Getting the best out of CEST: how to work with HMRC’s IR35 tool, if you must
HMRC’s IR35 tool, Check Employment Status for Tax (CEST), has been consistently tweaked in the three years since its hurried release just a month or so before the introduction of IR35 reform in the public sector, writes Seb Maley, CEO of Qdos Contractor.
Unsurprisingly, the government claims these so-called ‘enhancements’ have made what it sees as an already reliable tool even more capable when determining a contractor’s IR35 status - a task that public sector organisations were made responsible for in 2017 and one that on April 6th 2021, medium and large private sector businesses will also be assigned.
But is this really the case? What refinements have been made to this controversial IR35 technology? Should hiring organisations trust it to accurately assess a contractor’s tax position? And if they insist, what can contractors do - if anything - to help make sure their status is determined accurately by CEST?
Less reliance on substitution, but CEST still misses the mark
Late last year HMRC launched an updated version of CEST which, as this article points out, included around 40 changes. On the face of it, improving the tool’s logic so a contractor isn’t immediately determined inside IR35 based on not having the right to provide a substitute could be considered progress - as might the addition of accompanying information regarding the IR35 legislation to assist the user.
However, a recent update to HMRC’s Employment Status Manual (ESM) casts doubt over CEST’s substitution logic. While the tool simply asks whether a substitute could be rejected for any reason, the ESM contradicts this, stating that substitution is still entirely valid if the client can reject a replacement due to lack of suitability. As you can imagine, this calls into question thousands of IR35 decisions based on an answer provided by CEST. In our work, we have seen a number of the businesses that we advise change their overall stance on substitution after we explained what these well-hidden updates mean.
MOO not clearly taken into account
CEST still ignores one of the fundamental aspects of the IR35 legislation - Mutuality of Obligation (MOO). HMRC works off the basis that MOO exists in every engagement, despite the fact that it remains a focal point in IR35 court cases, as most recently evidenced in Talksport presenter Paul Hawksbee’s IR35 defeat.
And while the government has promised to work with “IR35 stakeholders” to continually improve the tool in the lead up to private sector reform, I don’t expect a change of tack regarding MOO.
It’s true that last year’s update to CEST saw an inclusion that, in HMRC’s eyes, addressed the issue of MOO - asking questions around whether a contractor is in business on their own account. However, these aren’t clear nor direct enough for a user to determine IR35 while considering MOO - not by any stretch of the imagination.
Before even taking into account that CEST still only asks a maximum of 25 questions (whereas HMRC will put forward well over 100 in an IR35 enquiry), the absence of MOO means the tool still doesn’t reflect IR35 case law, no matter how much HMRC insists that it does.
House of Lords spot on in its assessment
As the damning House of Lords report into IR35 reform rightly pointed out, “the support offered by HMRC in determining status - and the CEST tool in particular - falls well short of what is required.”
However, the reality is that many businesses will rely on CEST to set the IR35 status of the contractors they engage. Some don’t know any better, while some see using the tax office’s tool to set a contractor’s tax status as the safe option - these organisations are of the view that it minimises risk on their part, regardless of the fact it may actually lead to incorrect IR35 decisions and non-compliance.
So what, as a contractor, can you do to safeguard your IR35 status if your client insists on using CEST?
Focus on all aspects of IR35
Given the concerns regarding MOO, it’s best that you do not rely on this aspect of IR35 not being present for an outside determination. The few - largely inadequate - updates to CEST that loosely allude to MOO are unlikely to be enough for you to confidently pass the test if you’re counting on it.
IR35 status should only be set once all elements of the contract and working relationship have been considered. Think about whether the likes of personal service and control - the two other key status tests - could be strengthened, both in the written contract and day-to-day provision of services.
Additionally, other factors such as demonstrating you take on financial risk may prove important - as will any evidence you can gather to strengthen your case for being a genuine contractor, which we’ve written about previously for ContractorUK.
Presenting to your client an IR35 status review carried out by a specialist will also offer confidence, supporting your argument for belonging outside the legislation.
Request to be present
Contractors have every right to be concerned about their clients using CEST to determine IR35 status. And while you can’t insist on being present when a client is completing the tool's questionnaire to make sure the answers given are correct, you have nothing to lose in asking to be.
Whether your engager will involve you in the decision-making process, however, is entirely up to them. Working with contractors to determine status is something we strongly advise businesses to do - it’s our view that collaboration is key when assessing status.
Genuine changes allowed to pass CEST
In the 15% of cases where CEST can’t make up its mind, it delivers an ‘undetermined’ answer. If your engagement falls into this category, you might be wondering what can be done to change this to an ‘outside IR35’ verdict.
It isn’t beyond the realms of possibility that you can review and amend your contract and working practices before taking the test again, in the hope that you meet HMRC’s criteria for an outside IR35 engagement.
Given the complex nature of the IR35 legislation, I would recommend that your overall engagement is reviewed by an independent and expert third party. If and when these changes have been made (and mirrored in the day-to-day provision of services), your client can then retake the CEST test.
However, I should stress the importance of making sure any amendments to your engagement are genuine and reflected in practice, which is often easier said than done. HMRC will be watching closely and is well aware of contracts that have been adjusted simply to pass CEST and steer clear of IR35.
Are contractors safe if they pass CEST?
Let’s say you take all of the above steps and CEST determines your contract outside IR35. While you might think that a client using HMRC’s very own tool to set status means the taxman will look elsewhere when carrying out compliance activity, this isn’t necessarily the case.
In fact, anecdotal evidence in the public sector suggests that HMRC is quicker to target organisations who have used the tool than those utilising other methods. Given the binary and subjective nature of many of the questions, plus the distinct lack of guidance provided, HMRC have ample opportunity to question the validity of the information that has been inputted. We mustn’t forget either that HMRC can and will happily look at cases where it suspects deliberate foul play, irrespective of whether CEST has been used or not.
In conclusion, and as we close in on IR35 reform in the private sector from April 6th 2021, CEST remains flawed, not fit for purpose and is far more likely to deliver an inside IR35 verdict than an outside one. But even so, and as some businesses inevitably gear up to use the tool - despite our best efforts to persuade them not to - there are steps you can take to at least lessen the likelihood of being placed inside the legislation by your client.