IR35: Contractors, have you answered CEST’s new sector-specific question from HMRC?

It might not make every contractor’s bedtime reading list, but the minutes from a March 2024 meeting of the UK’s Employment and Payroll Group reveal that a new question has been added to the government’s IR35 status testing tool -- CEST, writes Nikola Nowak, senior consultant at Markel Tax.

A new (optional) probe faces those using the government’s IR35 tool

It’s an optional question and features at the start of the online questionnaire. And before we look at the question itself, for your reference, the Employment and Payroll Group is HMRC’s forum for discussing and addressing issues surrounding the administration of employment and tax.

The forum is staffed by both tax advisers/ experts, a bit like us, and tax officials.

So what is the new CEST question? It is, in effect, a probe about the trade sector of the engagement in question. The question is:

What job role are you using the CEST tool for?

The question gives the CEST user (‘hirer’ or  ‘worker’ which you have to select on the screen before it) a multiple choice answer in the shape of 10 different sectors. These sectors include IT, Engineering, Communications, Construction, Professional Services and; the sector many CEST users who are workers might now select they work in, “Prefer not to say.”

Should contractors answer the new CEST question?

The question is optional, so there are no repercussions for not answering it.

HMRC has confirmed (in the meeting) that responses to the question will not make a difference to the status determination which CEST arrives at.

Could the data collected in reply to the new CEST question be used against the user?

By their own admission, HMRC has stated that they are not able to trace results back to a specific user.

In other words, the data they collect is anonymised. As such, I can’t see how HMRC could use the data against the taxpayer using it.

The PAC may have inspired CEST’s new optional question

My suspicion is that this new CEST question is a direct result of the Public Accounts Committee report which recommended, among other things, that HMRC assesses the impact of the IR35 reforms in different sectors.

The recommendation came after the PAC found that HMRC’s approach to IR35 was at risk of “deterring legitimate economic activity” -- a well-founded concern.

The PAC suggested that better understanding by HMRC is required about the use of contractors in different sectors.

My belief is that the CEST tool could be a relatively easy way to capture this kind of sector-specific information, by giving HMRC the ability to monitor the frequency of CEST usage in different sectors. They may even look at the rates of ‘pass’ and ‘fail’ determinations in the 10 listed industries.

How might HMRC use CEST data collected from its new sector-specific probe?

Cynically speaking, it’s not outside the realm of possibility for HMRC to use this information for targeted campaigns, i.e. looking into sectors associated with higher rates of ‘inside IR35’ determinations to see if these determinations are being applied in reality. But we cannot be certain whether the aggregate data they use will provide such distinction.

At present though, HMRC is not even able to see which users are repeatedly using CEST until they get the outcome they desire. The newly added question is purely for “better user insight for HMRC”, the meetings’ minutes state.

CEST questions are under review

 The online record of the March meeting adds that HMRC is reviewing the wording of some of CEST’s questions “to improve clarity”. And this is part of a wider improvement to CEST. In fact, in addition to adding hyperlinks to relevant guidance, HMRC have confirmed that a new CEST platform is now operational, providing them with “better analytical data about how the tool is used”.

What’s next for CEST? Hopefully it’s a Mutuality question

While all these improvement are welcome, the change we’re all really waiting for is the inclusion in CEST of the Mutuality of Obligations test.

Currently, there are no questions in the tool relating to this key factor, because HMRC takes the view that where a contract exists between two parties, the factor of MOO will be present. This is not what case law universally tells us and this is one of the main reasons why we caution against relying solely on CEST output. That’s a stance we take which obviously isn’t going to be affected by the addition of a new CEST question, especially an optional question and especially a question unrelated to Mutuality.

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Written by Nikola Nowak

Nikola started her journey with Markel Tax in 2017 as an office administrator working within numerous areas of Markel’s business including dealing with client schemes, contract reviews and the Survive35 TaxSafe product. Nikola joined the contractor solutions team in 2019, where she gained a deep understanding of the contracting industry - specifically IR35 legislation, employment status and the agency legislation. She currently deals with all types of IR35 issues, CIS and handles HMRC enquires, and now advises all types of clients and accountants in these areas.

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