HMRC releases updated IR35 tool – but it still poses a threat to compliance 

HM Revenue & Customs (HMRC) has updated the platform underpinning its IR35-related Check Employment Status for Tax (CEST) tool, claiming the change will improve how users interact with the service.

The government tax collection agency confirmed to Computer Weekly in a brief statement that CEST had been “successfully moved” to a new platform on Monday 2 October 2023.

The platform in question is understood to be an in-house developed setup called Ocelot, which is billed by HMRC as “enabling the rapid production of interactive guidance” to make tools like CEST easier for end-users to navigate.

Where CEST is concerned, the Ocelot migration means information from the HMRC Employment Status Manual (ESM) is now embedded in the tool, offering further guidance on how it works, without users needing to open another window to access it.

According to a guidance paper published by the Office of Tax Simplification (OTS) in April 2021, Ocelot is considered something of a success for the HMRC in-house development team, as it has also been rolled out internally to The Valuation Office Agency and the Border Force.

“Having seen the benefits of using this software internally within HMRC, the guidance team developed the software to deliver interactive guidance through Gov.uk, and since autumn 2020, the software is considered where a user need for interactive guidance is identified on Gov.uk,” the OTS document stated.

Computer Weekly understands the migration to Ocelot is the first of a two-phased revamp for CEST, which has been subject to repeated criticism since its launch in lead up to the public sector reform of the IR35 rules in April 2017.

The tool was introduced to help public sector organisations cope with the additional administrative burden the reforms placed on them, as the changes made end-hirers responsible for determining the employment and tax status of the contractors they engage.

CEST poses a series of questions that end-hirers must answer about any contractors they engage to determine whether or not the work they do and how it is carried out means they should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35).

Before the reforms came into force, contractors were responsible for working out their own tax status, which is a system HMRC claimed was being deliberate misused by some contractors to artificially minimise how much employment tax and National Insurance Contributions (NICs) they have to pay.

IR35 specialist, Qdos, responded to the release, describing it as a “damp squib”, with the tool posing a threat to freelancers, contractors and businesses using it.

The tool was first released in 2017 prior to the introduction of the off-payroll working rules in the public sector, with HMRC encouraging individuals and businesses to use it to determine IR35 status and employment status.

Increased use upon the roll-out of similar changes in the private sector in 2021 saw CEST used 1,837,488 times between November 2019 and August 2021.

However, the tool has faced criticism over the years for:

Failing to align with IR35 case law
Being overturned in tax tribunals, raising questions over its accuracy
Being unable to issue a determination approximately 20% of the time
HMRC’s refusal to always stand by an answer provided by CEST

Qdos CEO, Seb Maley, commented: “This long-awaited update is a damp squib in truth and CEST’s fundamental flaws remain. Whether it’s the tool’s inability to provide an answer every time or the fact that it ignores crucial aspects of the IR35 legislation, rather than ensuring compliance, CEST actually poses a threat to it.

“Over the years, HMRC has consistently promised to refine, enhance and improve CEST, which will have been used millions of times by now. But this tool – which has decided how hundreds of thousands of freelancers and contractors pay tax – still falls well short.

“The new platform CEST sits on will make it more dynamic and easier to refine, but HMRC has given no indication as to what they will change, if anything at all.

“The fact is that HMRC has its head buried in the sand, refusing to acknowledge that this tool still isn’t fit for purpose. Whether you’re a worker or a business, relying on CEST to determine employment status is a big risk.”

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HMRC releases updated IR35 tool – but it still poses a threat to compliance