Distrust grows in HM Revenue and Customs’ off-payroll status tool

Since the introduction of the new rules in April last year, confidence in HMRC’s ability to stick to IR35 assessments has declined among employers. 

The latest research from IR35Shield, found that the online tool has been criticised as ‘not fit for purpose’ – indicating that firms, contractors and HMRC are all losing out due to the ineffectiveness (or mistrust in) the CEST tool.

Findings from the IR35 Impact Survey revealed:

• 65% of respondents said that firms lost at least half of their contractors.
• 65% of respondents got an assessment during the transition, 35% did not.
• Of those assessed, only 42% in April 2021 thought the assessment was fair – a figure that rose to 82% in November 2021.
• In April, 56% of respondents received CEST determinations, a figure that dropped to 49% by November 2021.
• The number of respondents receiving assessments from external tools rose from 39% to 44% between April and November 2021
• 60% would seek an alternative assessment to CEST
• Only 4% trusted HMRC to stand by the tool’s results with only 5% saying they thought CEST was accurate.

IR35 Shield says because of the way the implementation of the new off-payroll workings were carried out, “firms have lost experienced talent and the Treasury has lost out on tax.”

Commenting on the findings, Dave Chaplin, CEO of IR35 Shield said: “Despite the IR35 earthquake, we are seeing green shoots of recovery emerging, both for contractors and the firms that hire them. The levels of blanket bans are decreasing and the use of specialised assessment firms is increasing. The number of firms using HMRC’s Check Employment Status for Tax (CEST) tool is also on the decline, as trust in its accuracy is virtually non-existent. The supposed protection it provides, by way of HMRC’s non-statutory promise to stand by the CEST results, only gets a 4% vote. The drop in use is perhaps due to the multiple government bodies who used CEST and followed HMRC’s guidance but who are now facing combined tax bills and fines of some £250 million.

“That said, the dust is settling and firms are realising that blanket measures are not in their best interest as they lose out on the best talent. Firms that adhere properly to their compliance obligations can confidently navigate the new legislation without fear that HMRC will challenge them. And that is good news for UK plc and the UK’s contracting workforce as 73% will move back to contracting if they can secure an outside IR35 contract. UK plc and the UK economy stands or falls without the support of flexible talent and the contracting workforce has a vital role to play.”

“Hiring contractors is often a necessary part of expanding into the local market, as they can offer regional-specific guidance for localising your products, services, and marketing, “Nick Adams, VP EMEA at Globalization Partners, adds. “However, since the off-payroll legislation came into effect, it is imperative for businesses to be proactive in reducing the risk of non-compliance, appropriately classifying each worker to determine whether they will be an independent contractor, employee or digital nomad. This relationship dictates everything from a worker’s tax status to their severance conditions in each and every jurisdiction. 

“All large and medium-sized businesses are responsible for classifying the employment status of contractors and are required to follow a new set of administrative procedures to ensure compliance. The results of this latest IR35 Impact survey underline how complicated it can be – and with over half of those contractors surveyed still waiting to be assessed by their clients, there’s bound to be a significant proportion of these businesses that will fall foul of the IR35 legislation, and potentially lose valuable members of their workforce. One way to work around this situation is to alter the status of a UK contractor to a full-time employee. This can be done by hiring an Employer of Record. This not only protects your business from the impact of the IR35 rule changes, but it ensures you can confidently hire the workforce you need.”