CEST is not best: inefficiencies, inaccuracies, and a hung jury

The Check Employment Status for Tax (CEST) tool has been a source of contention since its launch in 2017. The tool was initially created to help businesses determine the employment status of any contractors they engage. But since then, it has been heavily scrutinized for its inaccuracies by official bodies, like the House of Lords, and the contracting community at large.

Unfortunately, it appears the controversy surrounding CEST won’t go away anytime soon. A recent survey by Kingsbridge reveals that many contractors, recruiters, and businesses remain sceptical of the tool’s ability to provide accurate IR35 determinations.

In this post, we’ll take a closer look at these inefficiencies and inaccuracies, as well as highlighting what other options are available for getting more accurate Status Determination Statements (SDS).

Why does CEST continue to divide contractors, recruiters, and businesses

According to data from the Kingsbridge survey; 50% of contractors, 40% of recruiters, and 48% of businesses who engage with contractors, reported they didn’t trust the CEST tool.

But why is this? There are several potential reasons.

1. CEST doesn’t fully reflect case law

One big criticism is that the tool does not fully reflect case law. The Employment Lawyers Association, for instance, argues that “CEST applies a higher standard to demonstrate self-employment than is true of applicable case law.” That means CEST sets a more stringent criteria for proving one is self-employed compared to the legal standards outlined in past court rulings.

Usage data from CEST between November 2019 and August 2021 showed that it was unable to deliver a verdict over 233,000 times. It was used 1,125,408 times and produced the following results:

• 49% of cases determined outside IR35 (558,346)
• 30% inside IR35 (333,431)
• 21% undetermined (233,631)

As a result, there’s a prevailing belief—whether true or not—that CEST has a natural bias for classifying contractors as employees.

2. HMRC’s historical disregard of CEST results in IR35 disputes

In the past, HMRC has disregarded its own CEST determinations during IR35 disputes. Perhaps because of that, 40% of contractors and 46% of businesses engaging with contractors don’t believe that HMRC would stand by a CEST determination.

An example of HMRC going against its own tool is the case of NHS Digital. The organisation believed that its contractors had an unfettered right of substitution. As a result, CEST gave an outside IR35 result. HMRC, however, challenged the result and NHS Digital ended up being slapped with a hefty £4.3M tax bill in 2019.

Andy Vessey, Head of Tax at Kingsbridge said, “The courts would also place very little weight on the result of CEST because it is not legally binding, and the courts will always form their own view based on the facts and the legislation, not HMRCs own status tool.”

In practice, even HMRC are likely to seek to find a reason to reject the answer if they think it is wrong. If it is reliable as HMRC claim, then logically HMRC ought to use the tool before litigating a status dispute. If it says the engagement is within IR35, the appeal can proceed to Tribunal in the sure knowledge that the Tribunal will find in HMRCs favour. However, this is not what happens in reality. HMRC appear to lose as many Tribunal cases in this area as it wins which suggests that CEST is reliable only 50% of the time

3. Negative user experience

When asked, 54% of contractors and 44% of businesses surveyed by Kingsbridge, reported that the tool was unclear and that it didn’t provide a particularly good user experience. This negative experience can cause uncertainty when answering determination questions, cultivating distrust in the tool and the results it provides.

HMRC tried to make improvements to CEST in 2019

Despite updating CEST in 2019 after public discontent from users, data still shows that it didn’t lead to any marked improvements

For example, the stats show that ‘undetermined’ status outcomes rose from 19% to 21% between November 2020 and August 2021. Additionally, CEST determined almost half (49%) of cases to be outside IR35. This perhaps shows that CEST is not reflective of the applicable case law.

In 2020, the House of Lords conducted a deep interrogation of the tool to establish whether it was fit for purpose. In the end, they concluded it didn’t meet the necessary threshold for a fair and accurate employment status determination.

So what are the implications for businesses who continue to use CEST when engaging with contractors?

Despite the evident mistrust of CEST, half of businesses who engage with contractors still opt to use the tool. Andy Vessey, Head of Tax at Kingsbridge suggests that this could be due to the fact that it’s free to use and convenient. He warns that relying only on CEST might not be in the best interest of the business.

“CEST should be, at best, used as a rough guide to determine status, but it is not, by any measure, a conclusive answer to whether IR35 applies”.

It’s true that both agencies and contractors don’t have much influence over which SDS tool a business uses. Indeed, according to Ryan Dawson, IR35 Project Manager at Kingsbridge,

“Agencies will often follow the lead of their clients’ choice of SDS tool, provided it is a bona fide tool. They may prefer not to challenge their clients’ choice, so to avoid compromising their relationship.”

Still, businesses should be wary, there are cases where their choice of SDS tool could lead to them losing out on the services of skilled contractors and recruiters. In Kingsbridge’s survey, 34% of contractors and 37% of recruiters said they would choose not to work with an end client who decided to use CEST.

Can the Kingsbridge IR35 Status Tool provide an alternative solution?

It’s clear that across the supply chain there are valid reasons for mistrusting CEST. However, there are other choices available to help businesses, recruiters and contractors mitigate their risk.

One option worth looking into is the Kingsbridge IR35 Status Tool. Developed by Andy Vessey, Head of Tax and other in-house experts at Kingsbridge. The tool incorporates real-life IR35 case factors into assessments, so you can be sure you’re getting a more accurate IR35 determination.

In the event that the tool produces an indeterminate result, Kingsbridge’s in-house team of IR35 specialists will manually review your case, ensuring you will always get a 100% determination.

You can also combine the Kingsbridge IR35 Status Tool with Off-Payroll Protect Insurance, which helps protect a business in the event of a HMRC enquiry.

Contact the team today for further advice and to get a free quote.

To read the full whitepaper, please click here.