HMRC’s IR35 CEST Tool: a contractor’s overview
HMRC’s CEST (Check Employment Status for Tax) tool aims to assist contractors, hirers and agencies in determining whether the intermediaries’ legislation (IR35) applies to a particular engagement, writes John Payne, Managing Director of Churchill Knight.
CEST was introduced alongside the rollout of the Off-payroll working in the Public Sector rules. Before considering using the CEST tool to determine whether IR35 applies to an engagement, find out what you can expect from using it:
The tool starts by asking questions on the individual making the assessment and whom they are making the assessment for. Typically those involved in an engagement would be three parties: the worker, the end-client and the recruitment agency (although in some cases none of these could apply).
In order for the CEST tool to determine the most accurate result, the individual conducting the assessment should know and understand the following:
- The contractor’s responsibilities
- Who decides the work to be done
- Who decides when, where and how the work needs to be done
- How the contractor is paid
- If there are any benefits or expense reimbursements involved in the contract engagement
The test collects information on the engagement and how the worker is engaged – via a limited company, partnership, sole trader or through another individual (e.g. consultancy).
The CEST tool’s questions are in a yes/no answer format which cover the contractor’s working practices for a particular engagement, including:
- Whether the worker or their business performs ‘office-holder’ duties for their client (i.e. as a director, shareholder, or some other statutory role)
- If Substitution exists in the arrangement – such as whether the worker is able to send someone in their place
- Whether the client can move the contractor to a different task with or without the contractor’s agreement (part of Supervision, Direction or Control)
- If the client has any say in how the contractor carries out the work (also SDC)
- If the client has a say in the contractor’s schedule of working hours
- Whether the contractor is obligated to fix any of the work the end-client is unsatisfied with, and who bears the cost
- Whether the contractor can choose where they work or if there is some flexibility
- How the contractor is paid – i.e. hourly, daily or weekly rate
Each question is determined by the answer given to the previous question. It’s unlikely to pose all the questions unless the engagement is complex.
In some cases a result can be reached quite quickly, and the possible answers include: ‘the intermediaries legislation applies’, ‘the intermediaries legislation does not apply’ or roughly ‘unable to determine’.
After the test
Following the test there is a brief description of each set of questions. The user has the option review the answers provided to each of these sections. HMRC stipulates that before the result is relied upon for the engagement, the following criteria should be met:
- The guidance for each question has been read
- Answers have been reviewed for accuracy
- The answers provided reflect actual and/or expected working practices
The test is useful in that the results can be personalised and printed out for reference of the contractor, end-client and agency which shows all of the answers given. This should be kept on record for evidence.
What happens if the CEST tool comes back with a ‘caught’ result?
At the end of the test, if the tool determines the contractor is employed for tax purposes, the fee-payer (the body actually paying the contractor), would need to make deemed employment payments for the engagement – that is, if the end-client does not seek a second IR35 opinion first. This includes income tax and National Insurance payments.
Is CEST only for the public sector?
Whilst CEST was created to support public sector end-clients in the rollout of Off-payroll working in the public sector, the tool is open to private sector clients and PSCs, as well as agencies.
When and how should the CEST tool be used?
The tool can be a useful and consistent way for end-clients in the public sector to make IR35 assessments of their contractors. It can also be helpful for PSCs and agencies engaging with private sector contractors. However the results should come with a pinch of salt, as it has been widely argued that some key factors are missing – specifically Mutuality of Obligation (MOO).
HMRC will stand by the results of its own tool, but if it believes the answers put into the test may have been inaccurate, it can open an enquiry. HMRC can review an individual’s taxes for up to 20 years, so for the sake of due diligence it’s wise to seek a second expert opinion just to be sure.
If CEST were used in conjunction with other IR35 assessments of the same engagement – from a tax specialist for example – that also yielded the same result, HMRC would find it harder to argue against.