Is CEST Fit for Purpose?
by on December 25, 2022
With the recent news that two government departments, DEFRA, the Department for Environment Food and Rural Affairs, and the MOJ, Ministry of Justice, are facing tax bills from HMRC totalling £120 million due to inaccuracies in the government’s own Check Employment Status for Tax (CEST) tool, here we look at what’s gone wrong and what needs to change.
Off-payroll tax rules
The government’s updated CEST tool was launched in 2019 in order to simplify the process of finding out whether a contractor on an assignment should be ‘classed as employed or self-employed for tax purposes’. It asks a series of questions so that the end-client can assess:
- the employment status of a worker or an individual they engage or represent
- if the off-payroll working (IR35) rules apply to a contract
- if HMRC will consider a contractor as employed or self-employed for tax and National Insurance contribution purposes
The update placed the onus on the end client to determine their contractors’ tax status, i.e. whether IR35 legislation applies, or if they should pay tax through PAYE. However, a recruitment agency may become involved when the contractor’s status is ambiguous and can use its own knowledge of both the contractor and their contract, to specify if the client’s determination is correct, and pass that information on to the end client.
The government has taken these steps to try to mitigate what’s called ‘disguised employment’. This is where an end client claims that the contractor is self-employed, but is in effect a full-time employee – the end client can make a significant saving in NICs, as well as other employee benefits. HMRC estimates that over £12 billion is lost in tax revenue due to such practices every year.
DEFRA and the MOJ
The two recent cases involving DEFRA and the MOJ stem from inaccuracies in the government’s CEST tool, and mean that the taxpayer must pay an additional £120 million to HMRC due to the status of contractors being incorrectly determined. This is, apparently, despite DEFRA and the MOJ following all the guidelines laid down by CEST.
This latest scandal follows a 2021 case, in which HM Courts & Tribunals Service was also found to be in breach of the IR35 rules and was fined £12.5 million for workers operating outside the off-payroll tax rules.
Committee of Public Accounts
In a highly critical report issued in May 2022 entitled Lessons from implementing IR35 reforms, the Committee of Public Accounts notes that many of the government’s own departments are struggling with compliance in light of the reforms, and that £263 million was owed in back taxes from various government departments. It suggested that HMRC had rushed the implementation of the reforms, gave poor guidance, and that various public bodies struggled to use its own CEST tool. As a result, recruitment has been affected, due to increasing pay rates and changing engagement practices in order to be compliant.
The committee notes that HMRC has ‘done little’ to understand how the reforms affect both contractors and their employers, or whether any sectors are more affected than others. HMRC, however, is not persuaded by these arguments, but neither has it conducted any research. It is also suggested that HMRC underestimated the added costs of the reforms’ implementation for organisations wishing to hire contractors.
The committee warns that while the reforms are generating more revenue for HMRC, there are still structural problems to overcome. It notes that end clients have difficulty obtaining the information they need to correctly assess a contractor’s status, and that the appeals process for contractors who have been incorrectly assessed is problematic, given that there is no independent appeals process.
How can recruitment agencies protect themselves?
In an industry that’s already under pressure, this news adds yet another layer of complexity and additional barriers to a necessary and functioning method of employment.
Last year, The Register, an enterprise technology news publication, noted that over a third of UK contractors have either become permanent workers, have retired, have moved overseas to work, or have simply decided not to work, since the changes in the IR35 tax legislation.
This naturally has a knock-on effect in not only the supply of quality contractors that the UK needs to function in an ever-more demanding and competitive global market, but also for the other parties involved. And the question needs to be asked: who pays the tax bill when things go wrong?
Given that the government looks unlikely to change its CEST system in the near future to prevent mislabelling, it’s in everyone’s best interest to ensure that contracts are correctly labelled, and that the classifications that are agreed are the ones that are adhered to. It’s not only a legal requirement to pay the right amount of tax and NI, but it’s also a moral obligation to ensure the effective running of our country.
The alternatives are fines and reputational damage – both for agencies and end clients – and if contractors are deterred from applying for vacancies because of their indeterminate and legally ambiguous tax status, no one benefits.
The rumour mill now suggests that the pharmaceutical industry could be next on HMRC’s auditing target list, with the likely result that recruitment agencies will be apportioned blame for not completing CEST assessments correctly.
The answer to this problem is for contractors to protect themselves by using an umbrella company, such as we here at Payme can provide, and for agencies to use a rigorously compliant umbrella provider that meets all HMRC regulations and is FSCA and Professional Passport accredited.
Get in touch
If you’re an agency or a contractor looking for an umbrella company that’s not afraid of working within the law, call us on 0333 200 0845, email us email@example.com or complete our contact form here.