Among critics of the IR35 off-payroll legislation (and there are many), few topics are more contentious than CEST – the official online tool designed to help determine employment status.
Here we look at what the government’s CEST tool is, why it came into being, and why it has been criticised by contractors and IR35 specialists since its introduction in 2017.
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 shift in responsibility
The most fundamental upgrade to the IR35 rules came with the implementation of the off-payroll working changes, first in the public sector from April 2017 and then in the private sector from April 2021.
In essence, this change placed the onus on the engager (typically the end client) to decide whether a particular contract falls within IR35.
Rather than limited company contractors applying the IR35 rules themselves, it is now public sector bodies and medium- and large-sized private sector clients who determine employment status, and issue a status determination statement.
If a contractor’s engagement is deemed to be inside IR35, the engager (or fee-payer) is also responsible for deducting the appropriate employment taxes.
What is CEST, and how does it work?
Why CEST was introduced
To help determine whether a particular engagement falls within IR35, HMRC released an online tool shortly before the public sector rollout in early 2017.
The CEST tool is designed to determine whether a worker on a specific engagement should be classed as employed or self-employed for tax purposes.
HMRC maintains that the tool provides a straightforward way for businesses to make status determinations with confidence. It also states that it will stand by the results in most cases.
How the tool assesses status
Using a multiple-choice system, the CEST tool (Check Employment Status for Tax) collects information relating to the individual and the engagement, 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, for example, deciding how, when or where the work is done?
- What happens if the client is unhappy with the contractor’s work?
- How is the contractor paid – fixed price or by time worked?
- Does the contractor receive any employee-type benefits from the client?
Once the answers have been processed, CEST will state whether or not the Intermediaries Legislation (IR35) applies to the engagement.
Users can read and download a summary of their answers and HMRC’s interpretation of the relevant employment status factors.
If IR35 applies, the engager becomes responsible for operating the rules. If it does not, the contractor may continue operating outside IR35.
In some cases, the tool is unable to determine employment status at all.
HMRC caveats and limitations
There are also strong provisos listed on the summary screen. HMRC states that it will stand by the result unless a compliance check finds that the information provided is not accurate.
HMRC also says it will not stand by results achieved by gaming the CEST tool through contrived arrangements.
And, more ominously, HMRC notes that it can review taxes for up to 20 years.
Why has CEST been so controversial?
Aside from the legislation itself, nothing relating to IR35 has proved as controversial as the operation of the CEST tool.
Critics argue that CEST excludes certain key employment status indicators while being overly reliant on others.
HMRC’s position is that the tool focuses on the tests that case law has shown to be most relevant. It also argues that streamlining the assessment makes it more accessible for businesses unfamiliar with employment status case law.
There is also the broader question of how a digital questionnaire can accurately reflect real working practices, particularly when only limited aspects of a written contract are considered.
No Mutuality of Obligation
CEST does not include Mutuality of Obligation (MOO), one of the most fundamental employment indicators.
MOO is an obligation on the client to provide work and on the contractor to accept it.
HMRC assumes that MOO already applies to users of the CEST tool. It explains this position in IR35 Forum minutes published in December 2017. Their view is that if there’s an active engagement, MOO must exist by definition.
However, IR35 specialists at Qdos explain why this assumption is flawed. They state that HMRC’s narrow interpretation would mean MOO exists in every contract, rendering it meaningless as a status test.
This is not the view taken in Tribunal decisions, where MOO remains a relevant factor.
Over-reliance on substitution
CEST also appears to place disproportionate weight on whether the contractor has the right to provide a substitute, despite case law making clear that substitution is only one factor in a wider assessment.
Not a reflection of real-life working
The test relies on answers to a relatively small number of questions to establish employment status.
It cannot reflect the full reality of working practices or the nuances of individual engagements, as it is constrained by its limited scope.
That said, for straightforward engagements where the working arrangements are clearly outside IR35 (such as genuine project-based work with minimal supervision), CEST can provide a quick initial assessment.
However, for complex or borderline cases, many experts recommend seeking professional advice rather than relying solely on the tool.
Unreliable data and fitness for public use
Shortly before the private sector rollout in 2021, a Freedom of Information request revealed that CEST was never formally assessed against the Government’s Digital Service Standards.
These standards are used to determine whether an online service is fit for public use.
HMRC also disclosed that the tool was tested only in a workshop environment. It does not retain records of how individual questions were answered during testing, only the final outcomes.
This suggests that HMRC has no reliable way of assessing the accuracy of CEST’s determinations.
Industry criticism following the FOI request
We asked Dave Chaplin from ContractorCalculator.co.uk, who submitted the FOI request, to summarise his views on CEST:
As a result of our extensive investigations into the CEST tool, it is now common knowledge that it does not comply with the law, omits key provisions, 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 tax take in the public sector is £550m, almost double the OBR’s expectations.
If firms want to protect themselves from HMRC’s draconian tax grab, then asking HMRC for advice might not be the best place to start.
