HMRC Update CEST With Minimal Fanfare

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HMRC Self assessment or IR35 Checker

HM Revenue & Customs has updated its highly criticised online IR35 status checker to include over thirty new questions, following consultation with more than three hundred stakeholders.

The update comes just under six months before the roll-out of IR35 reform, known as the Off-Payroll rules, to the private sector, which will see the companies that hire contractors become responsible for assessing their contractors’ tax statuses. 

The online Check Employment Status for Tax (CEST) tool was developed to assist the hirers of contractors with this complex new responsibility, but has come under fire from commentators who have accused it of being either biased, inaccurate or “not fit for purpose”. 

The Chartered Institute of Taxation (CIOT) issued a press release in July calling for “significant improvements” to be made to CEST, saying that it did not factor all of the relevant criteria into its decision-making algorithm.  Colin Ben-Nathan, chair of the CIOT’s employment taxes sub-committee, suggested that any updated CEST tool would need to be ready by October to give hirers an opportunity to review new and existing contracts before Off-Payroll is rolled-out in April next year.

The CEST website’s update notes show that the tool was updated on November 25, but HMRC has drawn criticism for not making the changes to the tool more obvious.  No announcement or press release was made by the tax authority about the update, and whilst the update note suggests a simple change has been made “so if you do not know the worker, the tool will not ask questions about their circumstances”, in fact more than thirty new questions have been added and the tool has reportedly been subject to rigorous new testing against case law and settled cases.

Susan Ball, employer solutions tax partner at audit and tax consultancy RSM, said:

“It is understood that around 30 questions have been updated or included and that several industry bodies and reportedly more than 300 stakeholders were asked to use the new version and feed in comments.  Until now CEST produced an answer in only 85% of cases.

“The new tool has also been rigorously tested against case law and settled cases by officials and external experts.  After answering a series of questions, the CEST tool will return a judgement on whether IR35 legislation applies or not.  Questions cover worker’s duties, substitutes and helpers, working arrangements, financial risk, worker’s involvement and contracts (including if working for others).”

The one change to CEST that has been published in the update notes is an important one, says Julia Kermode, chief executive of trade body the Freelancer and Contractor Services Association (FCSA): “The previous CEST version was confusing in that it asked questions that people weren’t always able to answer,” she told ContractorUK.com.  “For example, a client or recruiter might be using it for an indicative assessment, prior to resourcing a [limited company contractor] to undertake the role.”

“In that situation, they wouldn’t know the answers to CEST’s questions about the worker’s circumstances, [such as if] they have other clients. So this latest change aims to clarify things and allows the tool to be used in situations where the exact [contractor] is unknown.”

Ms Kermode added that the changes to CEST do equate to “the substantive update that we’ve been waiting for”.

Whilst HMRC claim that they will stand by CEST’s results, they made headlines earlier in the year in the case of RALC Consulting Ltd v HMRC, in which the contractor, Richard Alcock, used an “outside IR35” result produced by CEST in his defence.  Instead of standing by the result, HMRC called it “irrelevant” and attempted to have the evidence omitted from consideration by the tribunal.

Whilst many engagers of contractors are expected to rely heavily on CEST, caution should still be exercised.  The courts have consistently advised against using a “checkbox” approach to assessing employment status, instead advocating a qualitative approach after standing back and considering all relevant factors.  The tool also still fails to take into account one of the more important IR35 criteria: mutuality of obligation (MoO).

Seb Maley of IR35 insurance firm Qdos said he still had concerns over the tool’s accuracy.

“Despite being tweaked, CEST still isn’t fit for purpose.  With IR35 reform only a few months away, recruitment agencies and end-clients shouldn’t rely on it to deliver accurate information regarding a contractor’s IR35 status,” he said.

“From the wording of the questions to the tool’s reliance on the right of substitution when providing an answer, CEST poses a risk, not just to contractors, but to the agencies and end-clients that choose to use it.

“Still, at this stage in the game, CEST doesn’t take into account mutuality of obligation either.  Given MoO has been the deciding factor in a number of recent IR35 tribunals, that CEST still assumes it exists in every contractor engagement – when tribunal results show otherwise – is another reason not to trust it.”

2nd December 2019.