HMRC’s Check Employment Status for Tax (CEST) tool needs to be significantly improved if the rollout of the off-payroll working rules to the private sector is not to lead to uncertainty and protracted disputes over tax status between businesses and workers, says the Chartered Institute of Taxation (CIOT). The criticism comes after HMRC have recently lost a number of tribunal cases on off-payroll working rules,1 and an acceptance by HMRC that the CEST tool only provides a determination in 85 per cent of cases.
The CIOT has set out its view in response to an HMRC consultation on how the off-payroll working rules will apply from 6 April 2020 when the plan is to extend them to all sectors (except small businesses). The off-payroll working rules (often known as ‘IR35’ after the government notice which announced the rules back in 1999) apply to those deemed to be working like employees, typically through their own company. They do not apply to the self-employed.
The CEST tool was launched in April 2017 (at the same time as the off-payroll working rules were introduced for the public sector) to help businesses and workers decide the employment status of their engagement. The CIOT has previously raised concerns that CEST does not factor in all the criteria established by case law as needing to be considered before its algorithms reach a decision on whether IR35 applies; a view that is borne out by the cases that have been argued in the courts over the years on when IR35 applies and when it does not. Consequently, CEST does not always give an accurate employment status determination, and this does not instil confidence in those relying on CEST to help with status decisions, warns the CIOT.
Colin Ben-Nathan, Chair of CIOT’s Employment Taxes Sub-committee, said:
“If businesses are to make the correct decisions on whether the off-payroll rules apply then we think that the existing CEST will need to be significantly improved. And we also think that the improved version will need to be ready by October 2019 at the latest so that new and existing contracts can be reviewed by April 2020.
“Until CEST takes proper account of mutuality of obligation, multiple engagements, contractual benefits - such as holiday pay, maternity/paternity pay - and whether someone is in business on their own account, it is unlikely it will be able to reach the right decision on status. And this is important because otherwise the lack of confidence in CEST will increase disputes between businesses and contractors and so lead to significant time and effort having to be expended by businesses, contractors, HMRC and the courts in trying to resolve them.”
The consultation on how to extend the off-payroll rules from the public sector to the private sector includes the Government’s proposals to exempt small entities from the off-payroll rules and proposals to transfer liability for PAYE and NICs to first agents or the end client where an agent further down a supply chain defaults on paying this liability.2
Colin Ben-Nathan continued:
“We welcome the Government’s decision to exclude small private sector entities from the off-payroll working rules, although we would suggest the Government consider extending the exclusion to small public sector entities to ensure a level-playing field. However, we also suggest the Government considers how employee numbers are to be calculated in the small entity test, as a test based on a simple count of employee numbers (even if averaged across the year) may discriminate against businesses with predominantly part-time employees. It would be unfortunate if this affected the behaviour of some small businesses by discouraging them from taking on part-time employees in order to retain their ‘small’ status.
“We are very concerned by the proposal to transfer liability back to the first agency in the supply chain – and ultimately, where HMRC is unable to recover the liability from the first agency, the end client – where HMRC are unable to collect an outstanding liability from a defaulting party further down a supply chain.”
The CIOT says that where the first agency/end client has used all reasonable endeavours to ensure the integrity of the supply chain but, for some reason, HMRC are unable to recover the PAYE and NICs, it is not fair and proportionate for the liability to simply be transferred to the first agency/end client. If the Government was to adopt this approach it would also create an uneven playing field relative to the position for agency workers where liability for PAYE is only transferred in very narrowly defined circumstances. At the very least, a power to transfer liability should be tempered with a defence of reasonable care, says the CIOT.
In its submission to HMRC, the CIOT recommends that a review is undertaken of the off-payroll rules by HMRC in, say, mid-2022, after a full tax year (2020/21) of operating the new rules in the private sector and with the submission deadline (31 January 2022) for self-assessment returns for that year having passed. This would provide the opportunity to assess what is working well, what is working less well and whether or not changes are needed to ensure that the process works as effectively and efficiently as it can for businesses, contractors, agencies and indeed HMRC.
Notes for editors
1. The complexity of IR35 has been noted in recent First Tier Tribunal decisions such as Albatel (Lorraine Kelly), MDCM, Jensal Software and Atholl House Productions (Kaye Adams). These cases are examples of where HMRC’s views as to employment status have not been upheld and highlight an important issue with CEST, which is that if the output from the tool does not reflect the decisions made by the courts (and, in particular, if CEST returns ‘false positives’ in such cases), this will not instil confidence to those relying on CEST to help with status decisions. And, ultimately, this will increase the number of cases where status is ‘in dispute’.
2. Often one or more agencies will act as an intermediary as between the business and the contractor’s company which can complicate the flow of funds and deductions for income tax and NICs.
3. The CIOT's submission can be read here.
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk