HMRC: We 'rigorously tested' IR35 tax-check tool... but have almost nothing to show for it
'Normally you'd have reams of documentation... all they have is one page'
The UK taxman has been slammed for a lack of transparency over the assessment of its tool to check contractors' tax status amid claims it has not retained full records of testing.
HMRC created the Check for Employment Status for Tax (CEST) service in March 2017 as the government cracked down on off-payroll working rules, known as IR35.
This online process was designed to squeeze more cash out of contractors by shifting responsibility for determining IR35 status from the employee to the employer.
HMRC launched CEST as a voluntary tool to help assess whether workers were classed as IR35 – but, according to the GOV.UK page, it is still in beta.
HMRC has disputed these claims, saying CEST has been "rigorously tested during development in conjunction with HMRC's lawyers against live and settled cases and reflects employment status case law".
But when asked to reveal documentation on that testing through a Freedom of Information request last year, the taxman said the CEST rules were "developed in a workshop" and the only documented output was those rules.
HMRC added it didn't create and or have a list of court cases or settled cases used to develop CEST, but that it had a "very similar" list of cases and test results after the tool had been developed. This lists 24 cases with decisions from the court, CEST and appeal.
There are no records in existence that HMRC are able to provide.
ContractorCalculator CEO Dave Chaplin, who submitted the FoI request, was unsatisfied with the response and so submitted further ones seeking more documentation.
But the responses, received last month and seen by The Register, show that HMRC has no record of any testing since that point – suggesting the only documentation HMRC holds on CEST's testing is the one-page case list.
"No further documentation has been created since April 2018 where CEST has been subsequently tested against court cases," HMRC said in one of the FoI responses, while pointing to the list of 24 cases.
It added: "As part of the CEST testing process HMRC did not retain output(s) from the cases tested, whether they be decided court cases or settled compliance cases. On that basis there are no records in existence that HMRC are able to provide."
Contractors slam UK taxman's 'aggressive' IR35 tax reformsREAD MORE
El Reg asked for clarification as to whether there have been further tests since the 24 cases mentioned, or whether the test results simply weren't recorded. We have yet to receieve a response.
Chaplin added: "Given how important this tool is, and how many people's livelihoods will be affected, it should have an audit trail and full transparency over its testing and accuracy.
"Just from best practice in terms of developing software, you'd normally have reams and reams of documentation and test cases, to then show that what you've built does what you wanted it to do. But all they've got is one page – which is absolutely absurd."
He said that his firm had run its own test of CEST using the 24 cases listed by HMRC – which returned the wrong assessment 42 per cent of the time – that generated 511 pages of evidence.
"HMRC said in an earlier FoI they tested it for 400 cases – so if they want to be rigorous and transparent they would need somewhere in the region of 8,000 pages of documented test evidence," he said.
Chaplin also asked, in a separate FoI, whether CEST had been put through its paces, either formally or informally, by the Government Digital Service.
The body assesses public digital services against a set of 18 criteria set out in its Digital Service Standard, which is required for all public-facing transactional services.
However, in response, HMRC said it hadn't carried out any informal or formal assessments on the grounds that it wasn't a transactional service.
"As CEST is a tool for guidance purposes, and not a transactional service, a GDS assessment was not appropriate," HMRC said.
An HMRC spokesman reiterated this, adding that the CEST service "reflects employment status case law and has been rigorously tested throughout development". HMRC is "confident" in its accuracy, he said, and will stand by the results it generates.
HMRC 'set up to fail' ahead of private sector rollout
Concerns about poor accuracy and a lack of testing are heightened ahead of private sector reforms next year. This could affect 5 million businesses and 2 million contractors.
In a letter, seen by The Register, Mel Stride, financial secretary to the Treasury, told an MP who is concerned about how IR35 would affect a constituent that CEST "enhancements" would be tested with stakeholders and users, and rolled out before the private sector has to play by these rules.
Stride said the service was "being updated to improve presentation and include inbuilt guidance to ensure it works effectively for the private sector".
But Chaplin said that such pledges did not reflect the reality of work being done, adding that the taxman "has continued to issue tax bills off the back of faulty results".
"HMRC is setting itself up for a colossal fall and more worryingly will be playing havoc with the livelihoods of thousands of hard-working freelance professionals," he said.
CEST has also come under scrutiny from the UK's spending watchdogs, the National Audit Office and the Public Accounts Committee, relating to the BBC's problems using it.
Initially, the NAO said, when the Beeb used CEST it produced an "unable to determine" status in almost half of the cases assessed. "It was not until August 2017... that the BBC felt sufficiently confident to rely on CEST," the NAO said.
BBC director Lord Hall told MPs recently: "HMRC should be thinking very hard about the difficulties created by them by rushing into something which was too global in nature and we still haven't worked through the consequences."
To make sure it didn't fall foul of the taxman, the BBC forked out £8.3m to HMRC between April and September 2017, and is now working to recoup that cash from staff. By June last year, it still had £3m left to collect.
BBC presenters are taking their battle to be IR35-free to court: Christa Ackroyd lost her appeal in May last year, and Eamonn Holmes' is due to be heard in the coming weeks. ®