What is CEST and how does it help with IR35?

What is CEST and how does it help with IR35?

With the new Off-Payroll Working Rules now in place, how are medium-to-large enterprises making their decisions for contractors’ IR35 status? 

The legislation requires ‘reasonable’ care to be taken when making the decision. Is HMRC’s own ‘Check of Employment Status for Tax’ tool, more commonly known as CEST, the answer? We take a look at the CEST tool and determine how it can help.


What does CEST do?

CEST provides contractors and hirers with a result on whether the IR35 rules do or do not apply, based on a series of questions in relation to how a limited company operates.


Does HMRC stand by a CEST result?

They have publicly stated that they will as long as it has been accurately completed: ‘HMRC will stand by the result produced by the service provided the information is accurate and it is used in accordance with our guidance.’ But it is noted that a CEST result could not be relied on as evidence (see RALC Consulting v HMRC).


What does case law say?

The case law test is ‘do you have the right to send a substitute?’ The important words here are ‘the right to’. The CEST tool only seems to be concerned if a substitute has been sent and if the hirer can reject the substitute. The hirer should be able to reject on the basis that the substitute isn’t suitably skilled or qualified, to avoid a replacement being an unqualified or inexperienced person. 


Is it a definitive test?

No. CEST doesn’t address the whole issue in this area by giving options for explanation of refusal of a substitute, meaning the decision could contribute to an inside IR35 result. It seems to be a very ‘yes’ or ‘no’ scenario.


Does the CEST tool cover mutuality of obligation?

It does not appear to, and this is one of the important tests when determining IR35 status. It doesn’t ask any questions surrounding the obligation of either party to accept or provide work, or rights of termination. HMRC’s own Employment Status Manual (ESM) 0543 states: ‘The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

  • that the engager must be obliged to pay a wage or other remuneration, and
  • that the worker must be obliged to provide his or her own work or skill.’

The House of Lords in Carmichael v National Power highlights the importance of mutuality of obligation in determining employment status, and many commentators informed HMRC of this omission from its tool when consultation was called for on the IR35 legislation. Yet, this important factor remains notably absent.


What about the issue of control?

The level of control over the services that must be provided – how, when and where they are provided – is another factor for determining IR35 status. Case law is clear that the most important factor when looking at control is the manner (so, the 'how'), yet the CEST tool seems to give equal weighting to the ‘what’, ‘when’ and ‘where’. The tool does not seem to accurately follow the case law guidance.


How comprehensive is CEST?

HMRC’s guidance on the use of CEST spans 35 separate ESM sections, and HMRC require all of these to be read and understood prior to using the tool.


Is CEST fit for purpose?

In our opinion, while CEST may be of some benefit to the few, simple, supply chains, it does not provide an accurate result for the majority of contracting chains. It simply doesn’t allow for sufficient detail to be provided about the nature of the services and real-world complexities of contracting. CEST remains a useful tool but should not be used in isolation without human intervention. If using the CEST tool, it would be best to do so with the help of an expert who can read through the contract and check whether it has got the right clauses.