CEST (Check Employment Status for Tax) is an online tool created by HMRC to help organisations determine whether contractors they engage fall inside or outside the IR35 rules.
In this guide, we explore why CEST was created, how to use it, and why it has proved to be controversial since its implementation.
What does CEST do?
CEST asks a series of multiple-choice questions about the working relationship between a contractor and the end client.
These questions cover key employment status factors such as the level of control exercised by the client, whether the contractor can provide a substitute, and how the work is carried out in practice.
Based on the answers provided, the tool generates a determination explaining whether the engagement is more likely to fall inside or outside IR35.
The result can then be used by the client when producing a Status Determination Statement (SDS), which confirms the IR35 status of the engagement.
According to HMRC usage data, most CEST assessments are completed by end clients, with workers and agencies making up the remainder.
You can try the CEST tool here.
Why was CEST introduced?
CEST was launched by HMRC in March 2017 to help organisations comply with the new off-payroll working rules introduced in the public sector.
Under these rules (often referred to as Chapter 10 of the IR35 legislation), public sector organisations became responsible for determining whether contractors working through intermediaries such as limited companies should be treated as employees for tax purposes.
The off-payroll rules were extended to most medium and large private sector organisations in April 2021.
Because organisations must now take reasonable care when determining IR35 status, HMRC created CEST as a free tool to help clients assess contractor engagements.
How reliable is the CEST tool?
HMRC states that it will stand by the determination produced by CEST provided that the information entered into the tool is accurate and reflects the contractor’s actual working arrangements.
However, the tool has attracted criticism from some tax specialists and employment status experts who argue that employment status decisions often require a detailed review of both contracts and real-world working practices.
In particular, some advisers believe that the questionnaire format may not always capture the full complexity of contractor engagements.
Limitations of CEST
The question format cannot capture every working arrangement
CEST relies on a series of structured questions and answers. While this can be helpful for straightforward engagements, it may not always reflect the full nuances of a contractor’s working relationship with a client.
Another complication is that the tool can be completed by the client, recruitment agency, or contractor. Different users may interpret questions differently, which can sometimes lead to different outcomes.
CEST cannot determine status in all cases
According to HMRC’s published usage data, CEST does not produce a determination in around 20% of cases. In these situations the tool concludes that it cannot determine whether the engagement represents employment or self-employment for tax purposes.
Mutuality of Obligation is not directly tested
Mutuality of Obligation (MOO) has historically been an important factor in employment status tribunal cases, alongside substitution and control.
HMRC’s long-standing view is that mutuality exists whenever a contract for services is agreed. As a result, the concept is not strongly represented in the CEST assessment process.
Will HMRC stand behind CEST determinations?
HMRC states that it will “stand by” determinations produced by CEST, provided the information entered into the tool is accurate.
However, organisations must still demonstrate that they have taken reasonable care when determining IR35 status. If HMRC believes incorrect or incomplete information was used in the assessment, the determination may be challenged.
This issue has been highlighted by Qdos:
Ultimately, HMRC’s promise to ‘stand by’ the result that CEST gives will only apply if the information used to generate it is accurate. Given that some of the key questions are subjective, this leaves room for HMRC to challenge how the tool was used.
For this reason, many organisations supplement CEST with independent IR35 advice or third-party status assessment tools.
Alternatives to CEST
Several third-party providers offer alternative IR35 assessment tools and services. These organisations often provide additional support such as contract reviews, dispute support and IR35 insurance.
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