Industry unimpressed with government and HMRC’s answers over CEST

The controversial Check Employment Status for Tax (CEST) tool was designed to give a clear determination in 80% of cases, the House of Lords Finance Bill sub-committee heard from Treasury and HM Revenue & Customs yesterday (13 December 2021).

CEST was launched by the government to guide decisions over whether an individual is truly self-employed or actually an employee.

“If we wanted it [CEST] to determine 100% of cases, we would have to make it quite complicated,” said Lucy Frazer MP, financial secretary to the Treasury, who was questioned along with HMRC representatives yesterday by the sub-committee for over an hour.

“So HMRC has made a decision that in order for it to be easy to use, not expensive, not take up too much time, it’s going to deal with 80% not 100%.”

The remaining 20% could obtain telephone support to work out their status, Frazer said. 

The sub-committee chair, Lord Bridges of Headley, countered by quoting the CBI as describing the CEST tool as “oversimplified”. He continued: “This is the problem now we’ve got to, which is it’s now oversimplified, and specifically on mutuality of obligation. It’s not in there because it’s so difficult. Therefore, it’s a tool that really is not worth it for many people.”

The sub-committee questioned Frazer and HMRC representatives about a range of Off-Payroll (IR35) issues during their hour-plus discussion, which left two leading observers of Off-Payroll issues nonplussed by the government’s responses, especially about the impact on the flexible economy.

For instance, according to software company IR35 Shield, 48% of contractors have said that firms they had worked for moved some of their projects offshore, “unnecessarily benching UK workers”.

The Treasury and HMRC seem “somewhat oblivious” and are “just paying lip service” to the impact of the Off-Payroll legislation’s implementation this year on the flexible economy, said Dave Chaplin, CEO of IR35 Shield, and Matt Fryer, head of legal, Brookson.

Chaplin said that Frazer “seemed in defensive mode as she responded to intelligent questions from the Lords. The rules have punished the UK’s flexible workforce and, in turn, have harmed UK plc and the economy as a whole”. On the other hand, he said, “the Lords seemed in tune with the evidence highlighting the damaging effects of the measures. In contrast, the Treasury and HMRC appeared somewhat oblivious – despite the reforms being in place for almost nine months, they kept referring to irrelevant research data from the public sector”.

Commenting to Recruiter, Fryer said of CEST: “I think this would probably go down as a bit of a failure for HMRC. But given the amount of money they’ve spent on it, they’ve got to keep pushing it, they’ve got to keep talking it up.”

Fryer went on to point to research conducted recently by Brookson, which found that although HMRC has said the end client is the best party to make the status determination, only 31% of that group is doing so. Another third is outsourcing the determination to the contractor, and a final third is handing the decision to the recruitment agency. 

Brookson’s research reports that 90% of businesses are looking to increase their use of flexible labour over the next 12 to 18 months. “So we know there’s a big demand for contractors coming,” Fryer said. “But to what extent is IR35 going to be a barrier to that? That’s the big unknown.

“And Treasury just didn’t have an answer for it, which I was quite shocked by,” Fryer continued. “You know, in the grand scheme of things, this is a very small change to tax legislation that could actually have a significant impact on our economy over the next 12 to 18 months. And they (Treasury) just didn’t seem engaged or interested on the point.”

Fryer said: “The pessimist in me feels like we’re just paying lip service here to a process.”

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