HMRC’s Check Employment Status for Tax has been at the centre of much of the controversy around the IR35 reform. CEST was launched to a chorus of concern – and some outright anger - from the contracting community. The tool was criticised so heavily, in fact, that the Chartered Institute of Taxation (CIOT) called for it to be reviewed back in May, supporting the ongoing demands for the tool to be overhauled that stretched back to 2018.
Despite no official homepage announcement by HMRC (in fact, the only real mention is in the publication update notes), the new CEST tool has finally been launched – but is it improved?
What were the criticisms of CEST?
You could get very different answers as to what was, and still is, wrong with CEST depending on who you ask. HMRC’s internal review of the tool identified the following issues (and we quote verbatim):
- Lack of key questions
- Ambiguity around terms such as ‘significant’
- Understanding of substitution
- ‘Early exit’ for some questions
- No guidance on ‘can’t determine’ outcomes
HMRC are characteristically vague with these criticisms and don’t detail any particulars or lend much gravity to what the issues could mean for the contractor concerned. If you ask industry specialists, however, the CEST tool has myriad omissions and biases that could seriously hinder an accurate status determination. Besides muddled phrasing on certain questions and catch-all circumstance assumptions, problems with the tool include:
Mutuality of obligation
The biggest omission in the tool is mutuality of obligation - or MOO. Being able to decline work 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. Lorraine Kelly, Loose Women’s Kaye Adams, TalkSPORT’s Paul Hawksbee, and BBC/ITV presenter Helen Fospero all won their IR35 tribunals because of MOO.
Right to substitution
CEST has 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. Not only are the questions regarding substitution reduced to a simple yes/no answer, but the wording itself is unclear for anyone not well-versed in IR35. This means that an inaccurate inside determination can easily happen by accident.
Doesn’t account for the whole picture
CEST doesn’t represent real-life contracting. It relies on only 16 questions (as opposed to our working practices review, which asks up to 50) to cover all aspects of the contractor’s working habits and written contract. CEST isn’t designed to be subjective or flexible, making its results unreliable for the majority of contractors.
Has CEST actually been improved?
With no grand unveiling of the revised tool, you have to go digging for what the taxman has actually changed. Although the notes section claims that 39 individual changes have been made to CEST towards the latter end of this month, it’s a game of spot the difference in many sections. The lack of prominence when it comes to the improvements seems a little counter-intuitive, given the scale and vehemence of the calls for overhauling the tool, but has HMRC made good on its promise to make sure CEST is fit for purpose?
The short answer is kind of. The Treasury has attempted to patch up some of the foggy wording, accommodate for the plethora of scenarios that contracting throws up, and streamline the usability of the tool. However, the bigger issues have been conveniently side-stepped.
Good aspects of new CEST
The aspects of CEST that previously cornered the user into guessing at the worker’s circumstances – for example, if a client was carrying out a prospective assessment before engaging a contractor - have indeed been improved. Questions concerning the right to substitution also no longer make a snap employment status determination based on a handful of yes/no options, and there have been more thorough answer options added that offer a range of reasons for ‘yes’ or ‘no’ responses where appropriate. Additionally, questions have been added to certain sections to get a more comprehensive idea of the contractor’s situation, particularly in the ‘Part & Parcel’ section of the tool.
Interestingly, there’s also now a disclaimer stating that HMRC will stand by the results produced, which the user has to agree to in order to get access to the questionnaire. HMRC maintains that individual results aren’t stored and there are no permanent records of CEST determinations, so could this mean that the taxman will truly honour whatever status decision CEST spits out? For the likes of NHS Digital, this may be difficult to believe.
Bad aspects of new CEST
While there’re now more questions to answer, it could produce a less accurate result than before. The user could give conflicting answers to what is essentially the same question or overthink answers in response to the wording, which is often reminiscent of a cross-examination. Questions on substitution are also still badly explained and reductive, even if they don’t produce an instant inside/outside determination anymore.
As initially pointed out by Simon Moore while writing for ContractorUK, the Work Contracts section also features some wry professions examples; alongside web designers and IT programmers, it provides instances for a ‘sports pundit’, a ‘TV presenter’, and a ‘news presenter’, all of which allude to the Hawksbee, Lorraine Kelly/Kaye Adams, and Fospero cases respectively.
The biggest issue, though, is that mutuality of obligation is still not included as a major status test. Matt Tyler, IR35 Consultancy Manager at Larsen Howie, reflects on how important MOO is - not just to prove a contract is outside IR35, but to win a tribunal.
“Looking at all of HMRC’s tribunal defeats over the last 12 months, MOO is the common denominator,” Tyler says. “Take the excellent result for Mr Alcock of RALC Consulting for example. It proves, once again, that MOO cannot be ignored as HMRC seems to be so adamant on doing.”
“HMRC’s opinion on mutuality of obligation is that if you accept payment in exchange for labour then you are indicating employment,” he continues. “This is simply not the case, as demonstrated in the RALC case and also in the Jensal Software case. In my eyes, these results only go to show the value in having an IR35 review performed by an expert rather than relying on an automated system (particularly CEST) as such systems may well miss the nuance that an expert would pick up on.”
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, IR35 specialist and Jensal Software defence 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.