Jeremy Hunt urged to withdraw CEST at Budget 2023 amid 'HMRC ignoring outside IR35 results'

A tool that the taxman set up to test IR35 status is seemingly increasingly being ignored -- not by experts who have already widely discredited it -- but by the taxman himself.

This disregarding by HMRC of what Check Employment Status for Tax returns happened in a new IR35 investigation, following the contractor achieving CEST’s “holy grail”.

An IR35 contract reviewer used the legendary term yesterday, as inputting substitution into CEST returns the sought-after ‘outside IR35,’ and further magically, it outranks other inputs.

Or at least CEST outranked other outputs at the time that the reviewer, Seb Maley of Qdos, ran the tool following the contractor (his client), coming under investigation in Nov 2019.

'£100k IR35 demand'

In the end, it took HMRC a total of three years to drop the investigation and its £100,000 bill, despite the Revenue tool determining the worker outside IR35 at about the halfway point.

It is not the first time HMRC has set aside an outside IR35 CEST result -- which Mr Maley says it did in July 2021, after which it kept investigating the taxpayer for a further 18 months.

In fact, HMRC has “ignored CEST outcomes in previous cases that we have been involved in,” Mr Maley, Qdos’s CEO said yesterday.

'HMRC will only stand by CEST when it provides the result it wants'

Professional Passport, an organisation that specialises in contractor compliance confirmed to ContractorUK: “This is not the first time that CEST has been disregarded by HMRC.

“The same scenario was evident in the case of RALC Consulting V HMRC in 2019 [in which HMRC reportedly applied to have the CEST results excluded from evidence]. 

“HMRC claims it will stand by the tool’s result, but it seems that HMRC will only stand by its tool when it provides the result it wants”.

'As long as CEST result accurately reflects the engagement terms'

Significantly, the Revenue now says it will uphold a CEST result “as long [as] it accurately reflects the terms of the engagement”.

And despite those terms being a key aspect which is in dispute in an IR35 investigation, HMRC handed Qdos such a statement to justify it casting aside the outside determination.

Asked why it was disregarding the CEST outcome, the tax authority also said in July 2021: “HMRC stands by the CEST result…[if it] is completed in accordance with our guidance.”

'The full picture'

The IR35 inspector’s explanation to Qdos, obtained by ContractorUK continued: “HMRC does reserve the right to check the information, and as our enquiry is still ongoing it would be premature for me to comment on the CEST result without having the full picture.

“As things stand now, we have not concluded our enquiries or formed an opinion and as such, our fact-finding is still ongoing.”

Mr Temple, CEO at Professional Passport has heard enough, saying what the taxman really wants is “for everyone [who uses CEST] to be classed as a deemed employee.”

“HMRC says that if CEST has been used appropriately, then they will stand by the decision but those reassurances are empty ones clearly, as we see again with this Qdos case.”

'Mayhem'

The compliance boss added: “This case once again also serves to highlight that CEST is flawed; has been an abject failure, and must be ditched. It has caused mayhem in the contracting market.”

Although sounding similarly outraged, outside IR35 advisory 34 Square says contractors won’t be surprised that CEST determinations aren’t being taken notice of by more and more parties. 

The advisory’s Adam Topham even indicated that, following years of industry experts criticising CEST, perhaps HMRC is starting to follow suit by giving its results less clout.

'CEST can't be relied upon'

“HMRC ignoring its own IR35 tool [outcomes]? That’s no surprise to me. It asks many irrelevant questions and fails to ask some key pertinent ones in determining IR35 status.

“[So] CEST really can’t be relied upon [by HMRC or anybody else] to add any value,” Mr Topham told ContractorUK. “[Not] either as a pre-emptive or diagnostic IR35 assessment.”

Professional Passport believes CEST is now in such disrepute, given even its maker is ostensibly turning its back on it, that chancellor Jeremy Hunt should use Budget 2023 to banish the tool.

'HMRC tool must be withdrawn on March 15th'

“[We] would urge him to take a long hard look at HMRC’s Check Employment Status for Tax tool and finally recognise that it needs to be withdrawn from use,” says the compliance specialist.

“It must be the most expensive free tool on the market when you look at the eye-watering penalties that government departments have faced over the last year or so, because they used CEST and got the determinations wrong.”

According to Qdos, HMRC finally satisfied itself in Jan 2023 that its client had been correctly operating outside IR35 (as CEST determined a year-and-a-half earlier), on the basis of Control and Substitution.

'Tax office ignored its very own IR35 tool'

“[Our contractor-client] was, in our view, genuinely in business on his own account and was absolutely right to consider himself outside IR35,” reflected Mr Maley.

“HMRC’s CEST tool agreed with us. When he completed their online questionnaire, it delivered a result of being self-employed for tax purposes. [But then] the tax office ignored [the] advice from its very own IR35 tool. How can anyone trust this tool if HMRC doesn’t?”

A spokesperson for HMRC has been invited to comment.