HMRC testing of IR35 'CEST' tool was not fully documented

According to a Freedom for Information request by contractor resource firm Contractor Calculator, HMRC has admitted to not holding any detailed evidence that its own IR35 status check tool was tested for accuracy.

HMRC released its IR35 tool – Check Employment Status for Tax (CEST) – in March 2017 amongst the rollout of off-payroll public sector rules. It allows contractors to check their own IR35 status, and for public sector clients to assess the IR35 status of engaged contractors based on individual working circumstances.

The test covers questions surrounding the three pillars of IR35 – Mutuality of Obligation (MOO), Substitution, and Supervision, Direction and Control (SDC). Depending on the contractor or end-clients answers to these questions, the CEST tool will reveal a result indicating one of the following:

• IR35 does not apply to the specific engagement
• IR35 does apply to the specific engagement
• The test was unable to determine the tax status of the engagement

HMRC has supposedly admitted that there is no detailed evidence to show that the tool delivers accurate results based on its testing. Of course, the test is only as accurate as the information that is input, however HMRC has backed the CEST tool whilst contractors and industry bodies question its validity.

No definitive evidence to suggest the tool was tested for accuracy

Following the Freedom of Information request, HMRC did admit that the only information held about the CEST tool testing are the results of each test assessment, not how each question was answered.

HMRC responded to the Freedom of Information request as follows:

‘The CEST tool testing was done by a workshop… The only documented output of the workshops is the set of rules used by the tool.

Our records show that HMRC has used the CEST tool to test all the cases cited in your request, but we do not have a record or how each question was answered as part of that testing, only the end determination.’

HMRC will likely publish further arguments on the credibility of CEST in April, although it has previously claimed that some supporting evidence regarding CEST is exempt from disclosure.

The reveal comes after several controversial events surrounding IR35 and CEST. In March it was announced that a contractor operating via a Personal Service Company (PSC) won his tribunal against HMRC on the basis that SDC did not exist in his engagement.

Another widely-publicised case involving IR35 is the BBC inquiry. Allegedly, 97% of BBC engagements that were tested by the CEST tool were deemed to be caught by IR35.

What does this mean for contractors?

If you are a PSC contractor in the public sector deemed to be inside IR35 by your end-client – regardless of which tool was used – you could seek a qualified and independent assessment if you believe your engagement is outside IR35. You may not be able to change or challenge the decision, but it’s a good idea to have your bases covered in case you may appeal in the future.

PSC contractors in the private sector are still able to make their own IR53 assessments for now – however obtaining independent IR35 assessments by qualified tax experts is strongly advised. HMRC has been known to retrospectively investigate PSC engagements for IR35; this was the case with the contractor who won his tribunal against HMRC.

HMRC will be consulting on the potential inclusion of off-payroll public sector rules in the private sector. Consultation results will be expected in the coming months – with any changes to legislation possibly coming into play in 2019 or 2020.

Do you have questions about IR35 or your contracting options? Don’t hesitate to contact us or visit our website for more IR35 resources.