Just saying ‘CEST doesn’t work’ helps nobody, given hirers are using the HMRC tool this much
First impressions are lasting, and with this new data on CEST, what should stay with us all is that the update leads with a reiteration by HMRC that it is a check employment status for tax purposes tool -- only.
In other words, CEST does not seek to determine whether a worker is employed, and what protected employment rights they may have entitlement to, writes Carolyn Walsh, managing director of CWC Solutions.
What HMRC says, what the experts say
As the Revenue stipulates here, “CEST can be used by anyone who needs to understand employment status for tax and NIC purposes.”
Not totally appreciating this fact is why some tax ‘experts’ will never really convince all with their argument that CEST ‘doesn’t work.’ Actually the HMRC tool doesn’t work for their purposes, but here, HMRC is reiterating, and in fact always has clearly said, that it is not meant to!
Only one of many means
Really, the CEST tool is only one of many means to an end and it should be recognised as such. Continually just claiming ‘it doesn’t work’ helps nobody, least of all contractors who need real guidance and support right now to build up a successful trading business to which IR35 presents no issues.
Let’s now look at the some of the specific CEST data. Just under two million usages between November 2019 and August 2021 but only 31,312 were generated by agencies. That’s less than 0.02% of the grand total!
Agencies don’t look like big CEST users, hirers do
One explainer is that agency legislation supersedes IR35 where a PSC is being hired (and is not trading as a business or does not operate IR35 when it should). So that may be why the contractor sector has witnessed many agencies turning away from using PSCs, as a way to circumvent agency legislation. And this very low agency CEST usage figure, which is actually astounding at first sight, certainly sems to prove that avoidance of PSCs by agencies is happening.
Separately, HMRC presents us with usage of CEST by end-users (“hirers”). The large number of outcomes generated by end-users means HMRC’s message is getting through. And officially, that message is that the government encourages the use of limited company contractors so long as it’s under a contract which is not one of disguised employment. We’ve heard a lot about blanket bans on limited company worker since the new off-payroll rules were introduced in April 2021 (the month which saw a massive 125, 630 total usages of CEST, outdone only by March – 233,133). Well, if all hirers really were intent on blanketing contractors, or banning PSCs permanently, we would arguably not be seeing this high level of usage. For example of those record 233, 133 CEST outcomes in March, end-users were behind in excess of 148,000 of that hefty total.
That inert one-third. Soon to move?
The data stops at August. Nonetheless, I would say that, based on what I’m witnessing and from looking at the numbers since the last CEST data update covering May 2021, the contractor market has settled into a pattern when it comes to using the tool. And taking just the very latest month available (August), where around one-third of determinations identified contracts as outside IR35, I’d expect that proportion to be roughly the same in future. Yet as hirers start to offer contracts designed with the intent of being outside IR35, often facilitated by using a genuine Statement of Works -- or placements where the contractor company owner/worker will not have access to the client’s staff and subcontractors, this outside IR35 proportion could rise beyond the one-third proportion which it’s been stuck at for a while.
When indecision means it's decision time
It’s worth noting that around a quarter of CEST usage in the last month of data were ‘undetermined.’ As I‘ve explained to ContractorUK this morning, in practical terms, this is simply where choices have to be made. The end-user may, for example, then treat the contract as one of employment. Or it may change direction and therefore the basis on which the contract is offered, and accepted. It can also mean there is a need for more information, so reaching out to a third-party expert for an unbiased review is understandable. But CEST’s not insignificant undetermined rate of 22% (it was only 15 % when HMRC first unveiled the tool), means there is a need for more information from HMRC too, on CEST usage, guidance and notes, and around the questions which the tool poses. That is, assuming two things. That HMRC wants to provide greater confidence to encourage future usage of the tool, and that it wants to quell the misinformation from some quarters which can simply get in the way of contractors paying their ‘fair share’ or ‘getting their tax right’ even if they actually genuinely want to. HMRC, take note.