Are businesses better protected by using the Government’s CEST tool?
When supporting thousands of businesses with IR35 reform, we encounter many different questions about this notoriously complex tax legislation. Here, Qdos’ Head of Tax Nigel Nordone, draws on his extensive experience and 20 years working as a tax inspector, to untangle certain aspects of IR35.
This week, an end-client focuses on the issues surrounding HMRC’s Check Employment Status for Tax (CEST) tool, asking if their business is better protected by using the government’s IR35 technology:
“I’m well aware of the many concerns that contractors have with regards to HMRC’s CEST tool. However, surely when it comes to assessing their IR35 status, HMRC is less likely to investigate us if we’ve used the tool? It is, after all, the taxman’s very own technology.”
You would think so. However, HMRC won’t necessarily stand by an IR35 determination that’s been made based on information provided by CEST- as illogical as that sounds.
As the Government’s Employment Status Manual states: “HMRC will stand by the result provided the information is accurate and it is used in accordance with our guidance.”
“Where there are subsequent material changes to contractual or working arrangements, the information originally provided may no longer be accurate and HMRC will not stand by the original outcome. HMRC would recommend that you complete CEST again to consider the new arrangements.
“HMRC will not stand by results achieved through contrived arrangements that have been deliberately created or designed to get a particular outcome. We would see this as deliberate non-compliance, and you risk financial penalties.”
What HMRC means here is that they will not accept an answer delivered by CEST if the user has answered any of the questions incorrectly, whether deliberately or not. This effectively means that CEST offers no guarantees. If a user punches in the wrong information into the tool and HMRC investigates, finding that the contractor in question is working under the wrong IR35 status, the business will be held responsible.
This is a major issue, and perhaps one that deserves greater focus. IR35 itself is ambiguous and complicated, with numerous factors needing to be considered when assessing the IR35 status of a contractor. To leave it not only to the fundamentally flawed CEST but also up to people within an organisation who up until now may have very little if anything experience in IR35, poses a risk.
One wrong turn on CEST – which has been criticised for being a tick box exercise that gives little opportunity for the inclusion of supporting information – and a business may incorrectly determine IR35 and therefore become non-compliant. HMRC meanwhile, is unlikely to have any sympathy.
We have already seen an example of this, in the public sector in 2019. Despite The NHS having used HMRC’s IR35 technology to assess the contractors it engages, this public sector body was hit with a staggering £4.3m tax bill, after the tax office found the incorrect information had been supplied.
Added to this, CEST has been disregarded not one but twice at IR35 Tribunal, and an answer the tool provided was even described as “irrelevant” by HMRC themselves.
To conclude, while HMRC heavily endorses this IR35 tool, the fact of the matter is the taxman will have no hesitation in scrutinising the way in which a user has completed the test.
As a result, I recommend that businesses avoid relying on CEST to determine IR35 status. After all, it isn’t mandatory. If there is resistance internally and stakeholders insist on using the tool in some capacity, it’s important that the answers delivered are supported by an independent IR35 status review.
IR35 status reviews offer an objective and considered decision after having assessed every aspect of a contractor’s engagement (something which CEST does not), constitute as ‘reasonable care’ and also improve the likelihood of IR35 compliance considerably.
Qdos is supporting over 2,200 businesses, helping them navigate changes to the off-payroll working rules. The Qdos Status Review facility provides a range of expert IR35 solutions, including IR35 status reviews and IR35 insurance, to allow businesses to compliantly place and engage contract workers. For more information, please get in touch on firstname.lastname@example.org or 0116 478 3390.