Determining employment status - can the CEST tool be relied upon?

The CEST tool was designed by HMRC to help end client organisations, who may know little about IR35, determine the status of their off-payroll workers. It was initially designed for the implementation of the off-payroll rules in the public sector from April 2017. However, the completion of the tool did not quite make it in time for the implementation of the rules in the public sector, and when it was finally introduced it was significantly flawed. There has since been time to fine-tune the tool and to make some much-needed improvements to it. There has also been more time for end clients in the private sector to prepare given the delay of reform due to the pandemic.

Whilst the tool has been improved, it is a tick box exercise. The tool does not allow for any context to be provided around responses to any questions.

Additionally, the CEST tool may not always provide a result. In some cases it may provide an indeterminate outcome, meaning that the tool is unable to provide an opinion. Where this happens, the end client is advised to contact HMRC’s IR35 helpline. HMRC does, however, claim that the CEST tool will provide a result in 85% of cases.

HMRC has already made enquiries into public sector organisations to check how end clients have determined the employment status of their off-payroll workers and that such determinations are correct. NHS Digital came under the scrutiny of HMRC and subsequently became liable for a tax bill of £4.3 million for failing to correctly determine the status of its off-payroll workers. Ironically, NHS Digital used HMRC’s CEST tool to make its status determinations.

Using the CEST tool is not a get out of jail free card, although HMRC claims that it will stand by the results of the CEST tool it will only do so where the information provided is accurate. The difficulty here is that because CEST is a tick box exercise, and no additional information can be provided, it is very difficult to be certain that responses are 100% accurate.

Whilst the tool can be useful to some degree as a guide, relying on it to make status determinations without considering the specific facts should be avoided. Where the CEST tool is used to make status determinations, additional evidence should be retained to support the responses provided. Otherwise, like NHS Digital, end clients could find themselves carrying the liability for the unpaid taxes of its off-payroll workers as well as the associated interest and penalties.