HMRC dismisses criticism of ‘perfectly good’ IR35 online assessment tool

HM Revenue & Customs (HMRC) has staunchly defended its online IR35 status tool after being asked by the Public Accounts Committee (PAC) to respond to complaints that it is unfit for purpose.

In a two-hour PAC meeting on Monday 30 April to discuss the department’s performance and progress review, HMRC was asked to respond to claims that its Check Employment Status Tool (CEST) is not up to the job of accurately determining contractors’ IR35 status.

This follows numerous complaints by contracting stakeholders about the accuracy of the results returned by CEST since it made its debut ahead of the IR35 reforms coming into force in April 2017.

More recently, though, BBC director general Lord Hall described the tool as “not fit for purpose” during an evidence-sharing session with the PAC on Wednesday 25 April, before calling for the introduction of an alternative test to decide whether contractors should be taxed as off-payroll workers (outside IR35) or salaried employees (inside IR35).

During the HMRC session, PAC chairperson Meg Hillier said Lord Hall had claimed that CEST had created a great deal of “confusion, anger and hardship” within the ranks of BBC presenters who had seen their engagements reclassified by the tool as inside IR35.

When asked what HMRC made of Lord Hall’s declaration that it is “not fit for purpose”, HMRC permanent secretary Jon Thompson rejected the claim, saying it is the department’s view that CEST provides a “reasonable guide” on how contractors should be taxed.

“The Check Employment Status Tool has been used 750,000 times by citizens across the UK, 60% of the outcomes of those are self-employed and 40% are employed,” said Thompson. “We think it provides a reasonable guide.”

Hillier said criticism had also been levelled at the tool from other third-party stakeholders, to which Jim Harra, second permanent secretary of HMRC, responded by claiming the results thrown up by the tool are “as good as the data fed into it”.

“We did a lot of work last year with public sector engagers to make sure they used the tool effectively to make sure it gives them the right answers,” he said. “It is ultimately a guide, but we believe in 85% of cases it gives a response that the engager can use and we stand by.

“In a further 15% of cases, they do have to either look at further guidance or get assistance from us to arrive at their decision, but as we continue to work on it and improve it, it is a perfectly good tool and supports IR35 compliance.”

The HMRC’s declaration coincides with the publication of data from the Freelancer & Contractor Services Association (FCSA), which polled intermediaries to find out how the 33,500 public sector workers the organisation supports had their IR35 status classified.

Its findings suggest that in 50% of cases, individuals who have had their IR35 status assessed were not subjected to any sort of compliance test, with 42% claiming to have been declared inside IR35 regardless.

Of the 50% who did undergo compliance testing, 26% said they were classified according to the role they did, and were therefore not subjected to individual assessments, as should be the case.

“The remaining 24% highlighted that individual assessments had been carried out, but these were seldom exclusively tested via the government’s Check Employment Status for Tax tool,” says the FCSA research.

FCSA CEO Julia Kermode said its findings suggest there is a reluctance among public sector engagers to use CEST to determine how contractors should be taxed, which could be attributed, in part, to how long it took HMRC to launch the tool in the first place.

“When HMRC issued its CEST tool, just weeks before the change, it was already far too late,” she said. “Public sector employers had already begun conducting assessments in order to hire new workers and to reassess existing contracts months before the IR35 reforms came into effect. As such, they became reliant on other commercially available assessment tools.

“Our data shows a reluctance to rely on the government’s CEST tool, perhaps due to the widespread criticism of its flaws and the fact that the tool does not accurately reflect accepted case law.”