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Head to Head with the Check Employment Status Tool (CEST)

David McManus

David McManus | Personal Tax Manager

Monday 24th Jun, 2019

Over the past year or so much has been written and said about this HMRC creation and it is destined to figure prominently in the lead up to April 2020 when the off-payroll working in the private sector rules are scheduled to come into effect.

Although we don’t know yet what the final format of the tax legislation will look like, we can be pretty confident that CEST in its current or slightly amended form will be at the operational end of it.

What is CEST?

CEST is an online tool on the HMRC website which assists an individual to determine their employment status. It will work out whether or not “a worker on a specific engagement should be classed as employed or self-employed for tax purposes”.

If accurately completed HMRC claim that the answer provided will produce the correct status and that they will accept the determination.

What is the issue with CEST?

The CEST is based wholly on HMRC’S interpretation of employment and tax law.

HMRC’s interpretation of employment status has been rejected in a significant number of recent cases before the Tax Tribunals.

A number of contracting industry and professional tax and accounting bodies have pointed out the inherent flaws in the CEST during the recently closed Consultation on ‘Off-payroll working Rules from April 2020.’ HMRC has yet to respond.

What is it getting wrong?

Here’s why we and the industry believe that the CEST, in its present form, is getting the determination of employment statuses wrong in many cases:

  • According to HMRC itself the tool is unable to make a determination in 15% of cases. These are likely to be the most marginal cases where the greatest guidance is needed.
  • Employment status issues involve complex tax legislation. The CEST lacks the sophistication to make correct determinations on the tax treatment of engagements that need to be made individually and subjectively.
  • One of the outstanding examples of the CEST’s shortcomings is the absence of a test for mutuality of obligation (MOO) which is a core pillar of whether IR35 applies or not. HMRC believes that an obligation exists in every engagement so CEST doesn’t test for it. The Courts have rejected HMRC’s view.
  • The CEST appears to be overly reliant on whether or not the individual has the right to use a substitute.
  • The test relies upon answers to a small number of questions which cannot reflect all real working life scenarios. It cannot take into account working practices or any number of nuances which apply in the real world.

What are the consequences of these flaws?

A real concern for contractors in the private sector is that agencies and end clients may use the CEST exclusively to test roles and assignments and come up with the wrong answer.

So what’s the solution?

Rather than be hostage to fortune we strongly recommend that contractors and agencies consider PayStream’s IR35 review service - IR35 Comply - to help them reach a balanced decision. All the key aspects, including the critical mutuality of obligation assessment is factored into the decision-making process.

We closely examine both the working practices and the contractual terms.  

Guidance on the law is provided for the user and an opinion as to whether a role or a contractor is inside or outside IR35 is given in every case. Users also have access to an IR35 support line.

IR35 Comply is operated via our innovative online portal. Where required, the portal will send a review to the agency and/or client for sign off and there is an  appeal’s process should a contractor disagree with the outcome and want to provide further information relevant to his/her circumstances.  There is also an auditable trail of evidence in the event of any HMRC challenge.

We are aware that HMRC have undertaken to look at the adequacy and accuracy of the CEST and we will probably find out more when a response to the Consultation is published later this year. However HMRC’s track record of admitting errors and putting them right is not great and we should not expect wholesale changes.

Obtaining an independent, balanced review of employment status will be critical for everyone in the supply chain whatever the outcome of HMRC’s potential changes to CEST.  

PayStream can help

If you’re an existing client of our accounting service, My PSC, IR35 reviews are included in the service at no additional cost.

If you’re an agency and you would like more information or a demo

Call 0161 923 0204 or email us at agency_support@paystream.co.uk

Related Article -  IR35: Are HMRC priming contractors for what's to come?

We have recently seen a number of letters from HMRC received by contractors working for a well-known end client in the engineering and construction industry.

The letters ask the contractor to check their employment status whilst they carried out work for this particular client. The implication from the letters is that HMRC have their doubts that contractors are or were outside IR35 whilst working on this contract.

Read more here