Can you rely on HMRC’s improved CEST tool for IR35?

The new IR35 regulations will come into effect in the private sector in April this year. HMRC promised to improve its online CEST tool to ease the pain. Does it work?

The HMRC Check Employment Status for Tax (CEST) tool was a great idea on paper. It should have given employers a simple way to review their contracts to determine whether they sat inside or outside IR35. Nice and simple.

That’s not quite how it worked in reality.

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Legal controversies over CEST results

CEST has developed a reputation for being deeply flawed. Determinations made by the tool have already been defeated in tribunals – Mr Elbourn v the Met Office and Qualserve Consulting is one such case.

Worse still is that HMRC has labelled the tool as ‘irrelevent’ in another case, RALC Consulting v HMRC. The Revenue is pushing to dismiss a CEST assessment, which determined that IR35 should not apply, as evidence.

“They’ve made some big howlers along the way, and I just don’t know if they’re going to be able to resuscitate the reputation of CEST or not,” says James Poyser, CEO of contractor-focused accounting practice InniAccounts. “If the contract comes out as being outside IR35 [in CEST], then fine. But you’ve got no confidence that HMRC won’t come knocking anyway.”

A lot of contractors are not accepting IR35 determinations from CEST, Poyser explains, because the tool’s reputation is now so tarnished. Third party tools are available, which have proved to give more reliable results than CEST does.

InniAccounts have set up a secondary website, offpayroll.org.uk, as a resource for contractors to share their experiences with various employers. It has highlighted the common issues arising as employers try to re-assess their contracts, and which tools available are the most reliable. It’s clear that CEST has caused confusion and consternation, and that contractors don’t trust it. “Recruiters and clients who are using CEST are going to find that its reputation makes it quite difficult to attract contractors and consultants who are genuinely working outside of IR35.” 

Revised CEST tool

Against this backdrop of unhappiness, HMRC produced an updated and supposedly improved version of CEST at the end of last year.

So how does it fare?

Mutuality of Obligation

The biggest problem with CEST is its algorithm – specifically, what it ignores. HMRC has not been forthcoming in sharing information on how the CEST tool actually works, but it has been upfront about one thing: it does not take Mutuality of Obligation (MOO) into account in its assessments.

In a nutshell, MOO, refers to the obligation of the employer to provide work and the employee to accept it as part of the employment contract. HMRC has assumed that it is present in all contractor engagements, which is why it isn’t taken into account within the CEST algorithm. In reality, MOO isn’t always present in contracts, and it has been a significant factor in numerous tribunal cases.

“Here is something that been shown time and time again to be a clear indicator of working outside IR35, and it’s been completely neglected by CEST, which is why it isn’t fit for purpose,” says Poyser. “HMRC has not managed to overcome a contractor’s defence at tribunal because of MOO.”

By ignoring case law completely, HMRC has left a gaping hole in CEST’s calculations. The best rated tools and services out on the market – Qdos Contractor, IR35 Shield and Kingsbridge Insurance are all based on case law in addition to the regulations. “It’s not a flaw with the technology-based approach, it’s a flaw with HMRC’s product,” says Poyser. “It’s not comprehensive enough to answer what is quite a tricky question.”

Who uses the tool?

The other big issue with CEST is more of a people problem. Untrained, ill-informed line managers are using the CEST tool without really understanding IR35 or even the contracts being issued to their contractors, and getting erroneous results.

Often, they’re testing one contract and applying it to all contractors and consultants, rather than taking the time to properly assess each contract.

“Contractors are pulling their hair out because the line manager is pushing these buttons in CEST without actually understanding the contractual relationship between the client and the contractor and the working practices. It’s a complex thing, so to put it in the hands of untrained line managers and expect them to deliver a fair outcome is madness.”

Under IR35, a client must take “reasonable care” in assessing a contract. They then have to issue the contractor with a Status Determination Statement (SDS), which the contractor can challenge. “Any contractor worth their salt that’s given an SDS that’s come from CEST, would go to one of the third party assessors, get them to assess the situation, and use that to challenge the client’s determination.”

Accountants advising employers

Accountants advising organisations that hire contractors want to avoid getting too bogged down in the ins and outs of determining what sits under IR35 and what doesn’t – it’s a legal issue, not an accounting issue.

The best approach is to partner with a third-party specialist in IR35 determinations. Qdos and Kingsbridge both have affiliate programmes that accountants can join.

“They can help accountants to educate their clients and their services aren’t that costly. You don’t necessarily have to deliver the solution – you can mediate and introduce your clients to the right people.”

Accountants advising contractors

Accountants should be educating their contractor and consulting clients about IR35 and encouraging them to be proactive with their clients in asking for new IR35 determinations. One of Poyser’s clients, an engineering contractor, spoke to his clients about it, only to find that they were completely oblivious to the changes. With Poyser’s client’s help, that client has now adjusted its practices and is known as an IR35-friendly employer.

“He pushed forward the case that if they got it right, they would have the pick of the very best contractors and consultants – they love firms that can make fair IR35 assessments. Particularly if you’re working in a small firm, it’s a big opportunity for accountants’ clients to really shine by helping their end clients to get this right.”

Alternative tools for assessing status

Qdos Contractor: Qdos has a free IR35 calculator on its site to help determine whether a contract sits within IR35 or not, among other resources.

Kingsbridge Contractor Insurance: Kingsbridge has an IR35 hub with information for contractors, recruiters and employers.

Further reading

Mark Rowland is the Editor of Accounting Technician and 20 magazine.

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