IR35: CEST criticisms and responses

Please note: this article does not provide legal advice.

This article is part of a suite - a whirlwind tour to get up to speed on IR35:

  1. Background to assessment. HMRC's intent, guidance, CEST tool - plus legal cases.
  2. Making employment status decisions. The big picture on employment status decisions.
  3. HMRC examples - Alan and Jemima. Quite simple, no CEST.
  4. Examples - Chenguang and Kaye. Two examples, including using CEST.
  5. CEST criticisms and responses. CEST can be helpful, despite the criticisms.
  6. Gaming the system and pressure. HMRC are targeting these.

Bottom line

A robust employment status decision should reflect the role, the contractor and his business model. Contract wording should reflect the reality and be consistent with the decision.

Where it matches reality an "outside IR35" decision is often appropriate "with room to spare" i.e. many of the key tests align with the decision. CEST can then be used as a back up.

In that context, CEST decisions are not unhelpful. Any contractor should know what the key IR35 areas are and will have set up his business and working practices to reflect this.

A short critique of CEST

... the highly criticised CEST tool is skewed against the contractor and not only misses out key case law tests ... it is also a mechanistic approach of a type which the courts have frequently warned against throughout - for examples see Mummery J in Lorimer v Hall, a passage cited frequently in recent cases.

All assessments should be conducted with ‘reasonable care’ with individual specialist advice from a tax specialist. Those denied this by CEST are being dealt an injustice.

Source: Dr. Iain Campbell - Deputy Head of Legal, Independent Health Professionals Association

My response:

Criticisms of CEST

Criticisms here are largely made by providers of software and legal advice. The source for all these criticisms is How to get an IR35 pass using the HMRC CEST status tool

There’s an obvious problem: their interests are not served by your believing you know enough to assess your own status and that will be backed up by (even a flawed) CEST and reinforced by a court.

CEST provides a false sense of security. The worrying aspect of CEST though, is its over reliance on substitution. If you pass on substitution, but do appallingly elsewhere (everything points to "inside IR35") then it will still tell you "outside IR35", contrary to what a court is likely to conclude.

My research confirms the criticism, but CEST should be a backup. If substitution is your only IR35 indicator and you do appallingly elsewhere you are either naively incompetent (but honest) or trying to game the system. I can’t feel much sympathy.

Outside IR35 decisions are given only in cases of absolute certainty. HMRC has engineered its CEST tool to only pass contractors in cases of absolute certainty. This means that if you don’t provide specific questions to particular questions, you won’t pass HMRC’s tool. HMRC may be trying to enforce its own flawed take on employment case law with its tool, but a pass can still be achieved.

Odd. The same source previously argued that CEST gives an outside IR35 decision just for a positive answer given to the substitute question (while other answers are “appalling”) but here suggests that in this “uncertain at best” situation you can’t get a “pass”. Sounds a bit desperate.

Unlike manual decisions - including courts - does not assess all factors in the round. CEST only issues “outside IR35” considering one area in isolation. This is contrary to the big picture approach used by the courts, and stems from Hall v Lorimer [1993] EWCA Civ 25.

You can get a CEST “outside” decision with just a right of substitution or with no right of substitution but other reasonable answers. CEST may make an assessment after each decision and stop, but the best thing is to build your understanding and evidence beyond CEST’s.

Determinations are made prematurely, failing to consider all questions.

There’s some overlap with the previous criticism. There are certainly other questions that could be asked, including coverage of mutuality of obligations. But it’s not obvious that CEST failings hurts the contractor, especially if his business and working practices are sound. Courts back this too.

The key test of mutuality of obligation is omitted, wrongly assuming it always exists.

It certainly seems to have been omitted. Whether or not CEST “assumes it always exists” this is unlikely to be critical; you really shouldn’t be relying on non-mutuality.

There is nothing in law that says HMRC or a judge has to agree with the CEST result.

That is surely true and good news. So what?

HMRC claim they will "stand by" CEST, but have already proved they don’t in the RALC Consulting IR35 tribunal case – which they lost. Their promise is weakened by heavy caveats.

HMRC’s failed case seemed to rest heavily on a claimed mutuality of obligation, not assessed by the tool, so this criticism seems fair - and HMRC should be ashamed. The “heavy” caveats are simply to have provided accurate answers and not rigged the system. That seems fair and would probably be required by insurance.

Investigations reveal that HMRC holds no evidence to prove that CEST is accurate.

Whose investigations? And even if that’s true, so what? Where appropriate, an “outside” CEST decision is easy to obtain and should only be used to back a stronger reality.

It is not possible to insure against a CEST assessment.

Probably true, but better to have confidence in your judgement than buy insurance.


And breathe…

Contractors’ business models can support working inside or outside of IR35, depending on the attractiveness of the project or work. Here we focus on an expected “outside” IR35 scenario.

It is clear that:

But, trying to be dispassionate: