CEST – Check Employment Status for Tax

We recently commented on the findings of a survey carried out on users of HMRC’s Check Employment Status for Tax (CEST) tool.  Of the 3,750 respondents, only 5% stated that they trusted the tool to accurately determine their tax status and only 4% trusted HMRC to keep its promise to stand by the tool’s result (a point disputed by HMRC).  Add to this the 20% of ‘indeterminable’ results and there are arguably significant issues which need to be addressed with the Federation of Small Businesses (“FSB”) going so far as to say that CEST is not fit for purpose.

The FSB reported that HMRC guidance says 85% of the status determinations are accurate and that in 15% of cases it cannot determine the outcome.  Perhaps the 85% that are reported to be accurate is because it produces a status determination, but is it accurate if it is not correct?  Certainly, court precedents and tribunal precedents are now proving that to be the case.  The FSB suggests that it is probably only about 50% to 60% accurate.

This article is not intended to discuss the finer points of determining employment status (which have been discussed previously), instead we want to point out the potential issues in the use of CEST a matter raised in a recent parliamentary committee which reviewed its effectiveness in the Public Sector.

CEST is typically used by individual’s and their clients to determine the employment status of the individual where they are not engaged directly as an employee by the ‘person’ on behalf of whom they are undertaking work.  Most often it is used by people who are unsure whether the engagement falls within what is commonly known as IR35, although it is also relevant to workers engaged as self-employed sole traders.

Since April 2021 it has, in most cases, been the responsibility of the end client to determine the employment status of the worker.  Given the size of these firms and the number of personnel engaged it is hardly surprising that we have seen an increase in the number of contractor engagements which are having a blanket determination issued to them by their end client.  21% of freelancers in the FSB’s survey reported that their clients had determined all engagements as inside IR35 without considering them individually.

It is worth noting that the determination is not valid if the client fails to take reasonable care in coming to the conclusion.  HMRC guidance states that ‘reasonable care’ is ‘acting in a way that would be expected of a prudent and reasonable person’ and it could therefore be argued that issuing a blanket determination is not acting in a prudent manner.

Thankfully, since April 2021, legislation has allowed individuals to challenge the determination if they disagree with it.  Thereafter, the end client has 45 days in which to respond either by issuing a new determination or standing by the original one.  This is however the only recourse the individual has to appeal.  There is an HMRC helpline, but it is reportedly difficult to obtain advice mainly because HMRC are still overwhelmed with the effects of Covid and do not answer the phone.  The FSB has reported that 90% of contractors who challenged the determination had it overturned.

It is understood that there are profession-specialist tools (which ask significantly more than the 12 questions posed by CEST) although HMRC enquiry letters state that “If you’ve used another test, we’ll ignore that. The only test we’ll acknowledge is the CEST tool”.  Given that CEST is guidance, not legislation, this may be another example of HMRC operating ultra vires.

What many end clients have not factored in with their blanket determinations is that, if they are stating that the individual would be an employee if it were not for the intermediary company, they are opening themselves up to challenge by the individual that they should have the same rights as an employee i.e. entitlement to paid leave, protection from unfair dismissal etc.

Many highly skilled workers are self-employed as it gives them the flexibility and autonomy to decide who they work for, oftentimes they have qualifications and experience far beyond any person employed by the client.  Following the private sector reforms, the FSB found that 30% of its members would leave contracting as a result of the changes, reporting that:

“There are lots of confusing and endless discussions about the regulations, which have resulted in projects stalling and clients not getting work done”

“I feel like I’ve been legislated out of business. I no longer wish to work in the UK”

“Clients are making blanket decisions, so I’ve stopped working. The client loses out on the experience that I bring and now I’m not paying any tax at all, so we all lose out”.

As a result of these individuals exiting, there has been a loss of some extremely high skills in various sectors with reports of individuals retiring or moving overseas (although it is difficult to say whether this is due to the private sector changes, Brexit, or Covid – it is most likely a combination of all three).

What is clear, given the number of high profile IR35 cases in recent years that there is a significant grey area in the interpretation of legislation and guidance and a prudent and reasonable person should probably seek expert unbiased advice.

HMRCs CEST tool can be found here

We previously wrote an article on Employment status which can be found here