Reasonable Care and the Off-Payroll Legislation – Don’t use CEST

Following the recent article on the requirement to take reasonable care when drafting status determination statements, it is clear that clients engaging limited company contractors and the non-legally trained IR35 advice community would benefit from an analysis of the law in this regard.

Various services have recently emerged which sell the illusion of a friction-free status determination statement process but are based either on a tissue of lies, ignorance of the law or both. The solution for managing risk is efficient, honest and thorough expert legal advice on the IR35 and off-payroll legislation.

Amidst the plethora of seemingly attractive IR35 “compliance” options and fancy tools offered by insurers, HMRC’s free Check Employment Status for Tax tool (“CEST”) has gained popularity. However, can it be relied upon? Is it fatally flawed? Does it really mean “Cheating Every Self-employed Taxpayer”?

In this article, the sections and sub-sections referred to below are all contained in the Income Tax (Earnings and Pensions) Act 2003.

Legal analysis

Section 61NA(1)(b) defines a status determination statement (“outside IR35”) as a document wherein the client “states (albeit incorrectly) that the client has concluded that the conditions in section 61M(1)(d) and regulations 14 and 14A of the Social Security Contributions (Intermediaries) Regulations 2000 are not met in the case of the engagement and explains the reasons for that conclusion”, and section 61NA(2) requires the client to “take reasonable care in coming to the conclusion mentioned in it”.

Section 61M(1)(d)(i) requires the client (or its lawyer) to assess whether “the circumstances are such that— (i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client”. In this regard, “circumstances” includes (but not limited to) “the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided” (section 61M(3)).

As a matter of law, a purported status determination statement is void ab initio (meaning it is of no legal effect) unless reasons are provided to explain why the clauses in the draft contract and other circumstances (i.e., working practices and other documents intended to have contractual force such as schedules) support an inside or outside IR35 conclusion with direct reference to the “terms on which the services are provided”. This means the specific clauses rather than the whole contract without elaboration. For example, a status determination statement must state, “Clause X is an enforceable right for the Contractor to substitute its Staff and is supported by an overall project basis to the engagement”. Merely stating that the draft contract has been reviewed and approved by a lawyer is not enough. Without direct reference to the actual clauses in the draft contract it is simply not possible to properly consider whether the hypothetical contract between the client and the worker constitutes employment or not.

It is dangerous and reckless to rely on a document which merely lists vague floating statements without reference to the actual clauses in the draft contract offered to a limited company contractor. It is no defence that the client does not have access to the draft contract between the limited company contractor and recruiter. The client can simply request a copy of the draft contract from the recruiter. A recruiter must comply with such a request due to the risk of liability under the Agency Worker Regulations 2010 if the engagement is inside IR35. A status determination statement must be passed to the limited company contractor when the offer of an engagement is made, so a contract has not yet been formed. Therefore, privity of contract is irrelevant so is not available as an excuse (n.b., this is a common misconception about the off-payroll legislation). 

Reasonable care has not been taken unless the person who completes the document (intended to be deemed a valid status determination statement) is sufficiently trained in contract law and employment status law to draft a formal legal opinion that is robust enough to withstand scrutiny by HMRC. Given the drafting of the legislation, it is not possible to hide behind legal professional privilege in an attempt to deny disclosure of a status determination statement to HMRC. Utmost care in the choice of adviser is critical to risk management; it is neither reasonable care to use a criminal law barrister nor a service provided by contractors (lacking law degrees) that facilitates substitution and offers CEST style bogus status determination statements. Clients must be prepared to justify why a non-lawyer was used to manage IR35 when organisations, such as The Law Place, aggressively undercut the competition and offer truly competent and professional IR35 legal advice.

The guidance offered by HMRC in ESM10013 regarding CEST is wholly incorrect and should not be relied upon. The Employment Status Manual is not law and HMRC will not stand by a CEST result that it disagrees with.

For the avoidance of doubt, the use of CEST is not compulsory. There is nothing in law that requires a taxpayer to use CEST. This is another misconception circulating the internet.


At The Law Place, we’ve heard everything, from claims that there is no IR35 qualification to assertions that being a contractor and reading parts of the discredited Employment Status Manual from HMRC (plus a few judgments) is somehow sufficient to advise on IR35. The Law Place’s director, Martyn Valentine, has legal qualifications (see About Us), including arbitration training, plus dedicated IR35 legal experience and training since 2005. IR35 is not about compliance like ticking boxes on a clipboard or facilitating substitution; it is a legal test requiring expert legal advice. There is no compliance solution other than legal advice provided by lawyers.

The vague statements in CEST’s output (and indeed the output from many insurance-backed automated assessment tools) bear absolutely no relation to the terms, so CEST cannot be relied upon under any circumstances, except perhaps as justification for why penalties for carelessness or recklessness are owed to HMRC.

Unnervingly, CEST can be used to produce an outside IR35 “status determination statement” where there is no contractual right to substitute and the dominant feature of the contract is the supply of a named individual to fill a role, not to provide an outsourced service such as legal advice in relation to a specific matter, a defence project or similar. Recent articles published on other websites regarding supervision, direction or control entirely miss the mark and do not deal with long-established case law such as Ready Mixed Concrete Limited.

A limited company contractor is at risk of prosecution for fraud if a patently incorrect document purported to be a status determination statement is relied upon to achieve a financial advantage, such as payment for services provided by a limited company without deduction of tax. Similarly, a client relying on CEST or another badly thought out automated assessment tool in such circumstances would face questions about the Criminal Finances Act 2017. 

A competently advised client will be able to avoid the dangers of using a recruiter masquerading as a managed service provider to make a mess of IR35, avoid the risk and reputational damage of using umbrella companies and the vast expense of engaging agency workers. Even HMRC expects two-thirds of all engagements involving limited company contractors to be outside IR35. 

A note on umbrella companies

Umbrella companies are not the panacea to the off-payroll legislation. Most umbrella companies are involved in toxic practices such as paying bribes to be on a recruiter’s preferred supplier list, not paying “employees” holiday pay correctly and aggressive tax avoidance scams (loan charges scandal anyone?). Do you really want an umbrella company in the supply chain putting your company’s hard-won reputation for due diligence at risk? Let’s drop the pretence that umbrella companies are actual employers as proven in judgments such as Sodipo.  

How can The Law Place provide a cost-effective solution?

Don’t use CEST – its output is void, as useful as a dead parrot.

CEST is a deceptive tool for tax and penalties collection – the digital equivalent of a jemmy.

Contact Martyn Valentine on 01323 335050 or 07788 773871 now for a free 15-minute consultation on how to engage limited company contractors profitably and safely.

Our advice is disruptively affordable.

Contact Us

“Looking for the best IR35 legal advice? You know who to call.”

Thanks to Kelly Kennedy.


More Posts

NEVER Buy Tax-Safe IR35 Insurance

Unfortunately, some unscrupulous recruiters are requiring contractors to buy IR35 tax insurance for engagements where the client is within the scope of the off-payroll legislation.

Spring Budget 2023

Today the Chancellor of the Exchequer, Jeremy Hunt MP, announced the Spring Budget 2023. Other than the increase in Corporation Tax from 19% to 25%