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No fear of tax risk for agencies when clients use CEST concludes ContractorCalculator white paper

Agencies may have no tax risk for processing off-payroll contractors using PSCs if the client has used CEST to assess their status, because it does not constitute ‘reasonable care’ concludes a new whitepaper by ContractorCalculator. But agencies using the tool themselves must be aware that it may not provide them with any form of tax certainty.

These arguments were made by Philip Manley, former HMRC inspector and current tax partner at Dow Schofield Watts, in his contribution to ‘CEST: not fit for purpose’, a collaborative whitepaper with ContractorCalculator and The Law Place out today following an 18-month investigation.   

This latest revelation should act as a warning to recruiters and clients that as a result of CEST potentially failing the reasonable care provision, it offers no protections from the tax risk imposed by the new Off-Payroll tax legislation.

Commenting, Dave Chaplin, CEO and founder of contracting authority ContractorCalculator said: “CEST oversimplifies a complex area of employment case law, omits key areas of law, does not take into account personal circumstances and has been shown to give the wrong answers in almost half of cases. It is for these, and several other reasons, that CEST is simply incapable of providing a consistently correct assessment and therefore fails to meet the required standard for reasonable care.”

HMRC’s own guidance clearly states that when systems are not accurate enough to produce the correct outcome, HMRC would consider this at least a failure to take reasonable care.

Added Chaplin: “CEST fits well within this description, given its demonstrable inaccuracy and inconsistencies, which are now apparent to the wider public.”

What does this mean for agencies and hirers?

Under the legislation, the fee-payer is liable for the tax risk, as detailed in sections 61N(3) and 61N(4). This would normally be the agency. But, there are two instances whereby the end client becomes the ‘fee-payer’, under section 61T of the legislation:

  • Where an agency requests the reasoning behind a status decision and the client fails to respond within 31 days
  • Where the client demonstrates that they have failed to take reasonable care when assessing a contractor.

It does potentially mean the agency could be free to overrule a client’s incorrect CEST assessment without assuming any tax risk.

Dave Chaplin concluded: “CEST evidently appears to fail the reasonable care requirement. Where the agency has in writing that the end client used CEST, it can now decide whether or not to disregard the decision and make its own reasoned decision regarding the contractor’s employment status, arguably without worrying about the tax risk.  To some extent, this is good news for agencies.

“There is also no legal requirement for the agency to inform the client that it is has decided to override any incorrect assessment with a correct one. Should HMRC investigate, the agency would need to share confirmation that the client made an assessment using CEST. Section 61T(6)(c) of the legislation would then apply as a statement of legal fact if CEST fails to provide reasonable care. The agency could then inform HMRC that it decided IR35 did not apply and that the hirer failed to take reasonable care and consequently made an incorrect decision, relieving the agency of any liability.

“Unless HMRC can disprove the substantial evidence demonstrating CEST’s shortcomings, then it’s clear that CEST is not fit for purpose. Years of case law, and most remarkably of all, HMRC’s own guidance for reasonable care, suggests that CEST must be improved or removed.”