IR35 – HMRC releases updated Check Employment Status for Tax (CEST) tool

In terms of content, the sections on personal service, control, financial risk, and integration are only marginally changed from the previous version of CEST; there are amendments to how the questions are worded, rather than new or different questions. CEST still does not take ‘mutuality of obligation’ into account and our understanding is that HMRC’s interpretation of this has not changed.

However, there is a whole new section that looks to assess if the worker is in business on their own account, asking questions on topics like exclusivity, the number of other engagements the worker has, and the amount of working time that this engagement will take up for them. HMRC acknowledges that not all organisations will have the information to answer all the questions about the worker themselves accurately, so these questions are not mandatory. A CEST output can still be obtained from the tool that HMRC will stand behind where these are not completed. That said, if this information can be obtained, then workers who can demonstrate that they are in business on their own account appear to have a greater chance of being outside the IR35 law.

The previous CEST version would return an answer at the earliest stage, potentially resulting in whole categories of question not being asked. This increased risk in cases where reliance on the outcome was placed solely on just one aspect of the questioning (e.g. substitution). However, the updated CEST asks all questions and only delivers the result at the end which means that there is a complete record of the whole engagement terms.

Finally, HMRC have also released guidance to accompany the new CEST which provides extra information on using CEST, how specific questions should be interpreted, and which answer is most appropriate in certain scenarios.

Links:

• CEST: www.gov.uk/guidance/check-employment-status-for-tax
• HMRC guidance: www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm11000
   

A long-awaited and welcome update, the release of the new CEST comes at a time when many businesses are stepping up their preparations for the April 2020 changes to the IR35 rules. For organisations engaging contractors, this may require adjustments to questionnaires and processes to ensure that all information is captured to allow the new version of CEST to be used.

It is reassuring that HMRC will continue to stand by the output from CEST. It is also helpful that the tool now considers the entire, rather than a partial, picture of an engagement. However, there are a couple of points to be mindful of:

• The “in business on own account” section is a welcome addition to CEST. Where this is relevant, we recommend that businesses discuss this section with contractors at the earliest opportunity to ensure the most complete and accurate assessment possible.
• Given the decisions in employment status cases, HMRC’s position on ‘mutuality of obligation’ and their decision not to include this in the new CEST looks out of step with the view being taken by the tax tribunals.
• The updated CEST directly replaces the previous version on HMRC’s website. As a result, it is no longer possible to access the older logic in the same way. However, our view is that outputs previously prepared using the old CEST will remain valid in the event of HMRC review (provided the questions were answered accurately). This is supported by the fact that the underlying logic of CEST appears consistent between versions in respect of most key questions (e.g. on control).

If you wish to understand more about using CEST or would like to discuss your preparations for the IR35 changes from April 2020, then please ask your usual Deloitte contact or one of the employment tax partners listed below.

Contacts

James Warwick
Partner
+44 020 7007 1461

Hayley McKelvey
Partner
+44 020 7303 3940

Michael Nicolaides
Partner
+44 020 7303 8874

John Lewis
Partner
+44 011 8322 2658

Harvey Smith
Partner
+44 012 1696 8773

Helen Kaye
Partner
+44 011 3292 1316