Additional guidance, but HMRC’s CEST tool still lacks robust nature needed to provide confidence

Additional guidance, but HMRC’s CEST tool still lacks robust nature needed to provide confidence 

There has been much discussion about the changes HMRC has made to its CEST tool and whether it will fulfil its promise of accurately indicating whether an organisation or individual is IR35 compliant.

The short answer is probably no, but what do these changes mean and how can contractors work to ensure they are fully compliant?

What is the CEST tool and why has it provoked criticism?

The Government’s online CEST (Check Employment Status for Tax) tool is an interactive questionnaire which is used to ascertain whether a contractor is deemed to be an employee under IR35 rules.

CEST has been criticised in the past for failing to fully consider all aspects of IR35 legislation and over its inability to provide an answer on every occasion.

HMRC has said that if the tool is used correctly and the information provided to it is accurate, then it will stand by the decisions made by CEST. This means HMRC will only take responsibility for mistakes made by the tool if the information entered by users is 100% accurate.

By its very nature, IR35 is complex and can be open to interpretation, meaning relying on the tool has been seen as risky.

Changes to CEST and what they mean in practice

In April, HMRC announced there will be some changes to CEST. Although this news garnered much interest and debate in the marketplace, it is worth noting these changes are actually quite limited and focus predominantly on the guidance that sits around CEST, its look and feel, and some of the language used.

While there are some changes to the questions asked there is no overall change to the logic behind CEST.

The CEST updates also feature additional guidance notes around its key tests, with items such as substitution and financial risk being updated in respect of how individuals completing the questionnaire should consider those questions and key status tests.

Further links to guidance in HMRC’s employment status manual in respect of those same tests have also been added. This means individual workers, or their hiring organisations, are now being directed to summaries of case law that HMRC are providing in order to support the points HMRC is making.

It should be noted that HMRC guidance around CEST is just that – guidance. It is HMRC’s interpretation of case law and it is not legally binding. Despite the fact HMRC insists it will stand by a case, that has not necessarily been true when it comes to specific tribunal hearings.

The bottom line when it comes to these changes is that individuals and organisations are now being pointing to significantly more guidance.

While HMRC's intentions may have been to make it easier for people going through the process to understand what they are being asked and the rationale behind those questions, there is a risk of flooding people with too much information and thereby making the test even harder to complete.

Our view at Qdos is there is a place for CEST, whether as a space where organisations or individuals can further educate themselves on how HMRC views IR35 and employment status for tax, or to get a sense of where an IR35 outcome may arrive at when it comes to determinations.

However, we believe that CEST isn’t a robust enough tool to demonstrate true IR35 compliance.

Organisations using CEST should therefore look to introduce additional measures in respect of IR35 compliance processes and policies to make sure they have as strict a structure around it as they possibly can.

One thing that does remain is the volume of indeterminate results that CEST can give. That doesn't leave organisations or individuals with any support or any clear routes to getting an outcome, which again further highlights the need to have other processes and support mechanisms in place.

New interactive tool will explain what happens when individuals are subject to compliance checks

Alongside the changes to CEST, HMRC has launched a new interactive compliance check tool.

The idea of this tool is to help support taxpayers and inform them about what they should expect if they’re ever in a scenario where they should find themselves subject to an HMRC compliance check.

It includes articles, guides and videos, and gives contractors and individual taxpayers information to help them decode HMRC communications, understand the timelines HMRC may apply to a particular compliance check, and be aware of what their individual rights are.

The tool can be used by anyone who is subject to a PAYE check, an IR35 compliance check or a variety of other checks.

Ultimately, it demonstrates that HMRC is taking a much more proactive approach in terms of educating taxpayers. This fits in with their wider strategy of clamping down on tax avoidance and evasion.

While the introduction of tools like this to educate taxpayers is laudable, there remains space for HMRC to improve its service across a variety of channels where taxpayers endeavour to engage with them, such as telephone lines – where we still have very high waiting times, the enhancement of the online tax portal, or new interactive initiatives which give taxpayers more information and more visibility around what to expect across different areas of tax.