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IR35: HMRC backs use of ‘CEST’ tool by large UK businesses

HM Revenue & Customs has confirmed that large UK businesses can rely on its ‘Check Employment Status for Tax' (CEST) tool when making status determinations under the IR35 rules.

In updated guidance about when large businesses need to make a notification of an uncertain tax treatment, HMRC confirmed that a status determination using CEST would be considered to represent HMRC’s known position as long as the information is accurate and the results are not “achieved through contrived arrangements”.  If the business follows the CEST determination, there would then be no requirement to notify. Large businesses are required to notify HMRC where they have adopted an uncertain tax treatment, which will be a treatment contrary to HMRC’s “known position”, under new rules introduced on 1 April 2022.

Tax expert Penny Simmons of Pinsent Masons said: “Whilst there still remains no obligation for a business to use CEST, by categorising a CEST determination as a ‘known position’, HMRC has provided another compelling reason for large businesses to use CEST when making IR35 determinations. It is important to remember that the uncertain tax treatment notification rules only apply to large businesses and therefore, HMRC’s guidance here is not directly applicable to smaller businesses.”

If the CEST tool is unable to make a determination, the “known position criterion would not be met” the guidance confirms. In these circumstances, the business would be expected to review HMRC’s guidance “to determine whether the principles in the guidance provide HMRC’s known position”.

“Although CEST and has been widely criticised – it fails to provide a determination in 15% of cases and is less effective in complex cases – all businesses, whether large or small, should still use CEST as part of a robust IR35 compliance process. In complex cases, when making determinations, it may be advisable to use a combination of CEST and expert judgment,” said Simmons.

The IR35 rules require that employment taxes be paid by people who provide services to a business through a personal service company (PSC) or other intermediary if that person would otherwise have been regarded as an employee for tax purposes of the engaging business. From 6 April 2021, engaging businesses became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' National Insurance contributions for contractors falling within the scope of the rules. Previously, where a private sector business engaged a contractor through a PSC, liability to decide whether IR35 applied and to pay any employment taxes rested with the PSC.

Simmons said: “If a business is faced with an HMRC IR35 enquiry, proper use of CEST may also support a contention that the business has taken reasonable care when making determinations, since HMRC has previously confirmed that it will stand by a CEST determination if the information provided is true and accurate.” 

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