutuality of obligation between a self-employed person and their client.

“In all our talks with HMRC, they have been adamant they will not change it to factor in mutuality of obligation. Therefore, we doubt this ‘enhanced version’ will improve matters.”

Susan Ball, employer solutions tax partner at consultancy firm RSM, also raised concerns that the changes would not be enough to help private sector employers. She said: “Today's announcement is encouraging in that HMRC is being proactive in seeking to engage with affected businesses to help them understand and implement the new rules correctly. However, we remain concerned that HMRC will not necessarily know about all the businesses in scope, and there is a risk that some will fall through the gaps.”

An HMRC spokesperson declined to give further details on what specific updates would be included in the enhanced CEST tool, saying that more information would be available “in due course”.

They added that the enhanced tool would offer improvements to usability, making it much easier for employers to navigate.

Separately, an analysis of ONS data has found that since the introduction of IR35 in the public sector, the number of off-payroll workers – those classified as outside IR35 – has dropped by 9 per cent.

Gary Smith, partner at Nockolds, which ran the analysis, said the figures showed initial concerns that rules would cause an exodus of contractors from the public sector were largely overblown. “Reports of an initial panic among public sector bodies, in which large numbers of off-payroll workers were moved onto payroll or dismissed, has not turned into a stampede. After a period of uncertainty, it seems to be business as usual for many public sector organisations,” he said.

For organisations preparing for the IR35 rules to come into force in April, Smith said: “For contractors with business-critical skills, organisations will have to decide whether they compensate them for the additional tax they will have to pay as employees or risk losing them to competitors prepared to pay them off-payroll.”