• Articles
  • February 17, 2021
  • Gareth Morris

Focus on CEST


CEST stands for Check Employment Status for Tax. It is HMRC’s own tool to determine a contractor’s position in relation to IR35 for a specific role. We know from experience that our clients and contractors have different views on it, so we thought it would be useful to explain those positions.

With the changes in April 2020 meaning that the End Hirers (i.e. clients) become responsible for assessing IR35 status, you can understand the attraction of the tool. From a client’s perspective, they use the tool, and the Government accepts any determination made by the tool so they have a simple, risk free process – right? Unfortunately, it’s simply not as straightforward as that. Now, I will caveat the next section by saying that HMRC, through the consultation on this legislation, has stated improvements to CEST will be made; so, it’s only fair we reserve final judgement until then, but the view on it at this point is not great.

CEST sets out a series of questions that are related to the primary legislation and the various case laws around IR35, and depending on your answers, you are given new questions to further clarify the position. It can take anywhere from 20 minutes to 45 minutes per assessment. It is provided as a voluntary tool and is still in BETA mode, though it has been used to assess thousands of public sector workers.

There has been a lot of criticism of the tool, including numerous complaints about the lack of documented testing – an FOI request revealed that there was only a one-page document evidencing the ‘rigorous testing’ HMRC said had happened. There are also broader, more fundamental concerns that are worthy of consideration.

Computer says no

IR35 legislation is complex, supported by case law and nuanced in interpretation. So, you might think your responses should be supported by context and reviewed by someone with that knowledge, right? Wrong. The answers are multiple choice, with no opportunity to add comments. Your responses are not reviewed, but ran through an algorithm that scores your responses. It doesn’t give you any indication as to what changes you could make to change the status of the contract, nor any explanations.

Computer says don’t know

At least if you have a sophisticated algorithm making the determination, you know where you stand. Well – not really. In 15% of cases, CEST is unable to give a determination. This means that even if you do use it, you’re almost certainly going to have to have a secondary assessment process for the 15% of contractors not given a determination. If your working practices are similar, it’s likely you’ll get a higher than average % of contractors without a determination. When the BBC first used it, they couldn’t arrive at a determination for almost half of their contractors.

Computer says ‘Inside IR35’, all the time

In a recent discussion with the Treasury, an MP (Paul Sweeney) raised a question about the reliability of CEST, when in one public sector organization 94% of contractors were found to be inside IR35. The former Finance Secretary’s response? “That doesn’t mean it’s wrong.”

Of course, it is possible for the vast majority of contractors in any given organisation to be inside IR35. A recent study by a global audit house of 55,000 contracts in the UK assessed the volume of inside IR35 contracts at somewhere between 15 – 20%. That is a vast difference, and more telling that the Government does not consider a landslide of inside determinations to be any reason to look again at the tool.

Computer says MOO!

In the interpretation of the law, CEST leaves out one of the key pillars for IR35 – Mutuality of Obligation, known as MOO. The IR35 forum (a group of key stakeholders formed by the Government to improve the way IR35 is administered) has raised with HMRC several times that the courts have specifically said CEST is wrong to assume that Mutuality of Obligation exists in all contracts, yet it continues to do so. It is surprising that HMRC felt no need to reconsider, when the judge in a 2017 case said:

“HMRC’s case is that where one party agrees to work for the other in return for payment, then this satisfies mutuality of obligation between the two parties. That would be true of every contract, both employment and for services; otherwise, the contract would not exist at all. The mere offer and acceptance of a piece of work do not amount to mutuality of obligation in the context of employment status.”

Computer is wrong

Even though you only get a result for some contracts, and most of the time it seems a bit biased and isn’t fully considering the rules, at least you know it’s correct. Well, if only that were the case. Unfortunately, it seems that the way HMRC sees IR35 is not the same way the courts do. Six cases have been brought to various tribunals challenging a decision brought by CEST, and in five of them, the determination brought by CEST was found to be incorrect. Unfortunately, the cost of legal action is prohibitive for many, so this isn’t an option for most people. However, it highlights why contractors feel incredibly frustrated to have their tax status determined by a tool proven to be wrongly applying the law over and over again.

What do clients do?

We know that our clients need to be confident they are reaching the correct determination, in an efficient way. Clients will also be concerned with the risk that either they fail to attract or retain highly skilled contractors, or that they fall foul of the law. So, if the flaws with CEST make it unfeasible, what is the solution?

We think there is a better way.

We can offer an initial triage based upon the CEST determination, but used as a guide only that rates a contract as red, amber or green. At this stage you don’t have a determination – only a risk rating, along with recommended actions – so you have the opportunity to make changes where they are practical. Those contracts with a low risk of being inside IR35 can be offered the opportunity for an independent assessment on status, which looks at the context and can take input from both client and contractor. Best of all, the assessment is backed by comprehensive insurance to both ensure representation in the event of a HMRC challenge, and to cover tax liabilities in the event of a successful challenge.

We wait to see the improvements made to CEST and will review them when that happens. But, in the meantime, clients need to prepare and they can’t do that adequately with a flawed tool – so this is a great solution to minimise commercial and legal risk, and arrive at the right decision.

Get in touch

If you have any questions about CEST or IR35, please feel free to get in touch with me on jeni.howard@evolutionjobs.co.uk. 

Contact us today.