Determining your status: CEST is CRAP

As we’ve discussed, end clients will now be responsible for determining your IR35 status. To date, they have been excused from the burden of administering IR35, but this is about to change, and the scale is unprecedented.

There are currently 60,000 private sector clients collectively engaging 400,000 limited company contractors and consultants. From April 2020, the clients will need to assess every single one of these 400,000 contractors and consultants.

This is a huge undertaking – remember that IR35 is more than just a review of a contract, it’s all about the reality of working practices.

HMRC foresaw this challenge and developed an online tool known as the “Check Employment Status Tool” (CEST). The client can follow this online wizard, answer some questions, and the tool will determine the status of an engagement. And HMRC will stand by the results.

It sounds great in principle, but in practice, the CEST tool is deeply flawed.

It’s missing a vital part of the law (“MoO”), meaning it’s stacked in HMRC’s favour

A key part of employment law is Mutuality of Obligation (MoO). MoO means that a company is obliged to provide future work to an individual, and the individual is obliged to accept it. This is how employment works. An employer gives an employee work, and the employee is expected to do it. Employees, therefore, have MoO. 

If you’re a contractor or consultant, and you’re in the business of your own account, then you may expect a client to hire you for a specific task with no obligation to provide you with further work once the contract expires. Whilst you might be contracted to deliver a piece of work, this is not MoO, as recently ruled by a judge: “the mere offer and acceptance of a piece of work does not amount to mutuality of obligations in the context of employment status.”

This is important: the absence of MoO is a strong indication that someone is outside IR35, and many IR35 court cases have been won with this approach.

But here’s the problem: the CEST tool does not ask any questions related to MoO. Instead, it presumes it exists. When the judge in the above court case proves that’s not the case. This means the CEST tool is likely to return a false positive, stating that a contractor is inside IR35, when in fact, they’re not. 

HMRC isn’t standing by the results

HMRC’s guidance says “[we] will stand by the result given unless a compliance check finds the information provided isn’t accurate”. Which is a pretty big get-out clause. 

NHS Digital now knows this only too well. In October 2019, NHS Digital’s annual report made reference to a £4.3m provision for IR35-related taxes. NHS Digital used CEST to undertake “considered assessments of the status for each individual contractor, which we believed met the HMRC requirements”. They followed HMRC’s guidance. They used HMRC’s tool. But HMRC didn’t stand by the results and served them with a £4.3m tax bill.

HMRC is losing cases when challenged in court

HMRC has a terrible track record of getting IR35 assessments right. Over the last ten years, HMRC has lost 9 out of 10 IR35 court cases. HMRC has a tendency to over-simplify the law, ruling people inside IR35 and demanding payment. For contractors who’ve challenged this in court, the case is unpacked by barristers and judges who understand the complexities of the law, and HMRC invariably loses.

CEST is likely to increase the number of successful court challenges by contractors and will increase HMRC’s losing streak. 

That’s because CEST adopts HMRC’s oversimplification of employment law. Many legal experts have looked back at actual IR35 cases and used the evidence to answer the CEST questions. CEST has decided these cases are inside IR35 when judges ruled the same cases outside IR35. CEST doesn’t follow the law.

In another case, HMRC challenged a contractor in court who they thought was inside IR35. The court ruled them outside IR35. What did CEST say? Outside IR35! Even if the tool gets it right, HMRC won’t listen.

The sum of ommissions and oversimplifications in CEST mean it’s an unreliable tool which doesn’t stand up in court. It should be avoided at all costs.

HMRC is bullying people with CEST to overpay tax

The sum of these first three flaws means that HMRC could be seen to be bullying clients, contractors and consultants into paying more tax than they should, by pointing them to a shonky tool. It’s stacked in their favour. If it makes a decision HMRC doesn’t agree with, they will investigate. If it makes a decision you don’t agree with, then it’s tough. 

And many clients, contractors and consultants won’t settle for this and will be confident challenging HMRC in court. Given HMRC’s form, the contractor will likely win, particularly if they have IR35 insurance to foot the legal bills.

But that’s not the same for everyone. For every client, contractor and consultant who are happy to fight their corner, there’s an equal or greater amount who won’t have the confidence to challenge HMRC. They’ll simply pay more than’s due to avoid conflict with HMRC. That’s not fair.

There is no happy outcome for companies using CEST

When assessing IR35 status, the stakes are too high for companies to get it wrong. Here’s why:

Contractors and consultants walk away

We’ve already seen contractors and consultants walk away from high profile projects where they’ve been deemed inside IR35 thanks to CEST. Ironically, we understand the team developing the CEST team suffered a walk-out by contractors.

Most ambitious organisations value their contractor and consultant workforce and want to assess them fairly. CEST is incompatible with this view.

The right to appeal is a time drag

The client has to provide the contractor or consultant with a written decision, called a Status Determination Statement (SDSs). The contractor has the right to appeal this, and the client is legally obliged to respond.

If they’re using the CEST tool they can expect a barrage of appeals with the very simple question, aimed straight at CEST’s jugular: “Can you show me why the absence of MoO was not considered in my case?”. 

HR managers won’t get the answer looking at the CEST tool verdict. To fulfil their obligations they’re going to need to get some outside help. The business case will soon stack up to get it right first time rather than deal with SDS appeals, which means sacking off CEST.

They rule someone inside IR35, and end up in court

This is probably our favourite IR35 story. Susan Winchester was a marketing contractor working for HMRC (rub your hands, this is a good one). HMRC used CEST and determined that Susan was inside IR35. 

Susan accepted the inside IR35 verdict but took HMRC to an employment tribunal on the basis that given she was now effectively an employee, she should have all the rights of an employee! In her particular case, she claimed for over £4,000 of unpaid holiday pay from HMRC. HMRC settled out of court. It’s odd to think that HMRC is policing these rules when they can’t get it right themselves.

It’s a stark warning for companies too – you’ve got to get your assessments right, and an incorrect inside IR35 decision is just as risky as an outside IR35 one.

CEST shunned and clients left with no support

We mentioned that NHS Digital used CEST and still got hit with a tax bill. So what are they doing now? Are they turning their back on contractors? No. They, like most organisations, know how important contractors are:

“Up to December 2018, we assessed all contractors using the toolkit supplied by HMRC. From January 2019, we are now making an initial assessment internally. Any contractors considered to be outside of scope are then being reassessed by an external provider… We are now additionally using a third-party assessment for completeness.”

NHS Digital is giving up on CEST and using third parties to do the assessments. And they’re not alone.

But there aren’t enough third party assessors to keep up with demand. This is why we’re seeing blanket bans on limited company contractors: there are 400,000 contractors that need assessing and very few people with the skills needed. A temporary blanket ban is the only choice for many large organisations.

Next → Up next in this guide: IR35 blanket bans

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