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image of ripping rules up | accountingweb | IR35: CEST tool has not been updated in five years

CEST stagnates as HMRC makes its own rules


Despite promising to continually update its tool for checking IR35 status, HMRC has not changed it for five years.

4th Apr 2024
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HMRC’s check employment status for tax (CEST) tool has been in use since February 2017 and the much-maligned tool has been relied on by countless firms to assess IR35 status for the past seven years. 

However, a recent freedom of information (FOI) request has revealed that contrary to explicit promises made by HMRC to Parliament to update the CEST tool as case law evolved, that update has not happened, and CEST has stagnated for five years. So, it begs the question, what is going on?

HMRC’s narrative around the promise previously given by their head, Jim Harra, to Parliament on 4 March 2019 to continually update the tool in line with the case law has morphed into a pledge to continually test the tool, which is not the same. 

For example, it doesn’t matter how often you keep checking the results of your spreadsheet calculations if the underlying formula is wrong – checking them doesn’t change the formula. From a software testing perspective, if the underlying formulas or code are accessible, one doesn’t need to try to ascertain if they are correct by looking at the test results. You can examine the original formulas.

No change in five years

An HMRC spokesman confirmed that CEST had not changed in five years but also claimed that HMRC did not need to update the decision engine because it did not consider that the status case law had changed during that period. Let’s unpack that claim.

I spent six years helping with the Atholl House court of appeal case involving broadcaster Kaye Adams, and have assisted with many other IR35 tax tribunal cases over the years. Having had sight of HMRC’s legal arguments in written court-submitted documents, both before the Atholl House decision and after, there exists unequivocal evidence that HMRC has rowed back on interpretations of case law they submitted to the court of appeal after their rejection on 22 April 2022. 

Are we now expected to believe that HMRC instructed their barristers to submit legal arguments to the court of appeal, which HMRC disagreed with and had not used in their CEST tool? I think the HMRC spokesperson has inadvertently released a provably false claim and is expecting us to reject the evidence of our eyes and ears.

Skewed determinations

Suppose we accept the premise that HMRC’s tool is not fully aligned with the binding principles from the court of appeal, thereby producing skewed determinations towards “employed for tax purposes” (inside IR35). In that case, we have to ask why. In my view, these are the possible reasons.

  1. HMRC attempted to build a status tool quickly but failed to meet its objectives.
  2. HMRC wanted only to release a tool that provided firms with certainty, so it purposefully set the “outside IR35” bar very high.
  3. HMRC built and released the tool, purposefully designed to produce a behavioural effect that would encourage firms to misclassify vast numbers of contractors, thereby collecting more tax.
  4. HMRC deliberately tried to kill the contracting industry, where individuals operate through limited companies.

My opinion is that 1 and 2 are most likely and that 3 happened not by design but because of 1 and 2. As for 4, that’s for the birds – if HMRC wanted to kill off contracting, there would have been far easier ways to do it.

Non-runner from the start

Because of what’s happened, HMRC now appears to be standing around a broken car that has always been a non-runner from the start, claiming it can win the next Grand Prix. HMRC’s change in the narrative around their original claims to continually update CEST to one of only continual testing seems designed to spare their blushes and more focused on protecting their reputations than meeting their duty of care to treat taxpayers fairly.

Readers who follow my IR35 musings may be aware of my obsessive time assisting with IR35 tax tribunals or watching them as part of my IR35 tax defence work. It’s increasingly frustrating to observe that HMRC inspectors use different arguments during their casework than those HMRC counsel uses at tax tribunals.

I’m not the only one to have spotted this. Alice Jeffries from the Confederation of British Industry (CBI) brought the issue to the attention of the House of Lords on 6 December 2021, when she provided oral evidence and told Parliament: “Where HMRC guidance and case law are not in alignment, either because HMRC’s view on something does not align with case law or because it has not been updated – the guidance tends not to be updated on a particularly regular basis for case law outcomes – businesses are left in the position where they are told that if they take this to court they will get one outcome, but HMRC is saying that it can rely on another outcome.”

Breaking the rules

During the Covid pandemic, readers may recall the brouhaha around Partygate, where the rule makers at 10 Downing Street were found not to be following the rules they made for everyone else to follow. The classic scenario of “one rule for them and another rule for us.” Based on my first-hand experience, I agree with Jeffries, and to paraphrase the words from Partygate, HMRC appears to have adopted the mantra of “It’s one rule for us – and another rule for us.”

So, here we are. The CEST bonnet is open, and we’ve discovered what many have been saying for years – it’s always been a non-runner. By encouraging its use, HMRC has ploughed through taxpayers’ legal rights and driven our valuable, flexible workforce into the ground. Yet, they still dare to stand around waving the chequered flag.


Replies (5)

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By Paul Crowley
04th Apr 2024 13:25

I really do not think the cest tool was intended to be neutral. So much depends on nuances, any such tool can only be capable of delivering a biased result based on simple questions.
It could state, on those questions, that the person is not an employee quite confidently. It cannot state the opposite.
Failing the cest test does not mean that IR35 applies, it means that a human needs to look at the full facts.

Thanks (4)
By Justin Bryant
04th Apr 2024 15:00

Or as they say in France: plus c'est la même chose.

Thanks (1)
By FactChecker
04th Apr 2024 19:41

The tool was never going to 'work' (in the sense of giving a categoric answer) ... and HMRC actually admitted this right from the start when they said (possibly not the exact words but the gist is correct):

* "We will stand by the outcome of any 'determination' arrived at through the use of CEST"
- which of course, and as intended, was the bit that stuck in the minds of many;

BUT that was only the first part of this 'commitment', which continued:
* "but only if we agree that the correct facts were input throughout"
- which not only doesn't define 'correct, but is really saying the decision is always up to HMRC!

Not surprising since the complexity of the regs, and even more those of real business life, are such that they don't lend themselves to a mechanistic online questionnaire.
Of course that points the finger back at the legislation (for not being amenable to easily interpret in common situations), but that's not the story here ... which is HMRC lying about CEST.

Thanks (5)
Replying to FactChecker:
By johnjenkins
05th Apr 2024 09:45

IR35 was never, will not and never will work. OK HMRC have won a few cases but to me they were either obvious or the tax payer was too frightened to take them on.
The reason is simple. The concept is wrong. Taking away Limited Company status purely to receive more funds for the coffers?
I have always said this to the point where it must be boringly obvious, HMRC shouldn't have any say in employment status whatsoever. Why should they? Employment status is a commercial decision not a tax one. The fact that HMRC have not updated means quite clearly they think they can do what they like.

Thanks (1)
By silverghost
07th Apr 2024 12:42

The old Employment Status Indicator stayed the same for four years, between 2007 and 2014. HMRC. after some lobbying, added version numbers but then took them away.

Thanks (0)