HMRC’s IR35 Tool – Cause for Concern?
What are the main concerns contractors have about HMRC’s IR35 tool?
Despite being in action for more than two years, contractors and IR35 experts are now scrutinising HMRC’s Check Employment Status for Tax tool (CEST) perhaps more than ever.
The arrival of HMRC’s IR35 tool just a matter of weeks before the roll-out of public sector reform in 2017 was met with scepticism. Specialists had reservations about the technology’s ability to provide accurate IR35 advice consistently.
Fast forward a couple of years and the same concerns remain. This is worryingly really, given changes to IR35 in the private sector will be enforced in less than 12 months, from April 2020.
But what is it that makes IR35 experts and contractors distrust the tool? Is it simply because it was built by HMRC? Or do the people and the parties impacted by this unpopular change to the off-payroll working rules have a reason to be worried about it?
We decided to explore some of the concerns that have been raised regarding HMRC’s IR35 tool, CEST, to find out.
Assumptions around Mutuality of Obligation (MoO)
An issue that is consistently raised is the fact that CEST makes the assumption that Mutuality of Obligation (MoO) is present in every working engagement. HMRC’s take on it is that without MoO, there cannot be a contract in place at all. In other words, the taxman believes there is an obligation for the client to pay a worker and for the worker to provide her or her skill.
The vast majority of IR35 experts disagree. And given that IR35 Tribunals still consider MoO an important aspect of the legislation, people are understandably asking why it’s missing in CEST.
Doesn’t consider every aspect of a contractor’s engagement
The thoroughness of CEST has also been criticised. The tool asks a maximum of 16 questions before delivering an answer regarding a contractor’s IR35 status. In stark contrast to this, a HMRC enquiry, for example, asks around 50 questions before focusing on the specific details. Given the IR35 legislation is complex to say the least, contractors worry that the technology is far too quick to deliver a verdict.
Reliance on substitution
If, as a contractor, you do not have the right to provide a substitute, it’s likely that CEST will deem you ‘inside IR35’ irrespective of any other details of your engagement.
While substitution is an important factor to consider when administering IR35, experts argue that a contractor’s status should not be decided on this alone.
For example, a recent high-profile IR35 case involving the presenter, Lorraine Kelly, demonstrated this. The well-known TV personality didn’t have the right to provide a substitute but was, after appealing HMRC’s initial decision, considered to be outside IR35.
Dismissed in IR35 court cases
Of real concern to contractors is that an answer given by the tool has been overturned in court. This not only raises serious questions about HMRC’s understanding of the IR35 legislation but also of whether the technology is reliable. In other words, will an answer it delivers stand up when scrutinised in an IR35 court case? Perhaps not.
An investigation carried out into the accuracy of CEST by Contractor Calculator revealed that the IR35 tool provided the ‘wrong’ answer in 14 of the 24 cases put through the technology by an employment lawyer.
Doesn’t always provide an answer
CEST isn’t capable of providing an answer every time. HMRC, of course, stands by the tool, but does allude to the fact that it provides an answer in 85% of cases. The sheer number of decisions that the tool has contributed to in the past two years (over 750,000) means that in thousands of cases CEST didn’t know whether a contractor belonged inside or outside IR35.
The Government has consistently promised to improve the tool – something which in itself concerns contractors and the companies in charge of applying the IR35 rules. There’s an argument to be made that consistent tweaks to the technology’s logic would cast doubt over previous IR35 decisions it has helped end-clients make.
With under a year to go until IR35 reform lands in the private sector, widespread concern regarding the reliability of the tool isn’t helpful. Therefore, it’s important end-clients and recruitment agencies bear in mind that they are well within their rights to engage the help of an IR35 specialist.
You can find out more about QAccounting’s IR35 services here.