Viewpoint: The party is over Surely it’s time to ditch HMRC’s CEST tool?

Dave Chaplin on the thorny issues surrounding IR35

The Ministry of Justice (MoJ) and the Department for Environment, Food and Rural Affairs (Defra) are two of the latest government casualties of HMRC’s Check Employment Status for Tax (CEST) tool, jointly facing tax bills of at least £120m due to HMRC claiming they incorrectly determined the status of their contracting workforce.

Perversely, the same government organisation responsible for educating and training all government bodies and enforcing the rules is now issuing two of its ‘customers’ with tax bills of £72.1m and £48m, respectively. Furthermore, the MoJ and Defra committed to using CEST and followed HMRC’s guidance, which should trigger HMRC’s non-statutory promise to ‘stand by’ the results. But instead, both bodies are now being charged extra fines for ‘carelessness’, ie. not meeting reasonable care. Surely it is time to ditch CEST?

The penalty for carelessness the MoJ faces amounts to £15m, and the one for Defra is pending. Carelessness is based on negligence, and assessing it requires knowing what was in the person’s mind at the time. HMRC provided the advice and guidance and populated the minds of those conducting the assessments, yet HMRC is now claiming its ‘customers’ are effectively negligent. It’s like the police training people how to drive correctly, then fining all the trainees for reckless driving when they get out on the road.

These cases follow previous government bodies who became casualties of CEST: the Department for Work and Pensions (£87.9m), the Home Office (£29.5m), and HM Courts and Tribunal Service (£12.5m). Fortunately, the Treasury can fund the extra tax by using the combined £250m collected by HMRC – akin to filling up a swimming pool’s shallow end by taking water from the deep end.

This clear departure from HMRC’s promise to  ‘stand by’ the results is contrary to claims made a few weeks previously in evidence provided to the House of Lords sub-committee inquiry into off-payroll working, where they stated: “It [CEST] is the only tool in respect of which HMRC will always stand by the result produced, provided the information entered remains accurate, and the tool is used in accordance with our guidance. In any compliance check, HMRC will not dispute an employment status determination that is in line with a correctly obtained CEST tool result.”

The new financial secretary for the Treasury, Lucy Frazer, along with representatives from HMRC, faced the Lords sub-committee in December. Frazer appeared oblivious to the damage done to the freelance sector, instead referring to irrelevant research data from the public sector over three years ago to bolster their success. 

One slight crack emerged regarding the widely criticised CEST tool. HMRC finally admitted that they had purposefully chosen not to include all the case law relating to mutuality of obligation into CEST, a longstanding charge, for which they have finally admitted defeat.

As Covid-19 still lingered, many accused the incumbent prime minister of being more focused on protecting his political reputation than the public's health, leading many to ignore government announcements and instead engage in voluntary self-protection.

With HMRC and the Treasury unlikely to admit CEST has been an abject failure, it may be prudent for firms to do the same by opting out of the absurd situation where those supposed to be educating and protecting them are instead issuing them with fines. 

For CEST, the party has happened, it was a flop, and now it should be over. 

Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained

Image Credit | IKON

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