ICAEW comments on HMRC’s enhanced CEST tool

HMRC has made available an enhanced version of its Check Employment Status for Tax (CEST) tool. Alongside CEST, HMRC has also published new guidance in its Employment Status Manual ESM11000 intended to provide users with greater clarity on the factors used to make determinations.

CEST is intended to help determine an individual’s employment status for tax and NIC purposes. It gives HMRC’s view of an individual’s employment status based on the information input into the tool. It can also be used to check if changes to the contractual or working arrangements alter the employment status.

Enhanced CEST includes more and better questions than the previous version, including on:

  • substitution: CEST uses a more sophisticated logic when asking questions on substitution;
  • business on own account: questions are asked about how rather than just whether the contractor interacts with customers of the client, whether the contract is part of a wider series of contracts with the same client and the extent to which the contractor provides services to other clients; and
  • provision of equipment: more detail is requested on the provision of equipment including specific questions on paying for materials, vehicles and other costs.

It also contains more links to HMRC guidance.

The detail needed to answer several of the questions means that clients using CEST will need to engage with the contractor more than hitherto.

Although we welcome HMRC releasing enhanced CEST earlier than we had expected, we are disappointed that where the client is in the private sector and CEST determines that the PSC contractor is in IR35, the tool output gives the wrong instructions as to who should operate PAYE. The results say that the organisation hiring the contractor needs to operate PAYE on their earnings. This instruction is correct currently only if the client is in the public sector, or, under the prospective rules published in the summer (on which we commented in ICAEW REP 86/19), if the client is private sector large/medium or public sector. We have made some suggestions to HMRC as to how CEST might be tweaked to resolve this.

We are also disappointed that the tool still does not cover mutuality of obligation in an employment law sense, despite recent case law placing more emphasis on this test.

Where the IR35 or off-payrolling rules apply, an individual’s employment status will determine who is responsible for working out the tax and NIC due and subsequently paying it to HMRC.

HMRC will stand by the result given by CEST provided the information is accurate and it is used in accordance with HMRC’s guidance. CEST also provides the reasons as to why it reached its determination.

If there are material changes to the contract or working arrangements following using CEST to determine employment status, the information originally provided may no longer be accurate and HMRC will not stand by the original outcome. It is recommended that the amended facts be input into CEST to enable it to determine afresh the individual’s employment status.

If you have comments about CEST that would help HMRC make it better, please comment below or email peter.bickley@icaew.com who can pass them to HMRC.