What if HMRC’s CEST tool is unable to make a determination IR35?

Employers in the public sector and private sector employers turning over more than £10.2m are now responsible for determining contractors’ IR35 status and tax liability.

Many companies turn first to the HMRC Check Employment Status for Tax (CEST) for help with this. CEST is an online multiple-choice questionnaire designed to assess a contractor’s employment status in relation to off-payroll working rules (IR35).

The problem is that, for around one in five tests, CEST can’t make a determination.

You need to know prior to engagement whether the working relationship you have with a contractor is within IR35. If it is, you as the end client (or the fee payer if there is a labour supply chain) are legally obliged to deduct income tax, National Insurance contributions and (if applicable) the Apprenticeship Levy from your contractors.

By searching for and finding this page, we assume that the CEST tax tool has not:

• Been able to determine a status based upon your responses or

• Provided detailed guidance on how you can find a reliable answer.

Don’t worry – you’re not alone. Let’s look a little further into the CEST service, why it returns so many “don’t knows” and why you shouldn’t really trust it that much in the first place.

When should you run IR35 tests on off-payroll staff?

IR35 applies in cases where there is an intermediary between a contractor you take on and your company.

That intermediary could be a personal service limited company, an umbrella company or a recruitment agency.

Which companies need to check for IR35 status and which ones don’t?

Public sector organisations and companies with a turnover of £10.2m are now almost always responsible for determining the IR35 status of their contractors.

If you declare a contractor relationship outside IR35 and HMRC deems it inside, you’ll have to pay backdated income tax, National Insurance contributions and (if applicable) the Apprenticeship Levy from when the work started. There’ll be a hefty fine to pay on top as well.

Contractors providing services to smaller businesses need to carry out an IR35 self-determination assessment, a bit like a version of Self Assessment.

If your contractor deems their relationship with you outside IR35 but HMRC later deems it inside, your contractor bears the financial risk in most cases.

The principle of reasonable care when assessing IR35

Answer all questions accurately on HMRC’s CEST tool and, in most cases, you’ll probably get an accurate assessment in the vast majority of cases.

But CEST really struggles to work out whether a contractor is either inside or outside IR35 for tax purposes on more finely balanced cases. Borderline tests are where many employers get themselves into trouble.

You must carry out your assessment with “reasonable care” (as defined by the HMRC Employment Status Manual). You might think that performing a CEST test would constitute reasonable care but it doesn’t.

The problem is that, although HMRC defends the efficacy of CEST tests, it does not record them. If you include a copy of your CEST result in your defence against an accusation of making an incorrect judgement, that won’t matter to the taxman.

Therefore, IR35 experts urge businesses not to rely solely on the government’s tool when assessing whether someone should be treated as a self-employed contractor or a permanent staff member.

And that’s even if you get a conclusive result. If they later take action against you, they’re likely to accuse you of not filling in the test accurately in the first place.

Has HMRC taken reasonable care with their CEST tool?

CEST is a multiple-choice test and, no matter how cleverly one could be designed, these types of test are never suitable for providing clear answers to complex questions.

We can see that in the results it produces In nearly a fifth of cases, it delivers an undetermined outcome.

Therefore, employers should trust the status decisions CEST outputs at their peril.

There are three possible status decisions with CEST:

• Inside IR35

• Outside IR35

• Unable to Determine

271,615 CEST tests were carried out between 25 November 2019 and 31 January 2020. 45% of tests came back with the answer “Outside IR35” while one in five tests came back “Unable to Determine”.

IR35 enforcement is rigorously pursued. That’s because HMRC genuinely believes that there is a vast black economy of well-paid independent IT, marketing and other experts engaging in conspiracies with employers to scam the system. It really works them up.

If that is the case, doesn’t finding 45% of contracts being outside the IR35 tax rule seem a bit high to you?

Critics of CEST have suggested that this is because it assumes that Mutuality of Obligation (MOO) exists in all contractual arrangements.

Your approach to CEST

While the CEST tool can be useful, it's important not to rely on it alone for a definitive IR35 determination. Instead, use CEST results to support your audit trail, documenting that you've shown reasonable care in each contractor’s assessment.

With CoComply’s IR35 expertise, you’ll have dedicated support both before and throughout your contractor engagements. Our solutions help ensure accurate IR35 determinations, protecting your business from potential compliance risks and liabilities by maintaining a comprehensive audit trail and offering peace of mind with every assessment.
Key features include:

• Integration with the CEST Tool – Seamlessly assess IR35 status and document each determination.

• Vendor Audit Tool – Gain visibility into your contractor supply chain to identify and manage compliance risks.

• Statement of Work (SOW) Analysis – Review SOWs for potential compliance issues and commercial considerations.

• Customisable Dashboard – Access real-time insights on your contingent workforce, financials, and project trends to make informed decisions.

To speak to IR35 determination specialists, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.