Contractors cleared of skewing CEST results, thanks to HMRC data

Limited company contractors have been cleared by HMRC’s own data of any suspicion of skewing CEST to produce the desirable ‘outside’ IR35 result.

In the last year, a hefty 32% of all PSCs who ran the Revenue’s online tool to test their IR35 status inputted details which burdened them with an ‘inside’ determination.

Some advisers expected the proportion of PSCs deemed IR35-caught to be greater, but the HMRC CEST data show that clients got ‘inside’ outcomes even less (26%).

'Not forcing the results'

The two parties are largely who received CEST’s 281,000 ‘caught’ determinations in the last year, as agencies accounted for only a sliver of the tool’s users (2%).

Referring to the 29% of CEST users who found the off-payroll rules apply (out of a total of 975,000 usages), a former tax inspector said it showed PSCs weren’t gaming the system.

“Fifty-two per cent were outside IR35, and broadly spread across the two big users. So it’s not that contractors or hirers are forcing results,” said the ex-tax official, Carolyn Walsh.

'There isn't a skew'

“I'll be honest -- these stats are better than I expected,” added Off-Payroll.org’s James Poyser.

“I thought there may be a skew depending if the contractor ran [CEST] versus the end-client -- what with clients being more risk-averse. But there isn't.”

For roughly the same reasons, the stats are exactly what adviser Rebecca Seeley Harris expected.

“It will probably surprise many to know that 52% of all CEST users were outside the off-payroll rules. Well, actually, I’m not surprised by the results at all.”

The adviser, who works on the client and agency-side, rather than with PSCs directly, also said:“ Most of the time that a client has used CEST, the outcome has been outside IR35.”

'Workers using CEST as a challenge tool'

Previously an OTS secondee, Seeley Harris points out that the CEST usage was quite evenly split -- over half was by hirers (55%), and just under half (43%) was by workers.

“This is interesting -- my guess is that the workers are using the tool to challenge the hirer’s decision, which is what CEST can be used for of course.”

If challenged with IR35 assessment resources other than CEST, Mutuality of Obligation is likely to be drawn upon, inniAccounts suggests.

“[We’d] expect that a third-party assessor would find the PSC ‘outside’ more often than not, especially once MoO is added in to the mix.”

The accountancy firm also said: “HMRC has always maintained that a third [of PSCs] should be inside IR35. And CEST isn't a million miles away from that.”

'Risk of erroneous result'

Relating to what the 12 months of HMRC data do not state but imply, Ms Walsh believes adoption of CEST is probably less than the Revenue wants it to be.

“Clearly some hirers are just not using the tool. As we suspected, hirers have made a policy decision in order to avoid the administration and risk of an erroneous result.”

Boss at Andraste Accounting, she added: “But I believe that if contractors now accepted the CEST tool, and HMRC’s attempts to get hirers to properly apply the rules, we would gradually see openings for contractors who have been forced into false employment to return to what they do best -- freelancing and contracting.”

15th December, 2020

Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.