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HMRC Check Employment Status for Tax (CEST) tool

people at computer
The tool is designed to streamline and simplify, so the changes are crucial in order to gain confidence in CEST and to be established ensuring the right outcomes are being produced.

Following a 14-month investigation by advice website Contract Calculator, it was recently revealed that HMRC’s ‘Check Employment Status Tool’ (CEST) was ‘routinely’ misleading contractors and the self-employed, coming to “the wrong conclusion in almost half of cases” in August.

Under the Freedom of Information rules, in 2018 HMRC released a list of cases that CEST has been tested against, which said the digital service was “rigorously tested during development in conjunction with HMRC’s lawyers against live and settled cases and reflects employment status case law”. The results showed that in two of the 24 cases, CEST returned a different decision to the First-tier Tribunal, which HMRC did not appeal. The First-tier Tribunal (FTT) decisions do not set a binding precedent, and HMRC takes many factors into account when deciding whether to appeal FTT judgments.

In these specific cases, the judgment in Castle Construction (Chesterfield) Ltd acknowledged that the case was finely balanced. In the case of Novasoft Ltd, commentators expressed surprise at the results. HMRC stated that they would expect to contest similar cases in future, and the CEST results reflect that position.

The new CEST

HMRC released its IR35 tool – CEST – in March 2017 among the rollout of off-payroll public sector rules. HMRC places considerable reliance on the CEST tool under those rules. This is despite consistent challenges since its launch. But it is not new; before CEST we had the Employment Status Service (ESS) and Employment Status Indicator (ESI) which covered employment status testing before the new IR35 rules.

Under the ESI, employers were told its response could be relied upon as evidence of a worker's status if:

  • the answers given accurately reflect the terms and conditions of the worker’s services
  • the ESI has been completed by the ‘engager’ or their authorised representative.

However, HMRC would only say at that time that if the worker completes the ESI tool, the result given is only ‘indicative’. The fact that HMRC would rely upon the ESI tool in the circumstances described above potentially gave some taxpayers the ‘best of both worlds’. If the tool provides the ‘right’ answer, HMRC will be bound by the outcome (if copies of the details are printed or saved and retained).

The problem then – and now – is that it doesn’t always give the right answer, so not much has changed.

There has been much talk about the new version CEST in recent months. At the end of June HMRC published a document  following questions by the IR35 Forum.

The document confirmed the CEST tool did not explicitly look into Mutuality of Obligation (MOO) when determining whether someone’s status is an employee or not. This is because HMRC considered that, for any contract to exist between an employer and worker, MOO will already need to be established, otherwise the contract could not have been agreed.   

Yet MOO is one of the fundamental factors to take into consideration according to the legislation, so the fact that CEST omits this shows that the tool is basic in design. The recent case in the FTT of Professional Game Match Officials Ltd (PGMOL) V HMRC is an example of HMRC’s failure to grasp the significance of MOO, which it simply presumes to be present in all engagements. In this case it was MOO and control, or rather lack of it, that resulted in the FTT decision concerning football referees, which was significant.  

For those who followed the Weightwatchers case years ago, this new case makes interesting reading, specifically the comments on referees’ terms, being  governed by the rules of the competition and the laws of the game, which at first glance might constitute something like the control that a ‘master’ exercises over a ‘servant’. 

The simple fact is that we are still in an uncertain position with regards to the status of workers. As a result, courts do not always reach the same decision. The recent Pimlico Plumbers and Christa Ackroyd cases show that current tests are largely based on case law which in itself is continually developing as a response to new ways of working and new relationships between employer and worker. 

Greater clarity will come as we continue to move from a new, peripheral way of working into ‘a new norm’. However, any digital tool based on the law as it stands will likely run into difficulty, unless it incorporates additional questions about employment status. Currently the tool only asks around 16 questions. When you consider that judgements run into pages and pages and hours of analysis before any judicial decision is reached, it is clear to see that the tool – no matter how good it is – would still not have the same level of detail as a full HMRC review or tribunal assessment where both parties are questioned on the relationship.

While CEST has been changed slightly over the last year since the introduction of the off payroll rules in the public sector, even independent research commissioned by HMRC conceded the system can be improved upon, given it does not reach a firm decision in all cases.

Undoubtedly this will be one of the areas that will have received significant feedback as part of the recent consultation on off payroll in the private sector, which closed on 10 August 2018. Following the consultation, we may see the tool being fundamentally changed over time, linked to any change in the off payroll rules in the private sector on which we are likely to hear more of in the Budget later this month.

While technology is often heralded as a resource-saving, efficiency-boosting tool for taxpayers and tax authorities, designed to streamline and simplify, there are some complex areas which can’t just be summarised in 16 questions and there are wider examples where “the computer says no” leads to HMRC decision making which may not reflect the underlying spirit of the legislation. So changes will be crucial in order for confidence in CEST to be established and to ensure the right outcomes are being produced. Where uncertainty exists on employment status, however it is vital that employers seek specialist advice.

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Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax