CEST vs. Brookson Legal Services IR35 Audit
When the new IR35 Private Sector Legislation is rolled out in April 2020, we know that end hirers will need to demonstrate ‘Reasonable Care’ when determining the status of their off-payroll workers. Despite this ‘reasonable care’ has never been defined and it is questionable if HMRC’s Check Employment Status for Tax (CEST) tool meets the reasonable care test. On the other hand, Brookson Legal Services offer a service to help clients and agencies fulfil their obligation to use ‘reasonable care’. This is achieved through assessing the relationship between contractor and end hirer from an IR35 perspective and supporting client’s future engagement with contractors.
Assessment Method
CEST
CEST is a digital tool designed by HMRC to assess a contractor’s employment status. It is a simplistic questionnaire answered in a yes or no format. CEST is able to provide an employment status determination in easy cases where the roles are definitively inside or outside of IR35. However, in the more complex scenarios (which we often see), CEST fails to provide an outcome or errs on the side of caution, providing an Inside IR35 Outcome.
Brookson Legal Services
Firstly, Brookson Legal Services educate clients and agencies on the IR35 legislation with detailed training sessions to increase knowledge and understanding. Secondly, Brookson Legal Services conduct an audit and report the IR35 status of the contractors in accordance with a Red, Amber and Green matrix. The client will be provided with a Status Determination Statement that can be cascaded down the supply chain. Thirdly, Brookson Legal Services can help to implement policies to ensure compliance and further strengthen the IR35 status of contractors. Finally, support can be provided for the future in relation to any new roles introduced or queries.
Are all employment status indicators used in forming Status Determination Statements?
CEST
CEST does not consider one of the most fundamental IR35 indicators that have been given great significance by the courts: mutuality of obligations. HMRC view mutuality of obligations in its simplest form defined in their Employment Status Manual 0543: the engager must be obliged to pay a wage or other remuneration, and the worker must be obliged to provide his or her own work or skill.
Case law demonstrates that this is not sufficient on its own to demonstrate the irreducible minimum obligations – (Datagate Services Limited v The Commissioners for HM Revenue & Customs [2007] UK SPC 656).
Mutuality of obligations has become an increasingly important factor in assessing employment status and this is something HMRC has failed to recognise.
Brookson Legal Services
Having advised thousands of independent contractors to ensure they comply with the IR35 legislation, Brookson Legal Services has developed products and services to ensure accurate and consistent outcomes when reviewing the employment tax status of off-payroll workers, considering all employment status tests. We investigate the 3 main areas (substitution, control and mutuality of obligation) whilst digging deeper to understand the financial risk the contractor is exposed to and whether or not the contractor can work for other clients, amongst other areas. We like to get a good understanding of the whole picture.
Are contracts taken into consideration?
CEST
No. CEST overlooks the importance of analysing contractual documentation.
Brookson Legal Services
Yes. A full review of all applicable contract terms and other documentation used in the engagement of contractors will be undertaken to ensure that they are consistent with working practices and up to date legislative changes.
The challenge process
Clients must provide Status Determination Statements to the next entity in the supply chain and to each worker. The determination must include their reasoning. Where an independent contractor or fee payer disagrees with the Status Determination Statement, they are entitled to challenge this. A response must be communicated by the client within 45 days.
CEST
As CEST is renowned for being unfit for purpose, contractors are likely to dispute their status determination statements. This, in turn, could be to the detriment of an end hirers relationship with their contractor workforce. Further, CEST does not provide any rationale behind its conclusions, therefore how is an end-hirer meant to produce a Status Determination Statement?
Brookson Legal Services
Brookson Legal Services provide Status Determination Statements when confirming the status of each role, enabling end-hirers to comply with its obligation to pass this information to the required parties. We also offer a dispute resolution/contractor challenge process. This process includes:
- Clarification discussion/email with the contractor.
- Review of additional information.
- Additional documents reviewed and conciliation process.
Using an external advisor for this process is likely to help the client preserve its relationships with contractors.
Is a detailed report provided to assist understanding?
CEST
Detailed guidance is not provided by HMRC. CEST fails to support the knowledge and understanding of this complex piece of tax legislation.
Brookson Legal Services
Brookson Legal Services will provide a detailed report to end hirers. This report will consist of an analysis of each role based on the contract reviews and working practices discussions. Our review process takes into account existing case law and the weight attributed to each factor by the courts. This can be retained by the Client as evidence of taking ‘reasonable care’ in assessing its contractor workforce. The report will also provide the client with recommendations for changes to working practices and/or contractual documentation to produce a definitive status determination for those contractors identified as ‘amber’.
Cost of an assessment
CEST
Whilst there is no monetary cost to using the CEST tool, significant time and energy will be spent in understanding the questions due to the lack of education and support provided by HMRC.
Brookson Legal Services
Brookson Legal Services charge a fixed fee based on the number of contractors audited.
When should an End Hirer start to prepare for the changes?
CEST
CEST is currently being enhanced. Whilst a go-live date for the enhanced version is yet to be confirmed, it has been muted that we can expect to see this in March. This gives end hirers little time to prepare and run all its contractor population through the tool. If you use CEST now, what comfort will you have that the decision won’t be changed once the enhancements have been introduced?
Brookson Legal Services
Brookson Legal Services have been advising on IR35 since its inception. We assisted many public sector authorities in dealing with the changes in April 2017 and we are now doing the same for private sector organisation. Private sector organisations need to understand their off-payroll population now, in order to ensure a smooth transition for affected contractors come April 2020. The rules on employment status aren’t changing, just who is responsible for determining status and deducting tax, therefore the processes and tests we have built over the years still apply and will apply beyond April 2020.
How can an End Hirer or Agency achieve ‘Reasonable Care’?
CEST
There have been various cases where CEST has determined a different outcome than the courts. In the case of RALC Consulting Ltd v HMRC, CEST was branded as “irrelevant” by HMRC themselves. HMRC went on to state “While 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”. It is evident that HMRC has attempted to distance themselves from CEST, thus the results of this tool should not be relied upon and will not amount to reasonable care.
Brookson Legal Services
Brookson Legal Services is a law firm, regulated by the Solicitors Regulation Authority, and their main area of work is employment status, and particularly IR35. Having advised on the IR35 legislation since its introduction in April 2000, Brookson Legal Services has extensive experience in providing first-class advice and guidance to hirers, recruitment businesses and contractors, to ensure full compliance. Every member of the Brookson Legal Services team is an IR35 expert, some with over 10 years’ experience. Additionally, Brookson Legal Services have team members who have sat on HMRC’s IR35 Forum as technical specialists in this field. Furthermore, Brookson Legal Services have vast experience dealing with similar changes, most notably advising public sector End Hirers on the IR35 changes introduced in 2017. Finally, their advice is protected by Professional Indemnity Insurance meeting the requirements set by the Solicitor’s Regulation Authority.
By instructing an independent firm with extensive credentials to audit the off-payroll workforce, have periodic audits and access to a helpline for any queries, a client will undoubtedly pass the reasonable care threshold.
If you have any further questions regarding this blog and how Brookson Legal can support your or your please please do not hesitate to get in touch.