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CEST tool called into question after HMRC admits it holds no detailed evidence on its accuracy

By PaperRocket Accounting, Apr 19 2018 12:12PM

Following a Freedom of Information request by contractor website, Contractor Calculator, HMRC had admitted to not holding any detailed evidence to prove that it’s CEST tool is correct.

What is the CEST tool?

CEST stands for Check Employment Status for Tax, and the CEST tool is something that was developed for the off payroll working rules introduced for the public sector in April 2017 in order to assist public sector bodies with determining their contractors’ IR35 status’ under the new rules. HMRC also encourages the use of it in the private sector. This tool will give a result either stating that IR35 does apply, does not apply or that the test was unable to determine the tax status of the engagement.

A number of industry professionals however have disputed its accuracy. They say that there is an over reliance on substitution, it ignores one of the three key status tests (Mutuality of Obligations) as well as there being discrepancies in certain criteria which must be met. Another large problem with the tool is said to be the fact that, by its very nature (being a digital tool), context cannot be provided, and for certain questions, a conversation with the contractor/end client would be required to ensure that the relevant answer is being given.

However, HMRC has maintained that the tool is capable of making accurate IR35 assessments in the public sector and claims that it is therefore serving its purpose.

So, what’s been discovered?

Contractor resource firm Contractor Calculator submitted a series of Freedom of Information requests to HMRC in regard to the CEST tool. In response to these, HMRC has supposedly admitted that there is no detailed evidence to show that the tool delivers accurate results. They said:

‘The CEST tool testing was done by a workshop… The only documented output of the workshops is the set of rules used by the tool.

Our records show that HMRC has used the CEST tool to test all the cases cited in your request, but we do not have a record or how each question was answered as part of that testing, only the end determination.’

In its own independent tests last year, Contractor Calculator compared the CEST tool’s IR35 determinations against historic court findings and found that it delivered an incorrect outcome in 37% of cases tested.

What does this mean for contractors?

For the time being, whilst determining IR35 status in the private sector is still in the hands of the contractor, it is advised that you obtain an independent IR35 assessment by a qualified tax expert, rather than relying on the CEST tool.

For contractors in the public sector, unfortunately determining IR35 status is no longer in your hands. However, if your end client does deem you to be inside IR35, regardless of which tool was used to come to this determination, and you disagree, it would be advisable to still seek a qualified, independent assessment. You may not be able to change the decision, but if you decide to appeal in the future, it is a good idea to have as much evidence for your case as possible.

PaperRocket Accounting provide accounting and tax services to professional limited company contractors and freelancers working in the UK.

We offer our clients a choice of four all-inclusive fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were shortlisted as 'Small Practice of the Year 2016' in the AccountingWEB practice excellence awards, as well as FSB Hertfordshire Service Excellence finalists in 2015 and 2016.

To find out how we can help you please get in touch now.

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