HMRC has been forced to abandon a three-year tax investigation into an engineering contractor’s tax affairs. The taxman pursued the worker for £100,000 despite its CEST employment status tool showing that the contracts fell outside IR35.
Background to the case
In November 2019, HMRC began an investigation into two contracts which the engineer had carried out over 4 years.
In mid-2021, the tax authority was shown results from its CEST tool, which demonstrated that these contracts were not caught by IR35.
Had these contracts fallen within the IR35 net, the potential tax liability for the contractor was around £100,000.
What is notable about this particular case is that HMRC continued to pursue the contractor for another 18 months before tax advisers Qdos succeeded in shutting the investigation down.
Throughout the three years, the contractor’s case was handled by multiple tax inspectors. And so disappointed were Qdos with the way the case was dealt with, it made two formal complaints to HMRC.
What is CEST?
CEST stands for Check Employment Status for Tax. It is an online software tool designed by HMRC to help contract workers find out if their contracts fall inside IR35 or not.
CEST was rolled out as part of the April 2017 ‘Off Payroll’ public sector reforms in the public sector. Before this date, workers could self-certify their employment status. Now, this responsibility falls to clients rather than workers.
The Off Payroll working rules were extended to cover almost all private sector roles from April 2021 onwards.
Unfortunately, the tool has been widely criticised since its inception.
It ignores MOO (the mutuality of obligation), uses ambiguous language in its questions, and according to a Government update, over 20% of results generated are ‘undetermined’. This is despite the launch of an ‘enhanced’ CEST too in late 2019.
Some interesting insights into the case
We asked Seb Maley, CEO of Qdos, for his thoughts on the case.
Why do you think HMRC carried on pursuing the case when their own CEST tool showed that the contractor was working outside IR35?
“HMRC will say that it stands by an answer provided by CEST only when the information inputted is correct. So, in their view, the only way for them to confirm that the information given on the CEST tool was correct was to continue their review.
“Incidentally, this information was inputted by one of our IR35 experts – an individual who has specialised in the IR35 legislation since its inception. Eventually, HMRC agreed that the contractor was correctly operating outside IR35, which proved our own IR35 expert correct.”
What does the result mean for the future of CEST? Will HMRC just carry on regardless?
“It should be the nail in CEST’s coffin, but we’ve been here before. HMRC’s flawed IR35 tool has been shown on countless occasions to be unreliable and simply not fit for purpose. However, the reality is that HMRC will stick with it.
“It’s worth stressing, though, that its use is not mandatory. Independent IR35 assessments are not only compliant, but also provide a far more accurate view of status.”
Were all of the costs of defending the case covered by the client’s tax enquiry insurance?
“No. This contractor didn’t hold an insurance policy with Qdos and therefore paid a fee for our experts to represent and, in turn, successfully defend him. With our IR35 insurance policy, this cost would have been covered.”