IR35: Impact survey suggests downturn in use of HMRC CEST tool by enterprises

A growing number of end-user organisations appear to be shunning HM Revenue & Customs’ (HMRC) online Check Employment Status for Tax (CEST) tool when assessing whether their contractor engagements fall within scope of the IR35 tax avoidance rules.

That is according to further data released through the IR35 Impact Survey, a study by compliance consultancy IR35 Shield, which featured input from 3,750 contractors about their take on how the roll-out of the IR35 reforms to the private sector in April 2021 affected them and the companies they worked for.

The reforms, introduced by HMRC as part of its ongoing clampdown on disguised employment, were first rolled out to the public sector in April 2017 before being extended to the private sector in April 2021.

Before the changes came into force, limited company contractors were responsible for determining whether or not the work they did for their end-clients meant they should be taxed in the same way as permanent employees (inside IR35) or off-payroll workers (outside IR35).

The key difference between these determinations is that inside-IR35 contractors are liable to pay the same employment taxes and national insurance contributions (NICs) as permanent employees, but are not entitled to receive workplace benefits such as holiday pay or pension contributions.

According to HMRC, this system of self-classification has resulted in some contractors deliberately misclassifying themselves as working outside IR35 in an effort to minimise their employment tax liabilities.

To counteract this, HMRC has now revised the IR35 rules so that responsibility for determining how contractors should be taxed falls on the end-client, with organisations encouraged to use CEST to inform these decisions.

However, the IR35 Shield survey results suggest a downturn in the number of status determinations being carried out using CEST in recent months, with 60% of respondents indicating a preference for using third-party IR35 status assessment tools over relying on the HMRC offering.

Also, when the reforms came into force in April 2021, 56% of respondents said their role was assessed using the HMRC tool, but by November, this figured had dropped to 49%. During the same period, the number of respondents who had their IR35 status assessed using third-party tools rose from 39% to 44%.

The CEST tool has come in for heavy criticism since it was introduced ahead of the IR35 reforms being rolled out to the public sector in April 2017, with reports describing it as “inaccurate” and “unreliable”.

Despite numerous updates being rolled out to CEST over the years, including a sizeable revamp in anticipation of the IR35 reforms being rolled out to the private sector, the tool has continued to attract criticism for failing to return results and for being out of step with IR35 case law.

A trawl through the evidence shared during the House of Lords Finance Bill Sub-Committee’s ongoing inquiry into how the IR35 reforms have affected the private sector has also seen CEST condemned for being error-prone.

In its written feedback to the inquiry, the Recruitment and Employment Confederation (REC) acknowledged that some minor improvements had been made to CEST, but “there is a broad consensus that it is not fit for purpose”.

It added: “The CEST tool also appears inaccurate. Oftentimes, changing the response to a single question can change a determination from ‘inside IR35’ to ‘outside IR35’. As a consequence, the CEST tool is not sophisticated enough for hirers to be able to rely on it in many cases to meet their obligation under the rules to use reasonable care when reaching a conclusion.”

Other findings from the IR35 Shield survey included feedback from 65% of respondents that the firms they worked for had lost at least half of their contractors in the wake of the reforms coming into play because of how these firms approached complying with the changes.

As previously reported by Computer Weekly, the roll-out of the reforms saw many of the medium-to-large private sector firms in scope of the reforms employ compliance tactics that resulted in contractors leaving those companies.

These tactics included issuing hiring bans that prohibited the ongoing use of limited company contractors beyond April 2021, because this would absolve these firms from needing to carry out status determinations. Other firms opted to issue blanket determinations that resulted in all of their contractors being declared as working inside IR35.

Some 60% of respondents to the IR35 Shield survey said taking on an inside-IR35 role would not be a “financially viable” option for them, with 73% saying they would be worse off if they did so. Also, 41% of respondents said they were out of work for six months or more after the reforms took effect.

Dave Chaplin, CEO of IR35 Shield, said the survey results suggest, nine months on from the reforms coming into force, that end-clients are now taking steps to rejig their IR35 compliance policies to make their companies a more appealing place for contractors to work.

“The levels of blanket bans are decreasing and the use of specialised assessment firms is increasing,” said Chaplin. “The number of firms using HMRC’s CEST tool is also on the decline, as trust in its accuracy is virtually non-existent.

“The supposed protection it provides, by way of HMRC’s non-statutory promise to stand by the CEST results, only gets a 4% vote. The drop in use is perhaps due to the multiple government bodies that used CEST and followed HMRC’s guidance, but who are now facing combined tax bills and fines of some £250m.

“That said, the dust is settling and firms are realising that blanket measures are not in their best interest as they lose out on the best talent. Firms that adhere properly to their compliance obligations can confidently navigate the new legislation without fear that HMRC will challenge them.”

HMRC has dismissed the survey's findings, in a statement to Computer Weekly, claiming there is “simply no evidence” of a drop-off in the use of CEST, citing its own usage data as proof, which shows use of it peaked in March 2021 before the onset of the private sector reforms. “Usage since then has been consistently in excess of the usage at the same point in the previous year,” an agency spokesperson added. 

“Other status determination tools are available but none benefit from HMRC’s commitment to stand behind the result of CEST, provided accurate and correct information is used, in accordance with our guidance,” a spokesperson for the government tax collection agency said. “The tool was rigorously tested against case law and settled cases by officials and external experts.”