'CEST Explained' - How to use HMRC’s tool; relying on it and what you need beforehand
Rebecca Seeley Harris of ReLegal Consulting, previously seconded by HM Treasury to help improve IR35, has written an authoritative and practical guide on how to use CEST.
To help contractors navigate today’s IR35 reform, Rebecca gave her permission for ContractorUK to excerpt her ‘CEST Explained,’ available in full here, into four parts.
An introduction to CEST, using CEST in accordance with HMRC guidance, relying on CEST and what documents you need to run CEST
The purpose of this book is to demystify HMRC’s Check Employment Status for Tax tool (CEST). It is well known that the CEST tool has been criticised, mainly for HMRC’s stance on mutuality of obligations, but also because the questions are not that easy to understand.
How to use this book when testing IR35 status
The problem is that for HMRC to stand by the determination of the CEST tool, the input needs to be accurate and you need to have used HMRC guidance. This book will hopefully provide both, enabling you to be accurate by understanding the questions and bringing together HMRC’s guidance.
The guidance in this book is not my own interpretation of case law, but how I think HMRC have interpreted case law using their own guidance. In order to use the CEST tool accurately, it must be based on HMRC’s interpretation, not mine or the courts.
I have used the questions direct from the CEST tool online as at the date of publication of this book. I have also used the information from HMRC’s CEST guidance and the Employment Status Manual. You will see reference to the ESM, which is the Employment Status Manual and the CEST – which is the CEST guidance.
HMRC processes, disclaimer, and guidance
From April 6th 2021, the output from the CEST tool can be used as a Status Determination Statement (SDS) to comply with the off-payroll working reforms (OP21). The SDS can be used to send to the worker and any third party that is involved in the labour supply chain. It can also be used by the worker as part of the Status Disagreement Process (SDP).
This is the disclaimer issued by HMRC before you start using the CEST tool.
** Disclaimer **
HMRC will stand by the result you get from this tool.
This would not be the case if the information you have provided was checked and found to be inaccurate.
HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties.
** End of Disclaimer**
As seen above, HMRC have stated that they will stand by the results you get from CEST, but only if the information provided is accurate and it is used in accordance with their guidance.
What is ‘accurate’?
If there are any subsequent material changes to the contractual or working arrangements, the information originally provided may no longer be accurate. HMRC will not then stand by the original outcome. HMRC recommend that in the event of subsequent changes you complete CEST again to consider the new arrangements.
In the absence of further guidance on what HMRC define as ‘accurate’, the Merriam-Webster Dictionary might help in defining accurate as:
• free from error especially as the result of care; or
• conforming exactly to truth or to a standard.
HMRC’s statement that they will stand by the results is, however, not legally binding. It has been reported that HMRC have sought to distance themselves from the CEST results during various investigations and tribunal action. It will remain to be seen how the use of the output from the CEST tool in the form of the Status Determination Statement stands up in court. So, each answer needs to be answered carefully and accurately to stand up to challenge.
Relying on CEST alone
It is perhaps wise advice though not to rely on the CEST tool as your only piece of evidence, but the same could be said of any of the commercial tools.
Following HMRC’s additional guidance for what constitutes taking ‘reasonable care’ under OP21, https://www.gov.uk/hmrc-internal-manuals/employment-statusmanual/esm10014, the hirer should ensure that:
• they have someone with a good understanding of the work to be undertaken involved in the determination process;
• the individual responsible for making a determination within the organisation has proper support and training;
• that person understands employment status in general, the CEST questioning and HMRC’s Employment Status Manual. It is not compulsory to use the CEST tool but using it accurately does constitute taking reasonable care
What to gather before running CEST
In order to complete CEST, in addition to having a copy of the contractual terms, you will need to know details about the relationship between the worker and the hirer. These details might include:
• whether the worker can propose a substitute if they are unable or unwilling to complete the work;
• whether the hirer has the right to reject that substitute;
• what the worker’s responsibilities will be;
• the expected working arrangements;
• who is responsible for deciding how, when and where the work will be done;
• how the worker will be paid;
• entitlement to corporate benefits or reimbursement for costs; and
• whether the worker can provide similar services to other engagers elsewhere during the contract.
You will also need input from the worker as they may have information about other contracts they may have and additional information that demonstrates how they provide their services.
Editor’s Note: Text above exactly as published in Rebecca Seeley Harris’s ‘CEST Explained’ except for small additions like sub-headlines to aid readability in this excerpting, which is exclusive to ContractorUK.