HMRC releases CEST 2.0, with ‘welcome changes’ like OCELOT

HMRC will unveil ‘CEST 2.0’, a new and hopefully improved version of its IR35 status-testing tool, later today, ContractorUK understands.

Set to still be accessible via the same URL, the free tool for contractors, end-clients, and others like agents to use to test IR35 status has been dogged by criticism since its March 2017 launch.

An update to Check Employment Status for Tax (CEST) made 40 changes in 2019, but even HMRC’s mild critics -- like one who wrote a book just to help people understand it -- say it still falls short.  

That critic, IR35 expert Rebecca Seeley Harris, author of CEST Explained, says aside to three key changes to CEST, the big difference with CEST 2.0 is the technology underpinning it.

'New CEST platform OCELOT'

“In phase one of CEST 2.0, [released today, and ahead of phase two which will focus on CEST questions], HMRC has moved the digital tool onto a new platform, called OCELOT.”

Writing today exclusively for ContractorUK, Seeley Harris of ReLegal Consulting continues: “OCELOT…has gone through rigorous testing against case law to ensure consistency.

“The OCELOT platform is more flexible, and this will, [further] according to HMRC, make it quicker and easier to amend CEST, if required.”

The thinking appears to be that when new case law emerges -- such as the verdict in the PGMOL case (due shortly) -- HMRC can rapidly tweak CEST to factor it in to future outputs.

'Very different tool'

Charlie Hemsworth, senior tax consultant at Bauer & Cottrell is supportive, but says prior CEST users with Status Determination Statements decided by past outputs, may not be.

“If we’re all now looking at a very different CEST tool, where do organisations stand with determinations made using the old version?,” Ms Hemsworth asked ContractorUK.

“Will these organisations be expected…to re-assess IR35 assignments or contractors’ status, with the new tool? This is a question that [HMRC must address in] phase two.”

'Artificial Intelligence-backed customer experience'

But CEST 2.0 phase two (TBA) looks like it will move further away from ‘human-HMRC- officer-contact, towards an AI-backed customer experience with the OCELOT platform.’

A former inspector of taxes Carolyn Walsh, who was shown extracts from Seeley Harris’s article today, fleshed out her assessment last night to ContractorUK:

“Certainly much quicker and responsive-sounding, the new CEST should allow for more flexibility, assuming the underlying technology stands up.

“We’d all be happy [in phase two] to find CEST’s questions more tailored to a contractor’s profession, and therefore more easily understood and answered.

“For now though, the new platform looks like it will provide a real uniformity of response, which will increase confidence in the CEST tool, in all but its diehard detractors.”

'Welcome changes'

Boss at Oblako Ltd, Walsh was referring to CEST’s three big changes, according to ReLegal Consulting’s understanding of today’s CEST update by HMRC.

First, CEST 2.0 has HMRC’s official Employment Status Manual incorporated within it, so a user seeking guidance is taken directly to the corresponding detail.

Second, users can review their answers largely as they go -- at the end of each section -- rather than only being able to review at the end when CEST has already made its determination.

Third, and perhaps the most helpful and insightful change, CEST 2.0 informs the user of the outcome which CEST reaches from the answers provided for each question-section.

“Phase  one introduces some welcome changes, with more detailed reasoning and guidance now more easily accessible for users answering currently unchanged questions”, says Bauer & Cottrell’s Ms Hemsworth.

“In light of the more detailed reasoning around results as well…I can almost see the taxman waving a wagging finger to the warning: ‘There’s absolutely no excuse any longer for misinterpreting or getting things wrong.’”

'Learning device'

Walsh, the ex-Revenue inspector, reflected: “The added features of CEST 2.0, like the ability to review during the journey using the tool, and the links to the ESM could actually mean that the tool becomes a learning device.

“If so, that would help contractors and others recognise which areas of contracts are problematic -- if they are seeking an outside IR35 result. For contractors, it could pinpoint where to renegotiate contracts and change working practises. That’s a big step in the right direction.”

But in her article today on CEST 2.0’s new features, Seeley Harris says the “more interesting part” -- at least as far as most contractors are concerned, is likely phase two.

'Phase two will be the proof in the pudding'

At Bauer & Cottrell, Hemsworth agrees. “Phase one is a step in the right direction, of sorts, but phase two will be the proof in the pudding,” she says, “as it’ll show whether HMRC’s CEST can finally make its move to being a fit for purpose method of deciding IR35 and employment status.

“I’m very intrigued to see…what if any changes to the questions or [HMRC] ‘logic’ will look like, along with the results of OCELOT’s ‘rigorous testing’ against case law.”

The senior tax consultant added: “For example, will CEST 2.0 phase two finally address Mutuality -- MOO? Will a right of substitution alone remain determinative? Can contractors expect less ‘undetermined’ results and what will HMRC’s ‘additional support’ promised by HMT with such results involve?

“And finally, and perhaps most worryingly for contractors, if we decode talk of ‘continuous improvement’, does that mean HMRC will utilise the recorded results data of CEST 2.0 users -- which they claim to have never had with CEST mark one -- for any other purpose?”

'Indeterminate rate of CEST is up to 21%'

No such data retention by HMRC is flagged up today by Seeley Harris, a tax lawyer who was briefed by the department about CEST 2.0’s characteristics.

But the lawyer similarly indicates that a fall in CEST’s indecisiveness -- its indeterminate rate -- should surely be among HMRC's objectives for CEST 2.0.

“The tool’s output of unable to determine, however, has increased to 21%,” Seeley Harris acknowledged. “[But] the tool determines 49% as outside of off-payroll working rules…[leaving only] 30% showing as inside IR35. It would be interesting to know whether this percentage is in line with how many individuals HMRC believes should be inside or outside [the] OPW [rules].”