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Article:

NAO report on BBC contractors’ IR35 issues highlights significance of CEST

26 November 2018

The high profile story of the BBC engaging presenters and other contractors through personal service companies has already been subject to a huge amount of scrutiny. However, the recent National Audit Office report makes interesting reading: not only is it a salutary story for engagers, it also highlights the significance of HMRC’s online Check Employment Status for Tax (CEST) tool.

The IR35 rules introduced in 2000 required the personal service company or worker to decide whether or not individual engagements carried out constituted an employment relationship and, where they did, pay additional tax and NIC accordingly. This left the engager mostly out of the loop of responsibility for tax and NIC on the engagement. 

However, as the NAO points out, “the BBC hires thousands of freelancers every year, covering a number of different roles both on and off-air, including actors, entertainers and off-air workers, such as camera operators”. So it is no surprise that the BBC “…developed policies for what contracting method could or should be used when hiring freelancers in on-air roles, resulting in some roles being contracted through PSCs”.

The NAO comments that the BBC “…based its decisions on whether roles were employed or self-employed for tax purposes on its understanding of HM Revenue & Customs’ (HMRC) guidance and, for on-air presenters, of industry practice”.

However, once the rules for off-payroll working in the public sector took effect in April 2017, the BBC reconsidered the status of these engagements using the 2017 version of CEST. The NAO report states, “By June 2018 the BBC had assessed 663 on-air freelancers using HMRC’s tool and 92% received an ‘employed for tax purposes determination’ ”. Previously, most on-air freelancers had been treated at self-employed by the BBC.

The extension of the off-payroll rules to private sector businesses from April 2020 is predicted to raise over £1bn in revenue for the Government in the first year alone - so it is clear that the Government expects that many businesses may be in a similar situation to the BBC.

The future of CEST

While CEST has been criticised by many, it is expected to continue to play an important role from April 2020 onwards. However, it is important to remember that HMRC acknowledges that it can only provide an answer on employment status in 85% of potential engagement scenarios.

One of the long-standing objections to the way CEST works is that it fails to take account of tax case law around the need for mutuality of obligation (MOO) between the worker and the engager. The IR35 forum (a consultative group of advisers, industry bodies and HMRC) is working on ways to add the MOO considerations into the tool but differences in interpretation remain. HMRC argues that MOO can arise during one engagement, whereas advisers and industry bodies contend that it should come into play where there are a number of engagements between the parties. It remains to be seen whether outstanding test cases will help to clarify the legal position.

If the Government does seek to address the wider issues of employment status through a ‘statutory employment test’ (as suggested in the consultation earlier this year) it has a choice to make. Does it follow established case law (as the statutory residence test does) or does it take a simplified approach and ignore some case law eg the complexities of mutuality of obligation?

We suspect that there will be a statutory employment status test at some point in the future (ideally before 1 April 2020) and that the Government will seek to create a stronger legal framework for CEST. For example, it could legislate to make the answer provided by an updated version of CEST legally binding on all parties (unless the engagement data is entered incorrectly or fraudulently).

Whatever you may think of the current CEST, it seems likely that it or a similar online tool will be part of the Government’s solution to IR35 uncertainties.

For help and advice on all off-payroll working issues, please contact Jacqui Roberts or Nick Duffin.

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