CEST tool: a case study
- 14 Jun 2018
Recently I set aside two days to carry out some work for a client who I have been working with on an infrequent basis over the course of a few years. The client has no in-house development resource, and we have a fairly informal arrangement whereby when they have work for me they contact me to see my availability, and I try to accommodate their requests.
My work with this client ranges anywhere from zero to eight days per month. Typically, I invoice two days per month on average – though of course this fluctuates according to their needs and my availability.
Generally, I provide an estimate of the effort needed to meet the requirement but bill them on a time and materials basis for the actual work done. I do the work at my convenience, and from my home office (or wherever I want) but I do occasionally travel to their offices to scope out the work or to visit their end customers’ premises to configure the system.
In this recent instance, the work was to implement enhancements to create a data feed for a system for one of their customers. My client owns the copyright but the details of any code I write are left entirely to me. The high-level approach to any requirement is jointly agreed because, after all, the client understands their systems and capabilities far better than me.
However, the work I'd scheduled last week was cancelled because their customer had not yet issued a purchase order. I had no problem at all because, as a self-employed contractor, I have another client that I can be delivering work for.
I have explained the terms of the engagement to a number of independent experts who all agree that IR35 should not apply. Unfortunately the unreliable and much-maligned Check Employment Status for Tax (CEST) tool did not see it that way.
Despite an absence of many of the key indicators of employment – such as control over working practices and independence from the client – CEST determined that ‘the intermediaries legislation applies to this engagement’.
In other words, according to CEST, I am inside IR35 and therefore employed for tax purposes. However, this determination contradicts crucial details of the engagement.
There is an absence of mutuality of obligation, which CEST does not even consider. The client does not have the right to deviate to a brief different from the original scope of agreed work without first arranging a new contract or formal agreement.
The client has no input regarding my methodology. I am free to decide my own schedule for delivering the project and, other than some elements of work which need to be carried out in an agreed location, I have complete control over where the work is done.
I am paid on a per-task basis on an hourly, daily or weekly rate and I’m not entitled to benefits such as holiday pay, sick pay, a workplace pension, maternity or paternity pay or any other benefits associated with a contract of employment. How then could CEST determine this engagement to be inside IR35?
Thankfully, this is a private sector engagement so, for the time being, the CEST tool’s determination is immaterial, The client doesn't have to worry about IR35 or the CEST tool, so we are free to pursue this mutually beneficial, flexible and entirely tax compliant business arrangement.
However, the government are actively seeking to disrupt such arrangements by making the client responsible for determining IR35 status and holding them accountable for 'outside IR35' decisions which may later be found to be incorrect.
My client is a small company with no in house legal expertise to advise on the finer details of IR35. If affected by the potential rollout, they will no doubt turn to the government for advice. They'll be told to use CEST and be assured that HMRC will stand by the outcome of the tool
And just like that, a perfectly compliant engagement will come crashing to a halt.
Following a recent spate of defeats for HMRC we know the tool is incorrectly assessing engagements. This clearly shows that CEST is woefully inadequate and fails in many of its primary purposes.
HMRC, however, are staunchly defending CEST and are oblivious to the growing body of evidence and opposition to it. IR35 is an incredibly complex piece of legislation. Shifting the burden of determining status using CEST to the private-sector client will exacerbate what is an already dire situation.
Instead the government should be doing all in its power to create a business-friendly environment that actively encourages innovation and productivity. That starts with limiting the damage caused by inhibiting policies like IR35.
However, if the government push CEST with its inaccurate determinations as the method for deciding IR35 status into the private sector, its impacts on my business will be grave. I face a number of potential options, none of which are desirable.
I may have to refuse work. I may have to increase my rates to offset the additional tax burden. What happens if my clients refuse to pay the additional rates though? I may be left with no choice but to move abroad for work, or worse still, retire. I am not alone; I am one of thousands of contractors having these thoughts.
While Brexit tightens its grips, If the government wants to avoid an exodus of highly-skilled contractors to either retirement or other countries, it should urgently rethink this disastrous proposal.
Fiona Titcombe is a contractor and sits on IPSE's board of directors.
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