HMRC's IR35 CEST tool: An introduction

It’s been criticised in parliament and condemned by tax accountants as not fit for purpose. In a series of blogs this week, IPSE will explore the CEST tool and why it is wholly inadequate.

First released in March 2017 as the Employment Status Service (ESS), the tool provides public sector clients with HMRC’s view of whether the intermediaries legislation, known as IR35, applies to an engagement.

The tool does this by assessing the worker’s responsibilities, who determines the scope of work, who decides when, where and how the work is done, how the worker will be paid and whether the engagement includes any benefits or reimbursement for expenses.  

Once complete, HMRC state they will stand by the given result, unless a compliance check finds the information provided isn’t accurate. The information is input anonymously and is not kept by HMRC, with the public-sector organisation or agency required to apply the correct tax treatment as dictated by the CEST tool’s determination.

Far from making it simpler though, CEST is actually exacerbating the situation.

When the tool was first launched a mere month before the IR35 reforms were implemented, it did little to assuage the fears of the contracting community. With so little time elapsing between its launch and the IR35 reform, the problems were immediate and plentiful.

The first being that workers, clients and agencies had scant time to assess the tool, point out flaws and provide feedback. That meant, unless the first rendering tool was perfect from the outset, many thousands of engagements could be inaccurately assessed.  

Staggeringly, according to HMRC, the tool is unable to make a determination in 15 per cent of cases. It is likely these are the most marginal cases therefore the tool fails to accommodate for the cases in greatest need of guidance. Surely longer testing and more feedback would have reduced this?

CEST oversimplifies what is an incredibly complex piece of tax legislation. As a short questionnaire, it lacks the intricacies required to make correct determinations on the tax treatment of engagements that should be made individually and subjectively.

One of the glaring examples of CEST’s lack of depth is the absence of a test for Mutuality of Obligation (MOO) – one of the central tenets of whether IR35 applies or not. HMRC believes that an obligation exists in every engagement, so their tool doesn’t test for it. As we’ll explore later in the week, HMRC’s position has been heavily criticised in court.

Public-sector clients are now responsible for making determinations about a piece of legislation they, understandably, have little grasp of. Having never had to consider IR35 previously, they now have little choice but to rely on a tool that is clearly completely flawed.  

With inaccurate determinations and blanket approaches meaning many legitimate contractors are being wrongly employed for tax purposes, chaos has manifested itself in the public sector. With the government now intending to extend the reforms into the private sector, the worst is yet to come.