CEST pest!

It’s been an interesting week for all things IR35!  Two rather large settlements have been announced – firstly the Department for Work and Pensions have been handed a hefty tax bill of £87.9 million for the incorrect determination of the IR35 tax status between 2017 and 2021. Then hot on the heels, the Home office have also been hit with a £33.5million fine.

DWP’s fine was made worse by the fact that apparently they used the HMRC CEST tool in order to make the status determinations.  Many tax practitioners have long held the view that CEST cannot be relied upon, although historically HMRC have said they would stand by the results from CEST, provided the answers reflected the reality of the circumstances.  With the DWP fine, HMRC argued that the answers given were not what happened in reality – does this mean CEST doesn’t ask the right questions, or public bodies needed better training in using it, or shouldn’t have used it? Either way it’s slightly embarrassing that one public sector body couldn’t get their tax affairs correct and it takes a different public sector body to come in and fine them!

Interestingly the Home Office were said to have been “careless” during their HMRC review, although the Home Office classified it as a “small administrative error”.  Hardly small at £33.5 million and it’s currently unclear whether CEST was used.

Both these public sector bodies should have been operating the rules correctly since 2017, those same rules that were recently introduced to the private sector. Whilst HMRC did introduce the private sector rules with an announcement they would be light on penalties, I think these two cases beg the question, how reliable is CEST (dare I use the word ‘flawed’?)? Clearly contractors and engagers of contractors need to be more careful; perhaps using the tool as a guideline not the final answer, given it cannot be relied upon.

David Chandler, Tax Consultant