HMRC updates CEST tool for IR35 determinations

HMRC has rolled out an updated Check Employment Status for Tax (CEST) tool which took effect from 2^nd October 2023.

What is CEST?

CEST is HMRC’s free IR35 tool that poses a series of questions about contractors. These are designed to determine whether they should be taxed in the same way as permanent employees or as off-payroll workers. CEST produces Status Determination Statements and IR35 assessments which organisations and contractors rely to determine their employment tax status.

Updated CEST

The update now allows users to:

• Review and change answers after each section
• Check relevant sections of HMRC’s manuals, with links opening up new pages, without leaving the tool
• Understand the outcome by giving reasoning based on particular answers or sections.

In reality, the update has essentially moved the CEST tool to a new platform (HMRC’s Ocelot software which should theoretically make it easier to update the tool moving forward) but there is no immediate change to the logic that underpins CEST. And this is where the problem lies.

The most recent usage figures available from HMRC shows that CEST was used almost 2 million times by contractors, end clients and recruitment agencies and in 21% of cases it was unable to make an employment status determination.

Is CEST fit for purpose?

The main concerns surrounding the CEST tool are as follows:

1. CEST is misaligned with the law

In HMRC v Atholl House Productions Ltd, published by the Court of Appeal in April 2022, this case set a precedent for many of the now binding legal principles to determine employment status, having rejected many submissions from HMRC, which proved beyond doubt that their longstanding “policy view” on status matters (upon which CEST was built) is wrong.

In addition, the CEST tool does not factor crucial aspects of case law into its decisions, particularly mutuality of obligations which does not exist in all engagements – as evidenced by several recent tax tribunal cases. But HMRC and CEST seem to believe that it does.

2. CEST is not legally binding

CEST was not put into statute and therefore does not deliver legally binding decisions.

3. HMRC will not stand by CEST

Whilst HMRC’s manuals state that they will stand by CEST results, that has not been the case in practice. Anyone having experience of HMRC employer compliance reviews or going to tribunal will have learnt this lesson (in addition to public sector users who have been hit with £263m of tax bills as a result of relying on CEST).

HMRC’s Barristers in a Tribunal case stated that “the form, content and application of CEST to the Appellant’s arrangement is irrelevant to the issues to be determined by the Tribunal…..whilst CEST can be helpful in providing guidance, it is only the application of the legislation and relevant case law to the hypothetical facts that must be considered by the Tribunal”.

Furthermore, HMRC confirmed the stance that would be taken by HMRC Inspectors in a letter to the House of Lords in March 2022 when the Financial Secretary of the Treasury wrote:

“Regardless of whether a client has used CEST or not, HMRC’s compliance checks will always examine the actual working arrangements and contractual frameworks in place for the engagement in question to reach a view on whether status has been correctly determined with the relevant case law”.

4. CEST breaches reasonable care

CEST’s “single factor” decision logic when making “Outside IR35” determinations is based solely on triggering necessary conditions and leads to carelessly produced determinations, which can breach the statutory requirement to take reasonable care. Furthermore, CEST rarely delivers an “Outside IR35” determination when it conducts a full multi-factorial determination which is essential as per the seminal tax cases of Ready Mixed Concrete, Hall v Lorimer and Atholl House.

Users should remain cautious of CEST

Contractors, businesses and recruiters should not rely on CEST in isolation for IR35 status determinations. With the CEST known issues, one would expect HMRC to warn users, but alas, no. CEST is not mandatory, nor does it have any legal authority. The government has said that a second phase of development for CEST is planned, which may be backed by Artificial Intelligence, though it has not yet announced any further details. As things stand, could CEST be the most expensive free tool made available by HMRC to the taxpayer?

If you would like to discuss your off-payroll processes, systems, policies and status determinations please don’t hesitate to contact Jas Rai, Employment Tax Partner. You can read more about Jas here: Jas Rai – gunnercookeOP