FOI investigation into HMRC’s digital tool CEST reveals thousands of contractors have been wrongly taxed
Source: Contractor Calculator
An FOI investigation indicates that 54% of assessments carried out by HMRC’s Check Employment Status for Tax (CEST) tool obtained a “IR35 does not apply” result. This is one key finding of an 11-month investigation by contracting authority ContractorCalculator into the results of HMRC’s Check Employment Status for Tax (CEST) tool. It means that thousands of contractors are being wrongly taxed due to unlawful blanket assessments made by public sector hirers who could now face costly legal challenges for unlawful deductions from their wages.
Analysis of the figures provided by HMRC indicates that 54% of assessments yielded “IR35 does not apply”, roughly 31% will have resulted in a fail, with 15% proving inconclusive. The findings come just days after the Institute of Chartered Accountants in England and Wales (ICAEW) wrote to the Financial Secretary to the Treasury, advising that CEST is not suitable for use in the private sector.
Commenting on figures unearthed by the FOI, Dave Chaplin, CEO and founder of ContractorCalculator said: “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 because many contractors have been wrongly classified. Despite CEST’s advice, many hirers have been taxing contractors as employees and they are well placed to start mounting legal challenges.”
Despite repeatedly stating throughout the development of CEST that it would stand by the assessments delivered by the tool, HMRC carved out a huge caveat for themselves upon its release. Online guidance accompanying CEST states that the taxman can challenge results where they consider information is inaccurate or if arrangements are contrived.
Added Chaplin: “HMRC essentially granted itself the freedom to challenge any assessment that it sees fit. 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.
“Aside from the risk of being challenged by HMRC, the various shortcomings of CEST are fuelling further uncertainty among hirers and agencies. We have published evidence proving CEST provides incorrect answers and is not fit for purpose. This creates a risk for hirers and agencies. Receiving a pass from CEST is the equivalent to being presented with a dodgy MOT certificate. In light of this, it isn’t too surprising that so many hirers have taken the supposedly risk-averse option. They simply do not trust CEST’s results.
“The irony now is that they are lining themselves up for legal challenges from contractors who have been wrongly assessed. This will cost the hirers more as they work to defend themselves and face repaying the taxes due.”
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.
Concluded Chaplin: “It’s evident that asking hirers and agencies to assess IR35 status has been a massive error of judgement. Promoting CEST, a tool intended to support hirers, but which creates even more uncertainty instead, has only compounded the situation.
“The frictionless model of flexible working, where both parties have certainty, has eroded. The reforms have effectively poured glue on the flexible economy. Introducing these changes, and CEST, to the private sector in their current format, would prove catastrophic for UK Plc and the economy overall.”
Comment from the Interim Hub: For these reasons it is essential that you gain a full IR35 compliance review in the event of any uncertainty about the IR35 status of your contract, as the certainty of HMRC’s free tools cannot be relied upon. We recommend that you seek advice from specialists such as Bauer and Cottrell.