Since IR35 was first introduced back in 2000, it’s gone through myriad changes. However, the most fundamental adjustment to IR35 came with the implementation of the ‘off-payroll working rules’ which saw the public sector rules reformed from April 2017, with the private sector to follow in April 2020. In essence, this change shifts the liability of deciding whether a particular contract falls within IR35 or not from the contractor to the fee-payer, whether that’s the end-client or the recruitment agency. To help these end-clients and recruitment agencies quickly determine a contractor’s IR35 status, HMRC launched the CEST tool just before the 2017 public sector reform.
The CEST tool, short for Check Employment Status for Tax, has been at the centre of much of the controversy around IR35. Why has the tool been criticised, and what are the other options when it comes to getting an IR35 status review?
What is the CEST tool?
CEST is a digital tool designed and built by HMRC (using contractors, no less) to determine whether a contractor is inside or outside IR35. It was released to heavy criticism across the industry.
The tool uses a multiple-choice system to collect information about the contractor concerned, using questions such as:
- Does the contractor provide their services via a limited company?
- Is the contractor an ‘office holder’?
- Can the worker provide a substitute (or have they already)?
- To what extent does the client exert control over the contractor, e.g. can they move the contractor to a different role/location, decide how and when the work is done, etc.?
- What happens if the client is unhappy with the contractor’s work?
- How is the contractor paid – fixed price, or by the time period?
- Does the contractor receive any ’employee’ type benefits from the client?
After submitting your answers to said questions, you’ll be told whether or not the engagement falls within the scope of IR35. A summary of your answers will be available to download, along with an explanation as to why HMRC has given the determination of either inside or outside the legislation respectively.
Why is the CEST tool flawed?
As mentioned previously, CEST was launched to a chorus of concern – and some outright anger - from the contracting community. HMRC’s status determination tool has been one of the most controversial aspects of the IR35 reform and contributed heavily to the uncompliant blanket determinations within the public sector throughout 2017. So what are the main issues with the tool?
Mutuality of Obligation
One of the main problems with CEST is that it excludes some critical status indicators from its reasoning process. The biggest omission in the tool is mutuality of obligation - or MOO. This status indicator is concerned with whether the client feels obligated to keep giving the contractor work, or the contractor feels obligated to keep accepting work from the client. Being able to say no on both sides of the engagement is one of the biggest signposts of a true contractor-client relationship, yet it’s not counted by HMRC’s dedicated IR35 determination tool. In fact, HMRC assumes that MOO is present in all contracts for services by default, which is not the case at all.
Right to Substitution
CEST has also been criticised for relying too heavily on whether a contractor has the right to use a substitute should they not be able to carry out the contracted services themselves. This is often misconstrued to mean the contractor must have a substitute ready to hand, which isn’t the case. Where possible, a contractor should have a clause in their contract specifying that a qualified substitute would be accepted by the client should they not be able to carry out their services temporarily.
Doesn’t account for the whole picture
Finally, it’s been pointed out by many that the test isn’t representative of real life, relying on only 16 questions to cover all aspects of the contractors working practices and contract to get a status determination. Working relationships between contractors and clients can be complicated, especially if there’s a complex supply chain involved, and some professions may not adhere to certain status indicators simply because of the nature of the work. CEST isn’t designed to be subjective or flexible, making it reliably applicable to only a select few circumstances.
How can I get an accurate IR35 status determination without using CEST?
While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are just as valid.
There’s an argument to opt for a ‘manual’ contract review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed. A contract or working practices review carried out by an IR35 specialist may take longer to receive your determination from, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from our Head of Tax, ex-Qdos IR35 specialist Andy Vessey ATT, should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.