IR35: HMRC updates CEST tool for off-payroll roll-out
HMRC has released a new version of its check employment status for tax tool. Rebecca Seeley Harris warns the CEST is not neutral and should be used with caution.
The check employment status for tax (CEST) tool guidance makes it clear that it will give you HMRC’s view of a worker’s employment status based on the information you have provided. If you think it is biased, it is, and intentionally so. Think of it as replacing the HMRC status inspector.
However, I wouldn’t advocate the use of the CEST tool as your only evidence in a status enquiry. There is nothing to say that using the CEST tool does constitute taking “reasonable care” in isolation of other factors.
Who can use it?
The CEST tool can be used by the hiring organisation or by the agency. Also, to assist the new client-led status challenge process, the CEST tool can be used by the worker to check the determination reached by the hiring organisation, and then challenge it.
Interestingly, HMRC says it will stand by a determination issued by the hiring organisation, even if the hirer does not know who the worker is. However, HMRC recommends that once the worker’s identity is known, the hirer can use CEST again to get a final determination that incorporates the worker’s specific factors.
The CEST test is anonymous, but HMRC recommends that you retain a copy of the results.
Is CEST required?
It is not compulsory to use CEST and the tool should only be used for determining employment status for tax and NIC purposes, not for employment rights.
There are certain situations that CEST should not be used for, and this is mainly for the self-employed working through an agency. In this case, the agency rules in ITEPA 2003, s. 44 may apply instead.
If a worker has the right to provide a substitute and does substitute in practice, the worker should be determined ‘not an employee’ and therefore outside of IR35.
HMRC has added some new parameters to the substitution test. The HMRC guidance suggests that an engager will have the right to reject the substitute if the contract specifies that the worker will perform the work and it is silent on substitution, or if the worker can only provide a substitute from a pre-approved pool of workers.
It is most important that the worker pays the substitute, not the engager, otherwise it is not substitution. There is a big difference between a substitution clause for a personal service company (PSC) and the right to replace by an agency.
The operation of control by the engager is obviously a strong indicator towards employment. The CEST tool addresses the issue of control by looking at four distinct areas: what, when, where and how.
Traditionally in case law, it is thought that the “what, when and where” factors are not as important as the “how”. If you can’t tell someone how to do the work, it is a good indicator of self-employment. In HMRC’s view, however, what is important is the existence of a right of control over all four areas.
According to HMRC, the first place to look to establish the existence of a right of control over the worker will be the written terms for the hirer. Apparently, consideration of working practices may also assist.
With regards to controlling where the worker carries out the work, the guidance is that the right to work at home occasionally, especially if the client can withdraw the right or the right is not in the contract is not an indicator of self-employment. Task-based locations are, however, acceptable as is the right to work from wherever the worker chooses.
Nature of the work
The updated CEST tool has new questions on the nature of the work and exclusivity, including whether the worker can work for another organisation doing similar work. It also asks whether the worker is subject to a restraint of trade clause. Restricting the worker’s right to work suggests that the worker is not engaged in an independent business.
Who owns the product?
The CEST questions now include ownership rights. The tool asks users to consider whether any assets are created or used during the contract. This could include intangible assets, such as intellectual property (IP).
Most contracts will assign the IP rights to the client. If the worker does not retain ownership, this could be an indicator that the worker is not an independent business.
Will HMRC respect CEST?
HMRC says it will stand by the results provided the information is accurate and it is used in accordance with their guidance.
However, this seems to be at odds with HMRC’s stance in recent cases (such as RALC Consulting Ltd TC07474) where it has sought to disregard the evidence of its own tool and argue against its output.
This included fining NHS Digital £4.3m even though the organisation had used the CEST tool as part of taking reasonable care.
There are many dissenting voices around the use of the CEST tool, but it does provide valuable evidence of what the worker needs to do to remain outside of IR35.
HMRC openly states that the CEST output is its view, and as in any legal argument, there are two sides. Rightly or wrongly this is simply how HMRC sees the situation.
It is important to remember that CEST is not a neutral tool.
You might also be interested in
Rebecca is a leading expert in ‘employment status’ and IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35...