What IR35 consultation respondents revealed about CEST

Wrongly seen as mandatory. Too blunt to be sector-specific. Unhelpful to big firms. Fuelling wrong IR35 decisions. And a potentially unlawful derogation of HMRC’s powers.

These are just five on a long list of criticisms which respondents to HMRC’s Off-Payroll Consultation have levelled at the department’s ‘CEST,’ the IR35 digital tool.

Introduced in March 2017 after much delay, the “service” by HMRC is meant to help “people” decide IR35 status. But problematically, CEST does not reflect a key legal test for that status.


“CEST ignores important elements of case law upon which status must be determined,” said consultation respondent Qdos, an IR35 specialist.

“Its holes create a huge disparity between CEST’s own logic and the manner in which a decision is made in reality. Mutuality….historically a key determining factor, is absent entirely."

The UK’s largest accountancy body, the Institute of Chartered Accountants in England & Wales (ICAEW) -- which also responded to the consultation, agrees.

“CEST does not consider the particular kind of MOO needed to determine whether a contract is an employment contract, nor, fully, being in business on one’s own account,” it said.

'Stark contrast to case law'

Last month, HMRC tried to clear up the issue -- which has dogged the tool from the start -- by saying in a dedicated paper that CEST assumes mutuality of obligation exists already.

“This [position on MOO] is in stark contrast to many of the key cases in the history of the legislation,” countered Qdos CEO Seb Maley, citing the Synaptek and Marlen cases.

The Freelancer & Contractor Services Association (FCSA) said: “All interested stakeholders, including the accountancy and legal profession and all members of the IR35 forum, disagree with HMRC’s rationale”.  

The FCSA’s CEO Julia Kermode added: “Case law supports the inclusion of an assessment of mutuality of obligations in any IR35 test, so the tool must reflect this to be effective.”


But the tool also fails to reflect what HMRC would look at to determine status, in the event that CEST users got the IR35 status determination wrong, and the Revenue investigated.

“In a full status enquiry, HMRC will routinely ask at least 50 questions about the contractual and working arrangements,” said Mr Maley.

“[So] to reach a status decision that can be relied on based on a maximum of 16 questions [which CEST asks] -- with the likely input of only one party -- is impossible.” 

On top of his other charge that HMRC may be “misleading” CEST users by vowing to ‘stand by the result,’ another allegation by a consultation respondent should trouble the department.


“CEST may be an unlawful derogation of the powers of HMRC to a third party,” said the Association of Recruitment Consultancies (ARC), in its submitted five-point critique of the tool.

“[CEST also] relies upon evidence input by persons who may not actively be involved in the arrangements,” it said. “[And] it purports to reach a result before an assignment commences”.

The latter is at odds with the British courts, which would require an assessment of the facts of the actual assignment during its continuation, and up to the end of the assignment.

Now CEST merely 'provides a guide'

Some let-off for HMRC from the association’s criticism is possible, as the department says CEST only “provides a reasonable guide” to those trying to determine IR35 status.

Or at least, the Revenue used those words in May 2018. Previously, in 2016 for example, it told clients, agencies and others that CEST should be their “main way” to test PSCs’ status.

This flitting between the two (actually, three different descriptions – “optional” HMRC said of CEST in March 2017), hasn’t gone unnoticed by experts.


“Using CEST has essentially been positioned by HMRC as the only way organisations should make determinations,” Qdos says in its consultation reply to the Revenue.

“Many public sector engagers believed, having spoken to HMRC, that CEST is mandatory and that no other method should be used.

“This is both incorrect and dangerous, as we do not feel that the lack of detailed audit trail it provides will give any level of security or certainty in the event of compliance activity.”

But generally, the Revenue regards CEST to be 'working well’ and, when also asked by ContractorUK in June about any plans to change or make it sector-specific, HMRC said they were none.

The department is all but told in its consultation that not making CEST sector-specific was a mistake. “Industries can vary greatly, and the CEST tool does not take this into account

“[And] 85% of contractors [we have] surveyed do not believe CEST is appropriate for their industry or role, an issue raised by [BBC presenter] Liz Kershaw”, says Qdos.

'Too many unresolved determinations'

But quite apart from not covering sectors, CEST does not even cover contractors. “[CEST] does not reach a decision in 15% of cases”, says the ICAEW, citing HMRC’s own stats.

“For a large operation of, say, 10,000 contractors, [this omission of 15%] represents 1,500 unresolved IR35 determinations which is too many for a tool intended to provide certainty.”

Contractors whose engagements require Security Clearance are among those hit hardest by CEST, as its questions on Substitution and Equipment overlook the sensitive nature of their work.

“Security Cleared roles have criteria that would skew the tool’s assessment against the consultant’s business”, one contractor says in reply to the HMRC consultation.

Another adds: “[CEST] doesn’t…[realise that] security checks mean bringing your own equipment or providing a substitute would be very difficult or impractical”.

HMRC stood by CEST at the latest IR35 Forum meeting in May, saying it gets used to provide answers up to 50,000 times a month.

And it was admitted back in 2016 – albeit by the Treasury -- that the tool could never provide 100% coverage.


Yet it is both the coverage and the answers that CEST does provide which unsettles the ARC, Qdos, the ICAEW and the FCSA.

Blanket decisions have been made for various reasons...[one being that] the CEST tool, designed to make decisions easier, is flawed,” said ARC’s chairman Adrian Marlowe.

“A full objection to its operation was provided by our lawyers Bindmans in a letter dated 2nd March 2017, and the points raised therein remain open.”

At Qdos, Mr Maley said: “Given the tool does not align with IR35 case law, there is a strong possibility that it has contributed to many incorrect IR35 decisions in the public sector.”

On behalf of the FCSA, Ms Kermode concluded: “The CEST tool is not fit for purpose and should either be removed or updated as soon as possible.” 

And the ICAEW warned: “Although CEST is supposed to be a simple tool to determine status, the black and white nature of the questions do not fit well with making an informed, considered, qualitative appreciation of the whole, and are not necessarily fit for a 21st century labour market, and in particular, the private sector.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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