The failings of CEST
Its failure to address mutuality of obligation (MOO), which is one of the three key tests of status, is one of its significant shortcomings.
This is because HMRC is unwilling to accept that MOO goes beyond the creation of the ‘irreducible minimum’ – when one party agrees to provide services to another in exchange for payment.
IR35 – ongoing impact:
HMRC’s view is that MOO is met the moment someone signs a contract. This simply isn’t the case and it’s been proven many times that it is aspects beyond this process that determine if MOO exists in an engagement.
Another common criticism of CEST is that it does not fully reflect the case law.
The Employment Lawyers Association states: “It is generally considered that CEST applies a higher standard to demonstrate self-employment than is true of applicable case law.” As a result, there is a perception that CEST is predisposed to classify contractors as employees, i.e. ‘inside’ IR35.
In addition, some of the questions asked by CEST are unfairly weighted.
A prime example of this is the question 'Do you have the right to reject a substitute?' with 'yes' or 'no' as the only possible responses.
This doesn’t take into account the fact that a reasonable right of veto of substitution does not diminish the right of substitution (ROS).
A prime example of these failings is NHS Digital. The organisation believed that its contractors had an unfettered ROS and, as such, CEST gave an ‘outside’ IR35.
This result was subsequently challenged by HMRC and NHS Digital was presented with a tax bill of £4.3M in 2019.
What’s more, usage data from CEST showed that it was unable to deliver a verdict over 233,631 times – 21% of all results between November 2019 and August 2021.
When CEST cannot produce a determinative result, the taxpayer is left to work it out themselves, contact HMRC or seek professional advice.
So, the tool cannot really be trusted and can cause concern over unresolved status matters.
Criticism for CEST has been wide-reaching and high-profile. In fact, The House of Lords’ Economic Affairs Committee Finance Bill Sub-Committee report in April 2020, titled Off-payroll working: treating people fairly, questioned whether CEST was fit for purpose and claimed that the tool fell well short of what is required.
Off-payroll one year on
While we saw a number of end-clients introducing blanket bans on the use of personal service companies (PSCs) in the months immediately following the IR35 reform, this appears to have been a knee-jerk reaction risk-aversion measure.
Slowly, businesses are u-turning on these bans, and we are beginning to see clients engaging with PSCs again.
Meanwhile, however, we have seen an increase in the number of contractors closing their companies or working overseas because of IR35 reform, reducing the available skilled contingent talent available.
Umbrella company usage has also risen dramatically over the last 12 months as clients look to avoid IR35 risk.
This, however, can present its own risks if the umbrella company has adopted tax avoidance arrangements or proper due diligence has not been undertaken.
Despite these ongoing challenges, there is room to be optimistic. As the rules form part of business as usual (BAU) going forward, businesses and organisations are becoming more comfortable with the legislation.
We are also beginning to see more new and returning contractors coming into the market as a result of more ‘outside’ IR35 roles as end clients become comfortable with legislation.
However, more education and major improvements to the CEST tool are undoubtedly needed to counter the ongoing challenges and ensure that UK businesses don’t lose access to the skilled talent they need in the long term.
Andy Vessey is head of tax at Kingsbridge