CEST: HMRC’s online status tool and how it works

Extract from Tolley’s Tax Digest November 2020

CEST was designed to help organisations and individuals determine employment status for tax and decide whether the off-payroll working rules apply. It does a good job in a vast number of cases. However, for diffi-cult, more nuanced cases, which is actually where most help is needed, CEST may return an ‘Unable to De-termine’ assessment or might even return an ’employed/in-IR35′ assessment which the user feels is intui-tively incorrect.

However, used in the right way, I would advocate that CEST is still very useful, not least because HMRC will honour the output from CEST if its questions have been answered correctly.

In short, CEST will provide one of three outputs based on the information entered by the user. In my words (not HMRC’s) these are:

• ‘Self-employed/IR35 does not apply’ – applies to cases which HMRC can accept as being comfortably self-employed;
• ‘Employed/IR35 applies’ – applies to cases which HMRC see as being employed;
• ‘Unable to determine’ – applies where it is not possible to form a view one way or the oth-er based on the information provided.

From a risk perspective, it is only the ‘Self-Employed/IR35 does not apply’ CEST output that businesses need to be able to rely on, since the use of CEST is not mandatory. It is also not mandatory that an ‘Em-ployed’ CEST output must be accepted by the user. And it will be open to the user to disregard a CEST output if the user considers it is incorrect. However, an employed output from CEST signals to the user that, based the information provided, HMRC will consider the relationship to be employed. Therefore, any user of CEST should collate as much supporting evidence as possible to support a different view.

If you consider a CEST output to be incorrect but feel unsure about challenging it, remember that:

1. there are still many employment status disputes being heard through the Courts, some decisions going in HMRC’s favour, some against;
2. CEST is an algorithm. It will operate and deliver answers in accordance with its creator; and
3. CEST cannot step back and paint a picture (see Hall v Lorimer in [17.8]). But this does not mean that CEST is wrong or that it doesn’t serve a purpose. It is a perfectly valid tool for those cases with a clear outcome. However, it does, perhaps explain why further detail and human intervention may be required, such as the use of tie-breaker questions noted in [15.1], to resolve the difficult ‘Unable to determine’ cases.

For anyone wishing to use CEST, it may also be helpful to understand how it works, as explained below and illustrated in Figure 17.

Broadly speaking and in overview, CEST follows RMC principles but currently skips Mutuality of Obligation, given HMRC’s interpretation of this concept as explained above. Instead, CEST starts by asking questions about personal service and creates a low, medium, or high sub-assessment for this key indicator. If the sub-assessment is low, eg the Worker has an unfettered right to send a substitute, CEST will return an overall assessment of self-employed on completion. If the personal service sub-assessment is medium/high at this stage, CEST’s questions on control will become more significant in the final assessment. Then, if the control sub-assessment is low, CEST will return a self-employed output on completion, otherwise its ques-tions on financial risk will become more significant in the final assessment. Then, if the financial risk sub-assessment is high, CEST will return a self-employed output on completion, otherwise the sub-assessment on the Worker being ‘Part and Parcel’ of the potential employer’s organisation and ‘being in business on own account’ will become more significant.

Unless the final outcome can be determined based on the preceding low sub-assessments, CEST accumu-lates those medium/high sub-assessments, and evaluates these with the low, medium and high answers from Part and Parcel/business on own account sub-assessments, to form the final overall assessment. I have calculated that there are, in total 118,278,144 permutations to the way in which CEST’s questions can be answered.

CEST: weighting given to ‘business on own account’

[18.2]

The first version of CEST attracted much criticism for failing to consider the impact of being in business on own account. The reason for that was understood to be logistical, in that Clients may find it difficult to an-swer questions in CEST relating to a Worker’s business.

This has been remedied to a degree with the possibility of answering question in this area, if the Worker is known to the Client. This begs the question, what difference does answering these questions actually make?

By analysing the permutations of answers to CESTs questions, and in turn the permutations of sub-assessments made in relation to each key status indicator noted above, we can arrive at the CEST overall assessment before and after answering the questions on ‘business on own account’ (‘BOOA’).

Doing so shows that CEST is programmed so that answering the BOOA questions cannot bring about a change in status from ‘Employed/inside IR35’ to Self-employed/Outside IR35. It is only possible to move one step towards self-employment, ie from ‘Unable to Determine’ to ‘Self-employed/Outside IR35’, or from ‘Em-ployed/Inside IR35’ to ‘Unable to Determine’. It is also possible to move from ‘Unable to Determine’ to ‘Em-ployed/Inside IR35’ since, once more is known about a Worker’s business, it then becomes possible to de-cide if it has an impact in either direction. Figures 18 to 21 show the only permutations where answering BOOA questions changes the overall assessment closer toward self-employment.

Figure 18: Impact of BOOA in CEST

Figure 19: Permutations where BOOA questions change decision from ‘Unable to Determine’ to ‘Outside IR35’

Figure 20: Permutations where BOOA questions change decision from ‘Unable to Determine’ to ‘Inside IR35’

Figure 21: Permutations where BOOA questions change decision from ‘Inside IR35’ to ‘Unable to Determine’