A lot rests on HMRC’s online tool to determine IR35 status – and it's getting it wrong

When the Government introduced the disastrous changes to IR35 in the public sector in April, it launched the online tool to appease critics. The idea was that public sector clients, now faced with the responsibility of determining IR35 status, would be able to fill in a relatively simple form that would churn out accurate results. Now that the Government has confirmed it’s foolishly considering extending those measures to the private sector, it’s worth examining afresh whether the tool is fit for purpose - spoiler alert: it’s not, but do please keep reading anyway.

The Check Employment Status for Tax (CEST) tool, originally called the Employment Status Service (ESS), is thought by many - including IPSE -  to be an unreliable instrument upon which to base very significant tax decisions. There are various reasons for our lack of faith. 

  1. Even before CEST was made available, IPSE said the IR35 rules are too complex to be accurately captured by a relatively simple tool. Previous tools such as the Employment Status Indicator (ESI) and the Business Entity Tests haven’t worked for this reason, and there is no compelling reason to believe things should be different now. IR35 decisions are made subjectively - any online tool will lack the nuance required to get it right in every instance.
  2. HMRC report that in 15 per cent of cases, the tool will say it is unable to make a determination. Apparently HMRC believe this is an acceptable hit rate, but for those 15 per cent the tool is of no use. It’s likely that these are the borderline cases which are most in need of guidance, so the tool fails to those that need it most.
  3. The tool doesn’t test for Mutuality of Obligation (MOO). Case law dictates the existence or otherwise of MOO is central to whether or not IR35 applies. In crude terms, MOO refers to the obligations placed on both parties in the contract - you do something for me; I’ll do something for you. HMRC’s view is there are always obligations in any contract, so testing for it is pointless. Others - including IPSE - disagree. We believe the obligations must be of a sufficient level for the relationship to be considered an employment - and consequently for IR35 to apply - and that many engagements would fall under that level. The omission, therefore, of any questions that quantify MOO in the tool is a critical flaw.
  4. The individual using CEST may have an inaccurate or biased view of the engagement. Just because one person says certain conditions apply, doesn’t make it so. If we take the questions on control for example, it may be that a client manager believes he or she can decide how the work should be done, but in practice that might be entirely untrue, and it is the contractor that has all the control. There is no way to challenge the way the tool has been completed, so it is inevitable that determinations are made on answers that are at the very least contentious.  

It’s not just IPSE that points out these deficiencies in CEST - there are several articles online which report similar misgivings. It is all the more concerning, therefore, that the Government is considering extending the public sector changes to the private sector. This tool, despite its failings, remains a critical part of the decision-making process for public authorities, and in a lot of cases it’s getting it wrong. The problem will be multiplied many times over if all private sector clients are forced to make IR35 determinations for each of their engagements.

As IPSE has long argued, IR35 is a complete nightmare to wrestle with. Clients that previously have never had to consider IR35 will naturally turn to to the tool to try and make some sense of it. And because of the reasons outlined above, it will result in the wrong people paying the wrong taxes.

Just to be clear, IPSE believes extending the recent IR35 changes to the private sector will be calamitous whatever happens to the tool. But the fact that the tool is so fundamentally flawed, compounds the damage caused by the legislation.

If you are concerned about this proposal too, and we think you should be, then help us to fight it by writing to your MP. You can also have your say on the proposal and ask questions during our Budget webinar between 12.30 and 13:30 on Monday 27 November – more details to follow.

Meet the author

Andy Chamberlain

Deputy Director of Policy and External Affairs