The problems with using CEST as your IR35 status tool in 2022
We get why end-clients and recruiters are tempted to use HMRC’s CEST tool. We really do. It’s easily accessible, quick to fill in and free. HMRC have also seemingly pledged to stand by the results of the tool if the information has been entered correctly and remains accurate throughout the engagement. But – as we wrote last year – we’re firm believers that CEST isn’t best – and we have a growing body of evidence that we think backs up our case. Read on for our rundown of the biggest issues with CEST in 2022 – and what recruiters and end-clients can turn to if they’re not happy with their current IR35 solution.
CEST fails for government departments
At least 3 government bodies have been fined or required to pay hefty tax bills after failing to correctly assess the employment status of their contractors – the Department of Work and Pensions (DWP), the Home Office and Her Majesty’s Courts and Tribunal Service (HMCTS). Our expert Head of Tax, Andy Vessey, took a deep dive into these three cases for us. At least two of the departments – the DWP and HMCTS reportedly used CEST as their sole method of assessing contractor status at that time. This suggests that relying upon CEST alone isn’t a smart move – as we have feared, it’s not a complete or fully reliable tool. While HMRC promise to stand by CEST determinations provided that accurate information has been fed into the tool, and the tool has been used in line with guidance, this is clearly not a hard and fast guarantee of the tool’s reliability and doesn’t exempt organisations or businesses from being pursued for off-payroll tax.
It overlooks Mutuality of Obligation (MOO)
CEST has little focus on Mutuality of Obligation (MOO), one of the key IR35 status tests from case law. CEST is only interested in MOO in a general sense – whether a contract of any kind existed in the first place. Case law, however, shows that tribunals have frequently delved into more detail around MOO, interested in whether the obligation that exists is “a contract for services” or “a contract for service”, i.e. is the engagement genuine contractor working (outside IR35) or is it more akin to an employee-type relationship (inside IR35 – with higher and more specific degrees of obligation)? Because the CEST tool ignores this distinction entirely, it is unlikely to be able to fully assess the status of a contract
CEST is regarded in the industry as having confusing wording and questions that can be open to interpretation. Users of the tool have complained that the wording of the questions is not nuanced enough to capture the complexity of many contracting relationships. People using the tool also often find that some of the answers are too similar to each other, leading it to be hard to know which you should select to accurately reflect your circumstances. This leads us nicely onto…
All too often, users of the tool are left not knowing where they stand. Last year, over 210,000 users of CEST received an indeterminate result, according to statistics from gov.uk. More than a million users put their data through the CEST tool between 25th November 2019 and 31st May 2021, and a staggering 21% of these were left without a clear-cut result. An indeterminate status assessment result is bad news for everybody. The user is in limbo, your contractor can’t get started at work, the end-client can’t produce the required status determination statement and the only advice HMRC offers is to call them directly or use their Employment Status Manual, which isn’t necessarily user friendly to say the least.
An IR35 tool that works
With HMRC’s “soft landing period” for the private sector IR35 rules coming to an end on 6th April, now is the time to make sure your IR35 compliance is watertight. During this first year, HMRC has offered clients, agencies and other types of fee payers 12 months’ grace from penalties while they get to grips with the new rules, except where there is evidence of deliberate non-compliance. But after this date, businesses will be expected to be implementing IR35 guidance without error, and there is evidence that compliance checks have already begun.
If you’re not confident relying on CEST, a tool that has proved to be something of a blunt instrument when it comes to the nuances of contractor engagements, then there are other solutions available.
Kingsbridge has its own IR35 Status Tool, with clear, precise questions developed by our Head of Tax, Andy Vessey ATT. Andy is considered a leading authority on IR35 with more than 40 years of experience in tax and has dealt with IR35 since its inception in 2000. Andy has successfully defended more than 550+ IR35 enquiries, including Jensal Software Ltd at the First Tier Tax Tribunal in 2018.
Indeterminate results are far less likely with our more in-depth questions, but if the automated questionnaire is unable to deliver a firm answer on your contract, the case will be passed onto our team of IR35 experts for manual review, meaning you’re never left with the uncertainty and delay of an indeterminate case. The decisions delivered by the tool can also be backed up with our IR35 Protect insurance. This policy is designed to be held by contractors or recruiters and flexes to cover whoever HMRC deems liable in the event of an investigation. To find out more about our IR35 solutions for recruitment businesses, contact our team today.