The online tool created by Her Majesty’s Revenue and Customs (HMRC) has failed to determine around 20 per cent of users’ employment status over the past year, leading to criticism of the tool. 

With IR35 changes set to come into force from April 2021, many individuals have turned to HMRC’s online tool (CEST) to receive an evaluation of their employment status.

However, research has found that, in around a fifth of cases (19 per cent), the outcome has come back as ‘undetermined’ – meaning many people have been left in the dark about whether or not they fall within the off-payroll working rules.

Conversely, over half of users throughout the year (52 per cent) were reportedly outside off-payroll working rules or self-employed for tax purposes. Additionally, around three in 10 users (29 per cent) were determined to be within the off-payroll working rules or employed for tax purposes.

As it stands, IR35 applies if a worker/contractor provides their services to a client through an intermediary. However, the worker would be classed as an employee if they were contracted directly.

If IR35 does apply, tax and National Insurance contributions must be deducted from fees and paid to HMRC. The Government have stated that these rules are to ensure that workers pay broadly the same tax and National Insurance contributions as employees.

From April 2021, the rules are changing so that organisations that receive an individual’s service will have to decide whether the IR35 rules apply.

Some experts have criticised the online tool created by HMRC for failing to provide clarity to users in a fifth of cases.

Seb Maley, CEO at Qdos, a specialist contractor tax, IR35 specialist and insurance adviser, commented on the figures:

These figures are damning. It’s worrying enough that CEST has been used nearly 1m times in the past year, but that it hasn’t been able to make up its mind a staggering 188,000 times is frightening. To make matters worse, people are then expected to work it out themselves by checking the complex employment status manual or get in touch with HMRC, whose own tool couldn’t help them in the first place. It’s staggering that CEST allows so many contractors and businesses to be left in limbo. These are decisions that carry with them tens, sometimes even hundreds of thousands of pounds in tax liability.

This data is gathered from the latest version of CEST, which as we approach IR35 reform clearly isn’t up to scratch. Aside from being indecisive, the tool isn’t aligned with IR35 case law and has even been dismissed in court.

HMRC responded to the criticism of its tool by stating:

CEST produces a determination in the vast majority of cases and HMRC stand behind every result it gives, provided the information is accurate and it is used in accordance with our guidance.

To reach a conclusive result in a greater proportion of cases we would need to add in more complex questions, which would add difficulty for the majority of users.

In more finely balanced cases, CEST is expected to provide an undetermined outcome and HMRC has provided detailed guidance and dedicated support to help customers make status decisions.