How reliable is the HMRC CEST Tool and what are the alternatives?
As we approach the introduction of IR35 in the Private Sector in April 2021, the question ‘How reliable is HMRC’s CEST Tool?’ is what everyone is asking.
As agencies and end hirers will soon be responsible for unpaid taxes when an incorrect determination of an off payroll workers tax status is reached, it is important to ensure that you are assessing the status of off-payroll workers correctly.
HMRC originally introduced the Check Employment Status for Tax (“CEST”) tool in March 2017 to coincide with the introduction of the off-payroll public sector rules. As time is fast approaching where these rules are going to be live across the private sector, now is the time to look at the reliability of the CEST in assessing an individual’s employment status.
The purpose of the CEST is to allow agencies and end hirers to assess the status of off-payroll workers. CEST will provide one of three possible outcomes. They are:
- The intermediaries legislation does not apply to this engagement.
- The intermediaries legislation applies to this engagement.
- We are unable to determine the tax status of this engagement.
Due to the nature of the tool it is possible to rework results to achieve a preferred outcome. The tool is reliant upon the IR35 knowledge and the honesty of the individual completing it. By conducting a simple internet search, you are able to locate sites which undermine CEST entirely and provide you with a detailed step by step guide as to how to answer the questions in order to achieve the desired outcome.
Where you are able to amend the answers to return the desired ‘Outside IR35’ outcome then ultimately how reliable can the results be?
Whist the tool is useful for obtaining an overview of the workers status we do not recommend sole reliance upon these results. Since its introduction in April 2017 CEST has been updated to try and improve usability and make it more steadfast but in the ever changing world of technology and contracting, is this enough?
In order to successfully determine the tax status of an off-payroll worker, a review of both their contract and the day to day working practices is required. Something which CEST cannot offer.
In reviewing the working practices HMRC consider 3 main areas, amongst others. The 3 main indicators are; Mutuality of Obligation, Supervision, Direction and Control and the right of Substitution. CEST clearly overlooks Mutuality of Obligation as HMRC automatically consider this is present, even when case law rebuts this presumption. This therefore casts much doubt over CEST and whether it is geared towards achieving a favourable outcome for HMRC.
HMRC have stated that they will ‘Stand by the result given unless a compliance check finds the information provided isn’t accurate’. This doesn’t completely exonerate end-hirers as HMRC may still come to a different conclusion (as we have seen in recent case law).
One of the main criticisms of CEST is that it can identify the roles that are clearly inside or outside IR35, but more often than not, the status is undetermined and the tool requests you contact HMRC directly via email or phone for further assistance. Something most people aren’t comfortable doing.
So, what are the alternatives? Whilst CEST is useful to gain an idea and overview of the tax status of your temporary workforce, this alone cannot be relied upon. It is imperative therefore that the tax status of your off-payroll workforce be determined by undertaking a thorough review of their contract and working practices, considering each employment status indicator. This may be done in-house if you have the skills and expertise to complete such an undertaking, bearing in mind that in a HMRC enquiry you would be required to justify your decisions and demonstrate reasonable care. Alternatively, for peace of mind you may choose to engage with an IR35 specialist who has years of experience and are highly skilled in this area. Here at Brookson Legal Services we have over 18 years of experience in dealing with IR35 legislation, we have employees who have sat on HMRC’s IR35 Forum and are often instructed to act for clients who are subject to an IR35 enquiry, by HMRC. As such, we are well placed to help take the ambiguity out of determining the tax status of your temporary workforce and can assist in helping you prepare for the upcoming changes in April 2021.