Tweaks to simplify HMRC’s IR35 tool on the horizon

Last week, the Office of Tax Simplification (OTS) put forward its view on HMRC’s Check Employment Status for Tax tool (CEST), which the taxman has been under pressure to improve since it was released in 2017.

CEST was built in order to help engagers (contractor’s clients) in the public sector determine whether an individual belongs inside or outside IR35. Now, with further changes to the off-payroll working rules set to arrive in April 2020, HMRC is exploring ways to enhance the tool.

In a document titled, ‘Simplifying everyday tax for smaller businesses: a further business lifecycle review’, the OTS looked at how the tax system overall could be simplified for businesses. It also focused specifically on the confusion that still exists around the IR35 legislation.

HMRC’s IR35 technology, CEST, was the main discussion point in relation to the intermediaries legislation, with the OTS making a number of recommendations.

Improve CEST before IR35 reform

First and foremost, the OTS advised HMRC to continue making “its planned improvements” to CEST before IR35 changes in the private sector are introduced next year.

The government has often said work to refine the technology is well underway. In the IR35 forum minutes taken from February, it was revealed that HMRC is encouraging industry experts to help:

“HMRC are continuing to work with stakeholders to enhance CEST and encouraged members to respond to the invitation to take part in those discussions and user tests.”

Taxman encouraged to offer better support

CEST has been used around 800,000 times since its introduction and provides an answer regarding a contractor’s IR35 status in about 85% of cases.

To better support the 15% of cases that CEST cannot determine an outcome for, the OTS called on HMRC to signpost to the “guidance and the employment status helpline, where the tool does not provide an answer, or the taxpayer does not agree with the finding.”

Simplify the tool’s language

Generally speaking, the IR35 legislation is considered complex. Not just for the fact that it contains confusing tax terminology either. The rules are widely regarded as ambiguous and many different factors need to be taken into account when setting status.

The OTS suggested that the language used by CEST doesn’t help the situation. A lack of understanding, of course, leads to mistakes being made when administering IR35. Therefore, the OTS explained that “among other things, some of the language used will be in plainer English to reflect wider target audiences.”

Any move made to help engagers get a firmer grip on the questions that CEST asks will be welcomed by all parties.

CEST to get smarter

Emphasis has also been placed on the importance of building a more intuitive tool that offers users vital information while they work their way through CEST’s questions. You imagine that the idea behind this is to better educate engagers on certain aspects of the IR35 legislation in order to help them input all the information correctly.

The OTS report explained that HMRC is considering building “embedded data” into the tool, which would include information boxes and pop-ups at certain points where people might need further explanation.

While, on the face of it, the suggestions made by the OTS seem like small tweaks, anything that can assist engagers when administering IR35 is positive news - particularly for contractors, who largely distrust CEST.

According to Kathryn Cearns, OTS Chairman, the tax needs of the UK’s small businesses are a priority for this government department, which is independent of HMRC:

“Small businesses – of which there are millions - are a core concern and area of interest for the OTS, so it is pleasing that this is the subject of the first OTS report published since I became Chair.

“The long-standing concerns highlighted, about businesses avoiding mistakes as they get going, the workings of the PAYE system and the priority given to the role of agents, are not easy things to improve quickly. So it’s all the more important that the OTS continues to highlight these issues.”

Discover more about IR35

Whilst we wait for these improvements to the CEST, why not get clued up on the IR35 legislation yourself? We’ve put together a hub of IR35 resources to help you understand the intricacies of IR35. Visit our IR35 resources section to discover more about IR35.