When you can’t rely on CEST: How to stay IR35 compliant

Learn about how to stay IR35 compliant and why using CEST might not be the best option

March 7, 2024

The rollout of IR35 among businesses in the private sector has been far from easy for many of the UK’s companies. If your company uses contract workers, you’re likely already well aware of the confusion and headaches that have come with it.

With IR35 came the CEST — Check Employment Status for Tax — and it was supposed to remove the confusion around the law and give quick and clear answers on how each of your workers would be classified.

Unfortunately, this has not been the case. And with recently developing court cases casting even more uncertainty over CEST and its effectiveness, things only seem to be getting worse.

If you get it wrong, your company could be liable for hundreds of thousands of pounds, and leaving that up to an unreliable tool is as bad as it sounds. But what exactly doesn’t work about the tool? And what are your better alternatives?

Many CEST assessments are inconclusive 

CEST only classifies your worker as an employee or contract worker around 80% of the time, and the other 20% comes back as inconclusive. This has left more than 400,000 employment status checks in limbo and left the companies that ran them without a clear path forward.

When the cost of getting it wrong is so high, and the tool you’re given to classify your employees doesn’t help, you’re left with very few options. And the more freelancers you use, the bigger a problem this will be.

For more information on the latest industry developments watch Volume 1: IR35 Essentials webinar replay!

CEST is built off the assumption that Mutuality of Obligation (MOO) exists in all contracts

Generally speaking, if the client was obliged to offer the contractor work and the contractor was required to complete the work, MOO exists. The problem here is that MOO is extremely ambiguous to define.

HMRC’s position is that for any contract to exist, some level of mutuality of obligation needs to be there already. And because HMRC built CEST, the tool doesn’t take MOO into account and simply assumes it already exists.

The problem is that the courts have not agreed, and numerous recent cases in the tax tribunal have proven that this assumption is not legally correct. If these cases are not successfully challenged in the appeals court, HMRC will need to adjust CEST and consider these changes.

The penalties for misclassifying employees aren’t cheap

When you classify employees incorrectly, you won’t just pay the missing employment taxes. There are penalties for under-declaring your tax liability, and they get steeper depending on how accidental HMRC believes your misclassification to be.

If they believe you’ve only been careless, the penalty is 30%. That rises to 70% if HMRC believes you deliberately did not make the deemed contract payment and 100% if you deliberately misclassified them and attempted to conceal it.

Your best options for compliance

So what do you do when the tool created to fix a problem isn’t actually reliable? There are a few ways you can make sure your organization stays compliant, and one might make more sense for you than the other, depending on your size and needs.

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Managing IR35 internally 

If you decide to go this route, it’s important to take the best steps to ensure you’re off to a good start. Form a project team devoted solely to IR35, so employees are entirely focused on this. This way, they can understand the complexities and be more likely to get it right every time.

Make sure to over-communicate and document everything so there’s a clear trail in case you run into an audit down the line. And that’s not just with your internal teams — over-communicate with your contractors as well and involve them with your IR35 decisions. Transparency into your decision-making will help ensure that if you make any mistakes, it will be clear that you didn’t deliberately misclassify employees or try to hide anything.

Worker classification as a starting point, instead of an afterthought

If all of this sounds like too much of a hassle — or too much of a risk — there’s an option other than CEST. With Worksome, all of your projects will be classified as inside IR35 or outside IR35 in a matter of minutes.

Worker classification needs to be at the heart of everything you do, and it needs to be the first step, not an afterthought. Many companies tend to think of worker classification as an afterthought. Doing them retrospectively — or forgetting to do them at all — can get you into a lot of legal trouble.

In the UK, HMRC calls this systematic approach to remembering to classify a worker’ reasonable care’. By using Worksome, you all but eliminate the chance of running into issues on reasonable care. That’s why a system like Worksome is so useful. You can’t contract or pay workers without doing worker classification first.

When you create a new project or contract in Worksome, you and your freelancer will answer questions to determine worker classification. Once the freelancer starts your project, if it’s deemed inside IR35, the appropriate amounts of income tax and NIC will be deducted to comply with UK law. Worksome handles the deductions and your payments both to freelancers and recruiters automatically.

And best of all, because we’ll be paying the contractors directly, we are classed as the ‘Fee Payer,’ so should HMRC challenge any payments, we’ll be liable rather than you. Worker classification, payments, deductions, and liability are all taken off your plate.

Ready to get started? Click here to request a demo and learn more about how Worksome can help you manage your contingent workforce.