CEST tool – New and Improved?
In light of the impending changes to IR35 in the private sector regulations, HMRC have been promising improvements to their existing online Check Employment Status for Tax (CEST) tool to help engagers more accurately determine employment status and establish if the engagement falls within the scope of the IR35 regulations. On Monday HMRC released the, much anticipated, new version of the CEST tool.
Historically there has been widespread criticism of CEST with the results often being overridden by the courts. So, does the new version offer the improvements promised?
Encouragingly there is certainly more depth to the questions now being asked. The tool now probes into areas such as mutuality of obligation and delves deeper into matters of control and financial risk – all key factors in determining status.
As before, the question of substitution remains and early question. Historically when it was confirmed that a substitute has been provided and that substitute was paid by the contractor, CEST would return an immediate verdict of self-employed with no additional questioning. Reassuringly the new version continues to probe into the other factors such as control and supervision, financial risk and mutuality of obligation. However, despite these additional questions being asked, clearly the issue of substitution is still somewhat of a “slam dunk” for being self-employed.
We have road-tested the new model. When responses are flexed suggesting the contractor was under complete control of the engager (with how, when, where and what being dictated by the end user and the worker bearing no financial risk), a verdict of self-employed was still returned. Only when the response to who pays the substitute was altered to confirm this as being the engager, did the outcome change to employed. This seems inconsistent with the approach we have seen taken by HMRC when conducting status reviews.
When a negative response is entered to the right to provide a substitute, the verdicts do become more varied, seemingly taking into account the level of control, financial risk and mutuality of obligation in place. As with its predecessor, CEST can still return a result of “unable to determine status” which is clearly not helpful.
HMRC vow to stand by the results of CEST but, and this is crucial, only when they agree with the answers given. As the questions are clearly subjective and based on individual interpretation of the engagement, it’s easy to see how HMRC could disregard the verdict of CEST.
The question remains – does CEST provide the solution to businesses looking to assess their contractor population ahead of the changes next April?
In short, not entirely.
Any tool asking a series of black and white questions, to what is a very grey area, is somewhat flawed by its very nature. CEST fails to consider the context of the engagement. The weighting that should be applied to the various aspects differs hugely between sectors and the specific role being considered.
CEST fails to consider the context, thus does not have the ability to discount areas that would otherwise be considered neutral. HMRC themselves confirm the need to stand back and paint a picture in order to establish the status. CEST is rather like the numbers on a dot to dot – a starting point but not a whole picture.
The limitations within the CEST tool are likely to be mirrored in other applications designed for the same purpose. As with CEST, any tool is only as good as the information entered into it. This information is open to interpretation and as such should only be a part of the process and not solely relied upon to make the determination.
It remains the case that employment status needs a human touch. CEST can be a useful addition to the process in determining status but should not be the only tool in the box. Seeking the advice of human experts remains the most effective way of reaching a reliable conclusion.
If you would like to discuss these changes, please do get in touch with your usual Baldwins contact or ask to speak to one of our employment tax specialists.