September 28, 2020

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September 28, 2020

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Extension of IR35 to the private sector, Part 14 – is the CEST test best? (UK)

Here is another question from our IR35 webinar the other week.

Given what I have read about CEST supposedly being rigged in favour of HMRC, is it worth using for my PSC assessments?

If you google HMRC’s Checking Employment Status for Tax (CEST) tool, right back at you will come a substantial number of articles criticising different aspects of it. It is biased, incomplete, unreliable, they say. It contains no questions about mutuality of obligation even though that is a fundamental indicator of status for employment rights purposes. It is unable to give a view at all in about 1 in 6 cases and its questions seek black or white answers to which the real facts are rarely susceptible. There are suggestions that CEST’s development took place in artificial workshop surroundings only, and that this is why in some cases it reaches conclusions different from the judges who heard the facts in real life. A freedom of information request has apparently confirmed that CEST was never even formally assessed against the government’s own Digital Services Standards as used to determine whether or not a service is fit for public use.

And then, say the commentators indignantly, HMRC will feel free to disregard the product of its own tool in any case if it can argue that the inputs were either inaccurate or contrived. So, frankly, is it worth doing at all?

We think it is. If you get an outside-IR35 answer from the best answers you can give, you have the closest you will get to a guarantee that that particular PSC arrangement is not caught. So long as you guard against later laxity and mission-creep in how the contract is actually operated in practice, you should be OK.

So far so good. But what if CEST dings your answers as falling inside IR35? Are you stuck with that?

No, for at least a couple of reasons. First, so far as we are aware HMRC will not know of “dummy-runs” on CEST. Therefore it will not be able to see either your initial answers or their development as you work towards an arrangement which will both work in practice for you and satisfy CEST. Second, it remains open to you to argue with HMRC that there are subtleties and shades of grey in your PSC arrangements which CEST cannot cope with, and which should tip the balance the other way when considered in proper detail. A number of commentators say that CEST sets the bar too high in the questions that it asks, and that those questions are too vague. The questions about “control”, for example, require the end user to confirm that it “cannot provide input as to how work is carried out”. But “provide input” might cover everything from an occasional suggestion to a regular instruction, and those should lead to very different outcomes. That is an argument too far for CEST but might well be accepted by HMRC or a tax tribunal.

Alternatively, I suppose that you could think about the online tests created by a number of private sector suppliers, including some of the Big Four accountants. These are said to allow for a more forensic analysis of the relevant circumstances in any given PSC arrangement. However, in truth these can be no more than guidance and an opportunity for some further tweakery around the edges of your contract. There is no sign that private sector tools of this nature will be regarded even as persuasive, let alone binding, by HMRC (and without HMRC having access to all the algorithms behind those tools, that is only to be expected).

Analysis of the inner workings of the CEST tool has led to a number of articles teetering precariously on the line between telling you how to pass it on the one hand and advising you not to game it on the other. The main routes through to a green light are those we have covered in earlier posts in this series – substitution, control and financial liability. As end-user, you still have nine months in which to get your poultry all lined up in these respects. That might mean reshaping your existing and future PSC arrangements (both on paper and in practice) to maximise your case under each of those heads. Alternatively, it might mean recognising now that the degree of distance which those criteria require you to insert between your business and a contractor is incompatible with your branding, quality control or client service imperatives, and therefore that you are better off biting the IR35 bullet now.

CEST is not a definitive answer to that question either way, but you will never be criticised within or outside the business for taking its inputs into account in that decision.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume IX, Number 189

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About this Author

David Whincup Employment Attorney Squire Patton Boggs Law Firm
Partner

Following ten years at a Magic Circle firm, David has been Head of our London Employment practice since 1994. His expertise gained from twenty-five years as a specialist Employment Law practitioner covers a wide variety of employment-related issues, including in particular individual and team recruitment issues, policy and contract drafting, disciplinary and grievance procedures, individual and collective redundancies, the defence of employee discrimination and dismissal claims and other litigation, whistleblowing, employee health, data protection and matters surrounding...

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