Choosing your IR35 CEST tool? Here's what to consider

The IR35 rules relating to off-payroll workers determine whether a contractor is classified as self-employed or as an employee. It used to be up to the contractor to make this classification. Now, it's the responsibility of the company who pays them.

We put this to the test directly during a meeting with HMRC who ran two IR35 assessments through ESIP and CEST side by side, as part of its own stakeholder review of CEST improvements. One case matched. In the other, CEST returned ‘undetermined’ while ESIP correctly identified it as high risk. HMRC’s own feedback was that ESIP’s design supported a stronger demonstration of reasonable care than CEST.

HMRC continues to notify businesses of its intention to review compliance and sending out employment status questionnaires, often requesting a meeting to observe processes and question how decisions were reached.

IR35 rules causing concerns for off-payroll working

Our Business Outlook Tracker survey of 605 mid-sized UK businesses found that fewer than three quarters (68%) were confident in their IR35 compliance, with only 25% of those ‘very confident’.

Many businesses rely on HMRC's Check Employment Status for Tax (CEST) tool for these assessments, even though using it is not a legal requirement.

We've supported businesses with IR35 since the rules first applied to the public sector, and saw where CEST fell short. Consultancy support filled the gap, with employers making the investment to ensure clarity and confidence in their approach.

ESIP is our answer: the expertise of an employment tax specialist, built into a platform that gives you a defensible answer every time. Here's where CEST often falls short, and what we have developed, and continue to evolve, instead.

1 A result every time, not four times out of five

Statistics previously released by HMRC show that only 80% of IR35 assessments run through CEST produce an 'employed' or 'self-employed' outcome. The other 20% return a 'cannot determine' outcome, which leaves the user in limbo. That 20% doesn't disappear: it becomes a manual decision a business has to make and defend, potentially years later, if HMRC challenges it.

ESIP closes that gap: every assessment gets a result.

Employment status is not just a binary decision, either. There might be different levels of certainty between the outcomes, which is the reason so many instances end up in tribunal cases following disagreement between HMRC and the assessor.

ESIP undertakes two assessments; one for % certainty employed and one for % certainty self-employed. The higher of the scores determines the result, with an associated 'risk of challenge' rating.

This gives you a risk rating for every contractor, not just a yes or no, so you can prioritise your highest-risk cases before HMRC does.

Our clients have told us that ESIP is meeting this need:

“CEST often does not give a conclusive answer. ESIP does, and the breakdown into probabilities of successful challenge is both helpful and easy to understand.”

CFO at a mid-size business – ESIP customer

2 Subjectivity of input, reliability of employment status assessment output

The person who uses CEST for an IR35 assessment receives an immediate result and the option to edit any answers.

Anyone who has used CEST will know the temptation that exists to amend answers to see how it might impact the result or even get the answer desired. Before long, it's difficult to remember what answer accurately reflects the reality of the engagement and what has been put in as a 'test'.

CEST can be completed by either the contractor, the end client or the agency. My experience suggests that each of these users will interpret the questions and arrangements slightly differently and likely come out with different results.

One of the key requirements of IR35 legislation is for the end client to demonstrate 'reasonable care' in undertaking employment status assessments. This includes processes and controls over who is completing assessments and how the accuracy of input is determined. Something that HMRC will look at closely when undertaking reviews.

The difference with the ESIP IR35 assessment tool

We took this into consideration when designing ESIP and soeach completed assessment is peer-reviewed to support demonstration of reasonable care.

1. The assessment is completed by the end client, not the contractor. This is because it is the end client who will be held responsible for the outcome by HMRC.
2. The assessment is completed by a 'specialist'. Unlike CEST, the specialist does not initially see the IR35 employment status result. An 'approver' provides a more independent 'four-eyes' review of the answers to ensure accuracy prior to producing a status determination statement.

The assessment process is all recorded within ESIP and acts as an audit trail of how the decision is made, which is useful if it needs to be reviewed at any point in the future.

If a fifth of your CEST assessments are ending in 'cannot determine', or you can't show HMRC how a decision was reached, book a demo to see ESIP run against your own contractor population.

3 CEST ignores IR35 mutuality of obligation

CEST doesn't consider mutuality of obligation (MOO) between the contractor and the end client in its IR35 question set.

HMRC consider that MOO exists in all engagements where there is a contractual agreement to supply and provide work. Therefore, it goes without saying that it's present. However, when this has been tested in tribunal situations, it's regularly considered beyond this assumption.

The ESIP algorithm was developed by our team of employment tax experts, with many years of combined experience in employment status assessments and HMRC's approach.

We've designed a question set that covers every category that makes up employment status, including mutuality of obligation and the current and  recent relationship between the end client and the worker.

In addition, we've built ESIP to reflect the approach that we see tax tribunal judges take in building up an overall picture of the engagement and effectively weighing up the factors on either side of the argument before coming to a conclusion.

4 Will HMRC ‘stand behind’ CEST IR35 results?

A lot of organisations believe they should be using CEST for IR35 assessment because HMRC have said they will stand behind the results of its assessments. However, it's important to note that HMRC will stand behind the logic that CEST is based on, rather than accept the result without question.

Instead, they will challenge the accuracy and objectivity of the answers inputted. This highlights again the importance of taking reasonable care when completing assessments, regardless of how they are undertaken.

HMRC guidance is clear that there's no requirement to use CEST for IR35 employment status assessments.

5 A full audit trail, without the manual admin

Perhaps one of the biggest challenges of using CEST is that it doesn't retain a record of the IR35 employment status assessments undertaken.

When using CEST, this can become a manual process. This creates a lot of admin time when ensuring compliance across the business. Various stakeholders will be involved at different stages, and all documents need to be collated and stored.

We've already mentioned the requirement to demonstrate reasonable care as a key part of the IR35 legislation. Businesses will need to demonstrate the processes and controls that they have in place to do so.

With ESIP, we have created a contractor management and monitoring tool, as well as a tool that undertakes assessments and can be used both for self-employed contractors who are directly engaged as well as for those working through intermediaries such as PSCs.

ESIP's design means senior managers know how many contractors are in the business, which departments they work in, and what their current employment status is.

Client feedback supports this aspect of ESIP:

“Great tool, which is a lot easier to use than the CEST tool. The GT tool gives us an organisational view of non-payroll workforce, which the CEST tool does not.”

HRD at a large corporate – ESIP Customer

A defensible answer, not just a faster one

The IR35 rules are notoriously difficult to apply because employment status is such a subjective area. There isn't a clear set of guidelines to follow that determine employment or self-employment. There's only a body of case law to be weighed, case by case, which is exactly why a tool built by employment tax specialists and tested against HMRC's own scrutiny gives you a stronger position than a generic online questionnaire.

ESIP gives you a defensible answer for every contractor, a live view of your whole workforce, and the evidence to back it up if HMRC comes knocking.