IR35 expert regrets ‘missed opportunity’ to quiz HMRC on CEST

An imprecise line of questioning let the taxman flex his IR35 compliance muscles at a Public Accounts Committee (PAC) meeting yesterday.

Rather than put to it the specific charges which the BBC made around testing for IR35, PAC chair Meg Hillier MP merely asked HMRC if it believed that CEST was simply “not fit for purpose.”

She told HMRC’s permanent secretary John Thompson, who nearly got away with a predictable, one-word reply of “No,” that the charge was made by the BBC's director-general Lord Hall.  

But Lord Hall actually took issue with the many changes to IR35 (first the assurance process with BETs; then without BETs, and now CEST -- itself subject to change).

And he took issue with the short order in which the many changes were made by HMRC.

'Clarity'

Lord Hall had also said that “clarity about applying the new test [CEST] is going to be really really important”. Meanwhile his colleague at the BBC Anne Bullford was critical of the timing of CEST’s (late) introduction.

But none of these concerns were put to HMRC yesterday, represented at the PAC evidence session by both Mr Thompson and Jim Harra, HMRC’s second permanent secretary.

Seb Maley, CEO of status advisory Qdos believes it was a massive missed opportunity: “You could argue that HMRC weren't particularly hard-pressed on CEST's shortcomings today.”

He also told ContractorUK following the hearing: “It would have been beneficial for Meg Hillier to detail exactly why Lord Hall, and many IR35 experts for that matter, believe CEST isn't fit for purpose.”

This failure not to press about CEST will be regarded as a let-off by HMRC. The tool has faced legal challenges; internal rumblings about “issues” and been mocked by BBC PSCs.

'Reasonable guide'

As to what the Revenue did say about the tool (introduced as ESS but then re-named), it was much the same -- it’s been used a lot, “750,000” times, and ‘HMRC stands by its results.’

But the department is more lukewarm about it than it was. In May 2016, it called it the “main way” to test IR35 status -- yesterday HMRC said it only “provides a reasonable guide”.

The latter chimes with what a HMRC policy officer has said of the tool (“the best we can hope for”). Indeed, HMRC reiterated yesterday that it still fails to determine status in 15% of cases.

While these points of challenge to HMRC will not be lost on most contractors, when asked yesterday by Ms Hillier to pose their own queries to HMRC, not a single committee member obliged.

'Impacts millions'

“It would have been reassuring to see another MP raise these concerns in today's PAC meeting,” said a disappointed Mr Maley, an ex-tax inspector who now tests for IR35 status.

“After all, IR35 is on the radar of the national news, and impacts millions of workers and parties in the supply chain.”

No real pressure from the committee on its handling of IR35 left HMRC in a more dominant position at the hearing than many would have expected from a Q&A session with top MPs.

“[We’ve] operated a consistent approach to IR35,” HMRC declared, adding of CEST, “The results it gives are as good as the data that is inputted to it.”

'No guarantee' on retrospection

But an even more bullish moment came in the Revenue’s response to Ms Hillier asking about historical demands under IR35.

“There is no guarantee that we could not go back into earlier years if people have not been applying it [IR35] correctly,” threatened Mr Harra, alluding to BBC PSCs, but not excluding others.

In a bid to return to the issue of BBC PSCs (or 'ex-PSCs' given that HMRC said a “considerable number” have now joined the BBC's payroll), Ms Hiller tried -- in vain, to recall the BBC’s criticisms.

'Big disagreement'

She said: “Going back to what the BBC said and what you said about the BBC Mr Thompson, you seem to be quite at log...at a big disagreement here, with the position of the director-general of the BBC.

“They’re saying that a major part of the problems that they’ve had with people on personal service contracts have been the CEST tool and the changes in that.

“You’re saying – categorically, that that’s not the case; that ‘HMRC has provided the BBC with every bit of support it can get.’ I’m paraphrasing you, but is that what you said?”

Appearing to read from a prepared statement seemingly because, as he said, he wanted “to put it clearly” -- perhaps a retort to the question being unclear, HMRC’s Mr Thompson replied:

“We believe we’ve invested significant resources to provide guidance and support, specifically to the BBC, throughout 2017/18...That is our position.

'Blind faith'

Qdos said last night: “HMRC’s blind faith in CEST has the potential to endanger UK contracting, particularly should the government press on with reported plans to extend IR35 reform to the private sector.”

“[And] the [public sector IR35] rules [do] keep changing, which is perhaps what Lord Hall was getting at. From BETs, to the scrapping of BETs, to an evolving CEST. How can contractors and public sector engagers trust the government's advice on making IR35 decisions?”

Editor's Note: Related  --

Still a long way to go until HMRC 'gets' IR35 reform