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CEST & IR35; The Low Down

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Emily Ward-Masters

I know the government is promising to 'review' IR35 but I'm a sceptic who already wrote this post so... I'm back on my favourite topic!

But this time our friends at HRMC have something new up their sleeves. The ever elusive CEST Tool has been updated. For those of you not as emotionally attached to it as me, CEST is the online tool to 'Check employment status for tax' that is supposed to be used to determine a contractors IR35 status.

Now that responsibility for determining IR35 status reverts from the contractor to the end hirer in April 2020 this is big news. It at least shows willing on the part of HMRC to offer help in navigating the tricky legislation.

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CEST's previous incarnation was about 4 questions long and rarely did one utilise it or trust its outcome. But post update it's looking a lot racier. Ironically, this news landed in my inbox approximately 17 seconds after I paid a consultant to review the test I wrote myself.

Is CEST here to save us?

Well, considering I just paid for a second opinion, in addition to the hours of my own time I already spent researching and writing succinct and customised tests, I was secretly hoping not. And unfortunately, perhaps I was right not to pin too many hopes on it.

As a person who has been rather vocal (to a very small disinterested audience) about where the old CEST tool fell short I can admit whole heartedly that the new version is certainly a huge improvement. But should we all drop our outside methods and utilise CEST in order to determine an IR35 status? First let's discuss its back story.

The History of CEST

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The CEST tool launched some years ago amid zero fanfare and was largely ignored thereafter. It contained about 4 questions and most contractors and their tax advisors would file away the certificate but undertake their own due diligence. Contractors favoured paying independent experts to review their status, especially the individual contracts signed per engagement.

CEST's main criticism was that HMRC purposefully omitted the concept of mutuality of obligation from the original test (allegedly). Generally we consider this area to be one of the key indicators of outside IR35 status, as proven by extensive case law. But it was oddly missing in any capacity from the original test and therefore could swing decisions in the wrong direction.

Arguably the topic is probably too complex for a simple yes / no weighted answer test to actually work completely, so the human touch was always preferred. The new test still doesn't actually cover mutuality of obligation but it does goes into a lot more detail (27 questions to be exact). But now the IR35 status is the responsibility of agencies and hirers we're still seeming to favour external guidance, does this update to CEST change that?

How important is CEST now?

Look, I recognise that HMRC themselves wrote the CEST tool and claim to 'stand by the result' but in my experience IR35 is so far from being cut and dry that no one except a court presiding over an individual case can unpick it properly. The associated guidance seems to be more fruitful than the questions themselves. As a person who is genuinely just out here trying to work out what inside and outside IR35 actually look like legally, CEST hasn't really make it clearer.

In my opinion the questions remain unduly weighted on the topic of substitution and in the cases where a substitution wasn't actually necessary, the court cannot discuss this as a primary factor and would end up arguing over smaller more irrelevant details.

The key of question of IR35, although no one cares to admit it, is not really whether the worker should be a freelancer but more whether the client could have just hired a permanent member of staff instead. CEST goes into detail a lot about the aforementioned substitution topic and then further onto supplying equipment and the contractors financial risk to finish the task but it does not expose the basic premise of each engagement. Could the work available be done in the exact same manner and circumstance, but by an employee? If the answer is yes and there are no extenuating business reasons, there isn't much wiggle room to argue something as outside IR35.

So what's the problem?

CEST will not expose this element. Answers can be contrived, albeit rather innocently and without fraudulent intent, and CEST may indeed spit out an outside IR35 answer. But HMRC is under no obligation to back a CEST decision if a worker comes to their attention and they open an investigation. In that case the only line of defence is broken down and you're completely exposed.

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I mean technically the client as the 'hirer' is supposed to run the test and contractors are to contribute to the testing. But we're the recruitment experts, so instead of clicking around on CEST of your own accord and getting this crushing error message (I foolishly went to Starbucks 2 questions from the end) why not just come speak to JCW about the reinforced lines of defence we've already got to offer.

Let’s talk: emily.ward-masters@jcwresourcing.com.