On the 6th of April 2017, the government brought about a fundamental change to the way IR35 operated in the public sector by introducing the off-payroll working legislation.

The off-payroll reforms were introduced due to the original IR35 legislation proving too onerous and expensive for HMRC to effectively police.

The reforms moved the responsibility and often the liability for IR35 assessment from the individual contractor to the incomparably more significant end client. The change gave HMRC an economically viable platform to launch tax and NIC investigations and assessments.

After demands for help from the public sector, to assist end clients with their new assessment responsibilities, HMRC provided an online tool called CEST (Check Employment Status for Tax).

What is CEST?

CEST is a piece of HMRC guidance, in the form of an online tool provided to assist organisations in determining a contract worker’s employment status for tax. The tool requires the organisation to answer a series of questions about the contract assignment and provides a status determination statement (SDS) based on the answers given.

The SDS defines the assessment result and is commonly referred to as inside or outside IR35. Inside refers to operating like an employee and outside, the reverse.

CEST – Public sector failings

In April 2021, the government extended the rollout of the reforms to the private sector, with CEST remaining as its recommended tool for status determination.

HMRC followed up on the private sector introduction with an RFI (request for information) to numerous large-scale organisations renowned for engaging high volumes of contractors. The RFI specifically included whether the organisations had used CEST in their status determination assessment process.

While HMRC didn’t say “use CEST, and you’re safe”, it stated that it would not override CEST assessments where it was confident that the questions had been answered honestly and in accordance with the spirit of the legislation. This led many organisations to see CEST as either a mandatory obligation or a “get out of jail free” option, with neither being the case.

Although it’s taken HMRC almost four years to conclude some of its investigations into public sector organisations, some recently published results are enough to make anyone sit up and think again.

With a combined tax bill of over £270M, public sector organisations such as the DWP and Home Office were found wanting following HMRC investigations, even though they used CEST to make their assessments.

CEST – A false sense of security

Now that CEST has been tested in anger, including by the organisation promoting its use, it appears a long way away from the safety net many thought it represented.

With a reputation for its frequent inability to give a conclusive result and the omission of any questions on mutuality of obligation, a key IR35 test, the use of CEST may well have given organisations a false sense of security.

In addition to CEST’s apparent limitations, HMRC’s investigations also seem to point to a lack of appreciation and application of the legislation when using the tool.

Those organisations that have used CEST in the hope of keeping HMRC at bay would be well advised to think again and seek expert advice to review any assessments previously conducted.

IR35 Complete – A reliable, online IR35 assessment process and solution

With our independent and unbiased online status assessment tool and process, we are confident that we have a comprehensive, credible and reliable IR35 assessment solution in IR35 Complete™.

Our online status determination tool has been constructed using IR35 case law data and is supported by a robust compliance process and an experienced team of IR35 compliance specialists.

What to do next

In recent months, our teams have had plenty of conversations with recruitment businesses and end clients about the benefits and risks of using CEST – in light of HMRC public sector enforcement – and advising on the best action to take, given the significant potential liabilities at stake.

It’s concerning that public sector bodies did use CEST, but upon investigation were deemed to be ‘non-compliant’ for IR35 purposes – there is genuine confusion and unrest amongst a lot of private sector organisations on the best action to take.

We are able to share our experiences on this matter and advise on the broader IR35 BAU challenge as well as help you address other significant supply chain risks presented by legislation such as the Criminal Finance Act.

Whether you’re at a crossroads with immediate decisions to make, or you want to check/discuss the best approach, please email [email protected].