The outlook for HMRC's CEST, now private sector IR35 reform is in force
I wrote my book ‘CEST Explained’ partly because HMRC’s own stats say that it has been used 1.2 million times between November 2019 and February 2021, writes Rebecca Seeley Harris, the founder of ReLegal Consulting.
My rationale for helping you (or others if not) use CEST
It is used 56% of the time by the hirer and 42% of the time by the worker. I suspect that the use of CEST by the worker is set to increase now that the Status Disagreement Process is in place and the worker can use it to challenge the client’s assessment.
So, regardless of how good the tool actually is, there are a lot of taxpayers using it and those taxpayers need help to understand it.
What HMRC’s ‘we’ll standy by the results’ claim really means
HMRC has said that they will stand by the results if they are accurate, and it would be interesting to see whether a court case could be argued on the basis of the accuracy of taxpayer answers. But in my opinion, a court case is unlikely to be decided on the basis of the CEST output, in any case. So, the claim by HMRC that it will ‘stand by the results’ will only apply to an internal IR35 investigation. That means if you can convince HMRC at that stage that it is accurate, then they will stand by the results.
Reliance on any one tool? Probably not
In my experience working with clients, the interpretation of CEST questions has been wide and varied. The problem with this is that if the questions are not answered to what HMRC believes is accurate, HMRC will dispute the outcome. So, I have tried to interpret the questions and HMRC guidance how I think HMRC have interpreted them.
My view is that, given that it is free, the tool is a tick in the box -- even if you do also use one of the private sector’s IR35 status testing tools. In short, I would not rely on CEST as the sole evidence for an employment status assessment but, nor would I rely on a private tool exclusively either. This is mainly because I deal with more complex cases and usually they are cases which are undetermined on IR35 status.
The taxman’s latest research
In March 2021 ahead of the new off-payroll rules coming into force, HMRC published independent research on the effects of the off-payroll working reforms on agencies, and there were specific questions asked around CEST. There was feedback on the agencies’ perception over how reliable and accurate the CEST tool was. Some agencies were calling for yet more improvements.
In particular, some agencies said that CEST was too general and they queried the lack of questions around mutuality of obligations. These problems have resulted in occasional circumstances where contractors, agencies and clients have reached different conclusions about the employment status determination for the same assignment.
Mutuality of obligations
HMRC’s interpretation of mutuality of obligations is widely criticised and most recently in the case HMRC v. Professional Game Match Officials Limited  UKUT 0147. The Upper Tribunal (UT) disagreed with HMRC.
The UT went through the case law on MOO in fine detail and then derived the following propositions as to the required content of the mutual obligations:
- So far as the obligations on the employee are concerned, the minimum requirement is an obligation to perform at least some work and an obligation to do so personally. In line with the principles of substitution, it would be inconsistent with that obligation if the employee could decide never to turn up for work.
- The minimum requirement on an employer is an obligation to provide work or, in the alternative, a retainer or some form of consideration (which need not necessarily be pecuniary) in the absence of work. The tribunal thought it would be insufficient to constitute an employment contract if the only obligation on the employer was to pay for work if and when it is actually done.
- In both cases, the obligations must subsist throughout the whole period of the contract.
HMRC is appealing the PGMOL case, which is currently scheduled to be heard in July this year. It will be interesting to see whether HMRC continues to challenge the point on MOO or whether it will concede that its interpretation is, in fact, incorrect. And if it is, will it change the CEST questioning?
Case law and testing
The CEST tool was rigorously tested during development against live and settled IR35 cases. The case list is almost predominately ‘limited companies,’ rather than the ‘self-employed.’ The outcome in 13 cases were self-employed and 11 were employed. CEST, however, uses a completely different set of cases to those cases used in the Employment Status Manual. The CEST tool was developed specifically to accommodate the limited companies.
It will be interesting to see what kind of penalties HMRC will impose if a client uses CEST and took ‘reasonable care’ as, presumably, if reasonable care was taken, there will be no penalties. If HMRC deems that the inaccuracy was ‘careless’, however, HMRC will argue for penalties but they may of course be suspended. All the more reason to use CEST carefully.