Why CEST from HMRC should never be used to determine IR35 status
CEST should never be used in isolation to draft a Status Determination Statement (SDS), as the tool’s output does not satisfy the statutory requirement to undertake reasonable care in the context of various sections of the Income Tax (Earnings and Pensions) Act 2003, writes Martyn Valentine of The Law Place.
Explanation please, not empty statements...
Unless a purported SDS contains an explanation of the reasons why the circumstances of an engagement support an inside or outside IR35 conclusion -- by Check Employment Status for Tax (CEST) or another means, the end-client may be at risk.
But empty statements about substitution (which CEST puts a lot of stock into) are meaningless, if the object of the contract is the supply of an individual to undertake a role within the client's organisation.
The positions of client and contractor
For example, if a document does not explain why (having regard to the "terms on which the services are provided"), the engagement is outside IR35, or the client fails to ensure that the document is passed to the worker, the client has failed to undertake a SDS and will be liable for penalties of at least 30% , on top of any underpayment for tax and NICs.
Conversely, if the outcome of a SDS is that the engagement is inside IR35, how would the limited company contractor appeal, without being furnished with a full explanation as to why the circumstances support the conclusion?
A medium-sized or large end-client seeking to engage limited company contractors should always seek expert advice on IR35, preferably from someone trained in contract and employment law, to demonstrate that “reasonable care” has been taken.
IR35 is no different to other areas of law, but it's a myth that IR35 legal advice is prohibitively expensive.
Would you let a heating firm's salesperson fix your boiler?
Advice from an appropriate advisory is the way to go, however.
You wouldn't take guidance on criminal law from someone familiar with the magistrates' court with knowledge gleaned from personal experience, and you wouldn’t get your boiler repaired by a heating firm's salesperson!
Let's not forget, though, that a client who tries to help a limited company contractor by using CEST to achieve an outside IR35 result without even looking at the relevant documents would be liable for cheating the public revenue -- a serious criminal offence.
Groupthink on IR35 prevails, sadly
Remember, neither the use of CEST nor HMRC's Employment Status Manual is required by law and the continued usage of both is sadly an example of groupthink, rather than a critical assessment of IR35.
Also remember, HMRC's views on law and IR35 are frequently proven to be plumb wrong. Related, CEST is only useful as an indication of likely status, but it depends entirely on the expectation bias and training of the person inputting the data.
Therefore discussions about improving CEST are futile; indeed, I believe the HMRC tool ought to be renamed ‘CEST – Cheating Every Self-employed Taxpayer.’ It's pointless spending time trying to fix something which will never work.