Nothing makes critics of the IR35 ‘off-payroll’ legislation (and there are many) more irate than the mention of CEST – the official online tool which is meant to help determine employment status.
Here we look at what CEST is, why it came into being, and why it has been widely condemned for being ‘not fit for purpose’.
Background to the off-payroll working rules
Since IR35 came into being in April 2000, successive governments have been convinced that the legislation has been ineffective at stopping so-called ‘disguised employment’.
The most fundamental ‘upgrade’ to the IR35 rules came with the implementation of ‘off-payroll working’ changes from April 2017 onwards. In essence, this change put the onus of deciding whether or not a particular contract falls within IR35 or not – into the hands of the engager (typically the end-client) for the first time.
So, rather than limited company contractors operating the IR35 rules themselves (as they have done since 2000), it is now clients in the public sector who determine their employment status. If a contractor’s engagement is deemed to be ‘inside IR35’, the engager is also responsible for deducting the appropriate taxes.
As we all know, these same off-payroll rules are set to be applied to the private sector from April 2000 onwards.
So, what is CEST, and how does it work?
To help work out whether or not a particular contract falls within IR35, HMRC released an online tool shortly before the public sector rollout in early 2017.
The CEST tool will work out whether or not “a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”
Using a multiple-choice system, the CEST tool (Check Employment Status for Tax) collects information relating to the individual, 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?
Once the answers have been processed by the CEST tool, you will be told whether or not the Intermediaries Legislation (IR35) applies to this particular engagement.
You will be able to read and download a summary of your answers, and how HMRC has interpreted its understanding of IR35 as it relates to each employment status factor.
If you’re caught, then the engager becomes responsible for operating IR35, and if not – you can carry on operating outside IR35.
In some cases – the tool will be unable to determine employment status at all.
Of course, there are some strong provisos listed on the summary screen. HMRC say they will ‘stand by the result given unless a compliance check finds the information provided is not accurate.’
HMRC also say they will not stand by results achieved by gaming the CEST tool – by entering contrived arrangements.
And then, ominously; ‘HMRC can review your taxes for up to 20 years.’
Why has CEST been so controversial?
Aside from the invention of the legislation itself, nothing relating to IR35 has proved to be as controversial as the operation of the CEST tool itself.
Critics claim that CEST excludes certain key status indicators, whilst being overly-reliant on others. And how can a digital tool cater draw a picture of an individual’s working conditions, whilst also taking into account only certain elements of a written contract?
No Mutuality of Obligation
CEST does not include the Mutuality of Obligation (MOO) – one of the most fundamental employment indicators. MOO is an obligation on the part of the client to provide work, and an obligation by the contractor to accept the work.
HMRC assumes that MOO already applies to users of the CEST tool, and explains this reasoning in these IR35 forum minutes from December 2017.
However, IR35 experts, Qdos explain why this is wrong; “…their narrow opinion means that MOO will exist in any contract whatsoever and therefore would serve no purpose in determining employment status, but this is not the view held in Tribunal decisions, as laid out in case law.”
Over-reliance on substitution
CEST appears to be overly-reliant on whether or not the individual has the right to use a substitute.
Not a reflection of real-life working
The test itself relies on answers to a relatively small number of questions (16) to establish employment status, which cannot reproduce all real-life scenarios. Due to the nature of the test, it cannot take into account working practices or any number of nuances which are not covered by its limited scope.
Unreliable data, unfit for public use
A Freedom of Information (FOI) request established that CEST was never formally assessed under the Government’s Digital Services Standards, which are used to determine whether or not a service is fit for public use.
As if that wasn’t bad enough, HMRC also revealed that CEST was only tested in a workshop and that the tax body ‘does not have a record of how each question was answered as part of that testing, only the end determination’.
This suggests, of course, that HMRC has no way of working out how accurate CEST is.
We asked Dave Chaplin from ContractorCalculator.co.uk – who submitted the FOI request, to summarise his thoughts on CEST:
“As a result of our extensive investigations into the CEST tool, it is now common knowledge that it does not adhere to the law, misses key parts of the law, gives inaccurate answers and is loaded in favour of the taxman.”
“HMRC claims, without any evidence, that it thinks a third of contractors should be inside IR35. Yet at the IR35 tribunal for BBC presenters, the CEST tool indicated that 92% of the Corporation’s freelancers were caught – which HMRC blames on the BBC for having historic practices that “had gone adrift”. HMRC also estimates that the tax take in the public sector is £550m, which is almost double what the OBR had expected…”
“If firms want to protect themselves from HMRCs draconian tax grab, then asking HMRC for advice might not be the best place to start.”