A new CEST is here, with four big changes for contractors and the IR35-concerned
CEST is a controversial HMRC tool and is heavily criticised by some commentators.
It’s not always clear how valid or helpful some of that criticism is, as this free IR35 assessment tool from the government is still used and relied on a lot by clients and limited company contractors, to produce Status Determination Statements and IR35 assessments.
Peronally, I am very pleased that HMRC has embarked on a phased improvement of CEST and phase one of what’s informally being called ‘CEST 2.0’ is released today, Monday October 2nd 2023, writes Rebecca Seeley Harris of ReLegal Consulting.
Some quick context
HMRC made some fairly major changes to Check Employment Status for Tax in November 2019. Unlike the changes to CEST being released today, the 2019 changes related to the questions which CEST asks, and they included the addition of some new questions.
Fast-forward to 2023, and HMRC acknowledged that customer confidence needed to be improved, in terms of taxpayers both using CEST and its outputs.
So, in the current phase one of CEST 2.0, HMRC has moved the digital tool onto a new platform called OCELOT.
HMRC tells me that the OCELOT version has gone through rigorous testing against case law to ensure consistency. The results of this testing will be released at a later date. It will be interesting to see that data, when it is available.
The OCELOT platform is more flexible, and this will, according to HMRC, make it quicker and easier to amend CEST, if required. HMRC also needs to be able to analyse CEST data and ‘customer journeys,’ to be able to ‘continuously improve’ the customer experience, the department says.
‘Phase One’ of CEST 2.0 is, as the name implies, only the first step
Be aware, this is only the first step in ensuring that the Revenue’s customers know why and when to use CEST. Then the customer is going to need to understand why they are being asked a particular question. The department’s focus here is particularly welcome by me -- because so often I see that end-clients have misunderstood the reasoning behind the question. Unfortunately, this misunderstanding can lead to clients giving an inaccurate answer.
When a CEST 2.0 user receives an employment status output, they need to understand what this means, and what they need to do next. This is HMRC’s thinking with CEST 2.0, I sense.
The key changes
So, what is changing? What does the new CEST look like? And what do taxpayers need to know when using the updated CEST?
Well, while the questions which CEST asks to ascertain IR35 status will remain the same in this phase one, the tool will now differ in three key ways:
1. ESM embedded
The Employment Status Manual guidance is going to be embedded into the tool, removing the need for the user to find and open another web page outside the tool. This change guarantees the customer is directed to the correct guidance for a particular question/ area of IR35. This change also reduces the risk of the user being timed out of CEST.
2. More review options
The user is now able to review their answers after each section rather than at the end of the CEST journey. These review opportunities will help CEST users reflect on their answers and, if necessary, access guidance at earlier stages, helping them to provide accurate answers and reducing the risk of receiving an ‘unable to determine’ outcome.
3. Inside-Outside IR35 explainer per section
The CEST output will tell the customer the conclusion CEST has reached from the answers they have provided for each question-section. This will help the customer understand why they have received a particular CEST output.
What’s not changing with the new CEST
CEST, along with the Employment Status Manual (ESM), is HMRC’s core guidance for employment status. In this phase one, the CEST logic has remained unchanged but, HMRC will be publishing an updated version of the logic in due course.
Helpfully, there is also no change to how customers access CEST, it is still on: https://www.gov.uk/guidance/check-employment-status-for-tax
The PGMOL case is likely why we’re waiting on new CEST questions
As mentioned earlier, the OCELOT platform makes it quicker and easier to amend the tool and one reason why this might be necessary is when the judgment from the PGMOL case is finally delivered by the Supreme Court.
This judgment is due out soon as the case was heard in June 2023. This long-awaited judgment will hopefully shed some light on how to interpret mutuality of obligations.
Indeed, this may very well be why HMRC is delaying any changes to the CEST questions until phase two. If the decision on Mutuality Of Obligation goes against HMRC, then the department will have to change the CEST logic (presumably).
Who uses CEST?
HMRC’s own stats reveal that CEST has been used 1.8million times between November 2019 and November 2021. Fifty-nine per cent of the tool’s uage is by the hirer and 39 per cent is by the contractor / worker.
My expectation was that the use of CEST by the worker would increase, now that more and more organisations have Status Disagreement Processes in place. But, actually, CEST usage by contractors has decreased by 3%.
The tool’s output of ‘unable to determine,’ however, has increased to 21% -- whereas the tool determines 49% as outside of the Off-Payroll Working (OPW) rules. That obviously only leaves 30% showing as inside IR35. It would be interesting to know whether this percentage is in line with how many individuals HMRC believes should be inside or outside OPW.
Lastly, deep-dive ahead
Finally, to be clear, I have not yet had an opportunity to personally review CEST 2.0 and its three big changes -- four including OCELOT. But, I think phase two of CEST 2.0 will be the more interesting part, where HMRC takes a deep dive into the CEST questions which many in the contractor sector still rely on, agnonise over and get confused by.