THIS ARTICLE HAS BEEN UPDATED
Freelancers face a potential tax timebomb, thanks to a recent revelation about HMRC’s CEST tool. However, not all IR35 and Off-Payroll experts believe the HMRC is in the wrong
A Freedom of Information (FOI) request to HMRC by IR35 compliance firm IR35 Shield uncovered that the tax authority’s Check Employment Status for Tax (CEST) tool – relied upon by countless businesses to determine if a worker is an employee or contractor for tax purposes – hasn’t been updated in five years. This contradicts explicit promises made to Parliament that the tool would be constantly revised.
The lack of updates raises concerns about the accuracy of CEST, particularly in light of recent court decisions that have shifted the understanding of IR35. Since the last update, there have been 20 critical IR35 tax tribunal rulings, including the landmark Atholl House Court of Appeal decision, which the tool seemingly doesn’t reflect.
Experts warn that businesses using CEST to assess IR35 status for freelancers may be making decisions based on outdated information. This could lead to hefty tax liabilities and penalties down the line, especially for freelancers operating through limited companies.
HMRC regularly promises that CEST will be improved, but we’re yet to see any notable changes to the tool’s logic. If a contractor is assessed by CEST, my advice would be to seek a second opinion.”
Seb Maley, CEO of Qdos
The stagnation of CEST means businesses are essentially playing Russian Roulette with their tax compliance. Relying on outdated logic could result in significant tax bills for both the company and the freelancer.
The lack of updates to CEST in five years contradicts the promise made by Jim Harra, Head of HMRC, on 04 March 2019, to the Public Accounts Committee, when he told them:
“We continually update the tool as new tribunal and court decisions are made about employment status, as well as continually increasing its scope so that it can respond to more and more types of cases… It is an ongoing, unending process.”
Since the last published update to the CEST decision logic, there have been 20 IR35 tax tribunal hearing decisions, including the pivotal Atholl House Court of Appeal decision, but the CEST logic has remained unchanged.
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When asked if this news had come as a surprise, Seb Maley, CEO of Qdos, an insurer for the self-employed, told The Freelance Informer, “In a word, no. I’m not surprised. HMRC regularly promises that CEST will be improved, but we’re yet to see any notable changes to the tool’s logic. If a contractor is assessed by CEST, my advice would be to seek a second opinion.”
When asked if there are legal obligations by HMRC to update the tool to take into account the Atholl House Court of Appeal decision that changed HMRC’s approach to IR35 status determinations, Maley told The Freelance Informer, “Any verdicts issued at the Upper Tribunal or higher – the Court of Appeal and Supreme Court – set case law. While one might hope HMRC would update CEST’s algorithms as and when relevant verdicts are issued, this hasn’t happened – as a result, I don’t think you could argue there’s a legal obligation for the tax office to do so.”
Maley continued, “One of the difficulties is that CEST just asks binary questions, whereas court cases are hugely detailed and nuanced. Obviously, one of the fundamental issues with CEST is that it simply cannot deal with these nuances. So if HMRC was to update CEST every time a case finished, it would need to overhaul the tool – something which the tax office clearly doesn’t want to do.”
Commenting on the latest CEST revelations, Dave Chaplin, CEO of IR35 Shield said as it stands, businesses are making hiring decisions based on outdated logic that no longer reflects the current legal landscape.
“CEST has remained frozen since 2019, despite the landmark Atholl House Court of Appeal decision that dismantled HMRC’s approach to IR35 status determinations,” said Chaplin. “The FOI response provides irrefutable evidence proving CEST’s decision engine has been collecting dust for half a decade.”
Chaplin said continuing to use methods based on the “now-obsolete HMRC Policy View of status case law” could lead to “significant tax liabilities and penalties”.
Q&A
Freelance Informer: In light of the recent revelations that HMRC’s CEST tool hasn’t been updated in five years, despite promises of ongoing revisions, how confident are you in its accuracy for determining IR35 status?
Dave Chaplin: A stopped clock is right twice a day, but is wholly unreliable. Risk is attained by firms relying on “Outside IR35” determinations produced by a tool which is misaligned with the law.
Seb Maley: To be frank, I’m not confident in CEST’s ability to determine IR35 or employment status whatsoever. The flaws that plagued this tool upon its hurried introduction still do. This is something that HMRC will be well aware of, which is why it’s so disappointing that the tax office has failed to take action.
Freelance Informer: With this news, what is the likelihood that we will see more blanket bans on contractors?
Dave Chaplin: I don’t see this news having any change on blanket bans at all.
Seb Maley: While blanket IR35 determinations and contractor bans are still an issue, many more businesses are taking a fair and pragmatic approach to managing the off-payroll working rules. We should also bear in mind that CEST had little influence on these risk-averse policy decisions, so I don’t think these latest revelations will lead to knee-jerk reactions from businesses.
Freelance Informer: Given the potential for outdated logic in CEST, what alternative methods would you recommend for businesses to assess IR35 status for contractors? And for limited company directors/contractors working through their own company?
Dave Chaplin: Any process, whether it includes automation tools or not, should be underpinned by the current case law. There are many others available.
Freelance Informer: The FOI revealed HMRC’s outdated CEST logic could lead to tax liabilities and penalties. How would you propose mitigating these risks for a company that has relied heavily on CEST for IR35 determinations?
Dave Chaplin: Get proper assessments done and establish the position. Where mistakes were made, own up to HMRC first to reduce penalties. Doing nothing would increase penalties for deliberateness and even worse, concealment.
From a technical perspective, CEST relies on either an unexercised right of substitution, or confirmation, among other control conditions, that a person cannot be moved from task to task. If the “dominant purpose” is personal service the substitution clause is not worth anything, and the control issue is called “the right of redeployment” argument, which courts do not support. It’s really that simple.
Q&A: the counterargument: Rebecca Seeley Harris
However, Rebecca Seeley Harris, an Employment Status, Off-payroll & IR35 expert, disagrees with Chaplin’s findings from his Freedom of Information request. “To say that HMRC’s tax tool CEST has not been updated for five years is simply incorrect, Seeley Harris tells The Freelance Informer.
In an emailed statement, she states, “Having moved the CEST tool onto Ocelot, HMRC published 14 new cases that the tool was tested against in early February 2024. The testing was carried out up until November 2023, before the decision in the Atholl House case was handed down. HMRC has openly stated that it has not changed the logic as a result of these 14 new cases. There would be no need to change the logic unless HMRC’s lawyers had a different interpretation of the case law. I would expect anyone calling themselves an expert to be abreast of these updates.”
Seeley, who runs Re: Legal Consulting, says her point is to let businesses know that you “can use CEST as part of your assessment process.” However, she adds, “You should not use it in isolation but, I would say the same with any assessment tools.”
In light of this statement, The Freelance Informer asked Seeley Harris some questions to ensure more clarity for readers.
Freelance Informer : You suggest that users can use the CEST tool, but “not in isolation”. In your professional opinion, what does that mean? For example, what course of action should freelancers take to ensure they are compliant and without costing them money?
Seeley Harris – Well, freelancers under IR35 should do exactly what they did before any of these tools were invented. You don’t need a tool to assess for employment status but, CEST is particularly useful because it provides a free [Status Determination Statement] (SDS). For the businesses that are doing the assessments under OPW, I would say that you need to have a robust procedure in place for making the assessments and again you don’t need an assessment tool. I can see why companies with large volumes use them but, they are not a necessary part of the assessment process.
Freelance Informer: Why should freelancers not have 100% confidence in the CEST tool? Is this because there have been 6 of the 36 cases published where CEST returned a different decision?
Seeley Harris: I wouldn’t have a 100% confidence in any of the tools. Again, it comes down to having a robust system in place.
FreeIance Informer: You mention that testing was carried out up until November 2023, before the decision in the Atholl House case was handed down. Why in your experience with HMRC can they not change the logic or tool questions to reflect the result of that case?
Seeley Harris: They can but, I should imagine they are waiting for the all-important PGMOL case to see whether there needs to be a change in the logic. There are also three other cases pending on IR35.
You wouldn’t change the logic for every judgment that is handed down. Most of the cases are from the first-tier tribunal and these don’t set a precedent so, you wouldn’t change the logic based on the FTT. So, far in the last five years there have been only three cases in the UT that set a precedent and HMRC has won them all. There are still three outstanding cases on IR35 in the UT and PGMOL from the Supreme Court.
Freelancers and businesses alike are advised to seek professional advice on IR35 status to ensure they are compliant and avoid unexpected tax bills.
