Legal

Using CEST effectively to determine IR35 status

29 Mar 2021 By Rebecca Seeley Harris and James Poyser

With the new off-payroll rules imminent, Rebecca Seeley Harris and James Poyser explain how HMRC’s tool can work in the favour of contractors, despite the controversy

Come 6 April, HR directors and the labour supply chain will be on the hook for the off-payroll working rules. Some companies are holding out for a second reprieve but there is little chance. If businesses haven’t considered how they will take reasonable care to manage their contract workforce they will fall foul of the HMRC inspectorate – the intent is clear, it will enforce the rules and use the check employment status for tax (CEST) tool to build a legal defence.

Yet CEST has a bad reputation. Only 20 per cent of contractors consider it fair and 75 per cent believe third-party tools are fairer, to the extent that 86 per cent would pay for their client to use one instead. But, to provide context, HMRC’s latest usage figures, up to the end of February 2021, show that 48 per cent of determinations using CEST are deemed outside, only 29 per cent are inside and 22 per cent are ruled ‘undetermined’. This shows that CEST can work in favour of contractors provided there is clarity on what constitutes being outside IR35 in the first place. Indeed, there is no need to ban contactors from your supply chain if your working practices are solid. 

So, what can you do to make sure your use of CEST is sound and you have sufficient processes in place to manage challenges, stay compliant and attract the best talent for your specialist short-term projects? 

  • Understand that CEST is generic. When CEST was designed, it didn’t take into account all the nuances of different sectors and company operational models – an engineering firm runs differently to an advertising agency, for example. It’s therefore important to remember CEST acts as a high-level guide for all industries, meaning: first, every business will need to provide additional evidence to support an assessment outcome of inside; and second, employers will need to fully understand how the questioning relates to the idiosyncrasies of its industry. It’s also worth noting that because CEST can’t be specific, it’s fine to use external expertise to increase your confidence in a status outcome.
  • It’s advisable to have a contract management system providing an audit trail for both the contract and the provision of the status determination statement, so you can keep track and document the process to provide a clear-cut status. 
  • You must have a copy of the contract when you run a determination as CEST assumes the worker is already under contract. This is often overlooked and underlines the fact that you should not be running tests speculatively. 
  • You should communicate with the worker on the final section of CEST – worker’s contract – so your determination is not just based on the role, but on feedback from the worker as well. This is how contractors can build their case, so take care to listen and have an open and fair conversation. 
  • Mutuality of obligation (MOO) is the clause that causes the most concern. HMRC’s view has been highly criticised and courts have discredited its approach too, because CEST can miss cases when an outside status should be given. Even so, the CEST tool continues to incorrectly assume it's always present. If there's a lack of MOO, evidence can and should be provided as to why it is important in the contract you are assessing.
  • Substitution. Another grey area and, while it may be the silver bullet in practice, it isn’t for HMRC. That’s because CEST does not depend on the occurrence of substitution – someone can still fall outside IR35 without it.

Contractors are the lifeblood of our economy contributing billions to GDP. They deliver imperative change that keeps the UK’s plc innovating and progressing. Cutting them out is not the answer. Instead, it will take a strategic view of employment, solid working practices and a healthy regard for CEST. 

Rebecca Seeley Harris is an employment status expert and author of CEST Explained, and James Poyser is CEO of inniAccounts and founder of offpayroll.org.uk

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