New government monitoring data shows that HMRC’s CEST tool delivers an inconclusive result a worrying 20% of the time. Between November 2019 and November 2020, CEST failed to deliver a verdict in 188,719 of cases out of 975,416. With reform fast approaching, we take a look at this ‘black hole’ in the tool’s logic and what it says about its’ ability to deliver a reliable verdict.

CEST found ‘Unfit for Purpose’

It’s long been the opinion of many professional bodies that CEST is a fairly rudimentary digital tool that relies on set questions and answers to achieve its verdict. Both the Taylor Review and the Lords Report found that the CEST tool does not reflect the complexities of modern working practices, which are highly complex and subject to a great many variables. Rather than allowing contractors to input details that relate to the individual circumstances of their contracts, the tool uses a formulaic approach to achieve a result without thorough evaluation.

According to HMRC, there are certain key indicators based on personal service, control and financial risk that will prove conclusively that a contract is ‘inside’ or ‘outside’ IR35. The logic behind HMRC’s CEST tool means that unless the contractor gives the ‘correct’ set answers, CEST is likely to produce an ‘inconclusive’ verdict. However, it’s been proven on many occasions that the tool is based on fundamentally flawed logic, leaving contractors and end-clients caught between a rock and a hard place.

Incompatible with case law

CEST’s simplistic interpretation of these key indicators does not accurately align with case law. For example, a right of substitution paid for by the contractor’s limited company has long been seen as a ‘silver bullet’ when it comes to IR35 according to CEST. However, unless this right is actually enacted, it would fail to carry much weight in court, making CEST’s reliance on substitution misleading. While contractors may, in some cases, arrange to carry out a substitution as ‘evidence’, it would become impractical to carry this out for each contract. This will certainly be the case when it becomes the responsibility of the end-client to determine employment status in April next year.

Similarly, neither Control nor Financial Risk offer a straight forward means of determining employment status. Many genuine contractors will agree a schedule of flexibility with their client, and many contractors will not incur financial risk, but will still be considered outside IR35 according to case law. Conversely, the CEST tool completely ignores ‘mutuality of obligation’ (MOO), which has been shown to be one of the most important factors when considering IR35 in a court of law.

In fact, it has been suggested that CEST is mostly irrelevant when it comes to case law, not least by HMRC themselves, who have argued to exclude its verdict on more than one occasion. HMRC also issued NHS Digital with a £4.3m tax bill after investigating a large number of IR35 status assessments made using the CEST tool.

Inconclusive verdicts leave contractors and end-clients at risk

HMRC have stated that they will stand by a verdict delivered by CEST, providing the ‘correct’ answers have been entered. However, the lack of certainty around what constitutes a correct answer when a large proportion of contracts don’t fit the set Q&A formulae leaves contractors in limbo. Faced with the same uncertainty come April 2021, it’s likely that that many end-clients faced with decisions carrying hundreds of thousands of pounds in tax liability will opt to reduce risk by automatically assessing contractors as inside IR35.

HMRC have already confirmed that the IR35 reforms will go ahead without further delay. They have recently updated their digital IR35 reform guidance, while also reopening IR35 investigations that were put on hold due to the coronavirus pandemic. Fortunately, use of CEST isn’t mandatory. There are alternative means for assessing employment status and reducing the risk of getting caught by IR35. Next time we’ll be considering the various options, so don’t forget to check the news page for regular updates. In the meantime, you can read our complete guide to IR35 here.

This content has been supplied by IR35 Guru.

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