IR35 Liabilities to Government Departments utilising the CEST tool

Rhian Lloyd, Senior Manager at Aspire, comments on the recent publications demonstrating that government departments have incurred liabilities due under IR35.

From April 2017 public sector bodies have had to comply with Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (‘the IR35 legislation’), which meant that the responsibility of assessing whether an “off-payroll worker” working via their own intermediary looks like an employee of the public sector body.

Over the last few months HMRC have issued assessments to;

1. The Department of Work and Pensions (DWP),
2. The Home Office and
3. The HM Courts and Tribunal Service (HMCTS)

for falling foul of the IR35 legislation.

The DWP reported in their “Annual Report and Accounts 2020-21” that they utilised HMRC’s Check Employment Status for Tax tool (CEST) to assess their off-payroll workers’ employment status. This states that HMRC formally concluded a review of IR35 implementation in March 2020 and that total liabilities plus interest totalled £87.9m.

The Home Office’s “Annual Report and Accounts 2021-22” states that HMRC began a review into contingent labour in 2018 which concluded that the Home Office incorrectly assessed contractors as out of scope. HMRC found the Home Office to have been “careless” in applying the IR35 legislation, therefore their liabilities totalled £29.5m with a £4m penalty, plus interest.

The Home Office’s penalty has been suspended for three months subject to the following conditions;

• A 100% assurance check on ‘out of scope’ determinations
• Improved governance around the use of contractors and contingent labour
• Improved training of hiring managers and
• Improved monitoring and assurance over IR35 compliance throughout contract life cycles

The HMCTS’ “Annual Report of Accounts 2020-21” reports that in 2019 HMRC had challenged the Ministry of Justice to revisit employment status for off-payroll workers engaged between 6 April 2017 and 5 April 2020, where it had previously been concluded that the workers were outside of the scope. The liability of £12.5m has crystallised.

The HMCTS state that they applied the IR35 legislation with diligence and care and used CEST to assess the status of each contingent worker in the first instance.

CEST tool

HMRC had always stated that they would stand by the result of CEST, provided the information input is accurate. Whilst we do not know the detail of HMRC’s review of these governmental departments, two of them specifically state they used the CEST tool to make their assessments.

The CEST tool has come under vast scrutiny for various reasons, including how HMRC preach that they do not like a “checklist approach” yet introduce a multiple answer tool and there being no consideration of Mutuality of Obligation (MOO) in the decision making process.

It is disappointing that HMRC have not updated their stance on MOO, or any other aspects of the tool for that matter, after losing IR35 challenges at Tribunal.  I will never forget my experience at a roundtable event in 2018 about the IR35 reforms and being told not to “get hung up on the Tribunal outcomes”.

Understandably, these liability decisions listed above may make businesses think twice about utilising HMRC’s CEST tool.

IR35 policy

Our recommendation at Aspire has always been that you have your own bespoke IR35 policy for your business setting out the procedures and the bespoke documentation you will utilise in order to make IR35 determinations and take reasonable care in complying with the IR35 legislation.

Please give me a call on 0121 445 6178 if you wish to discuss.