Spot the Difference: A Closer Look at HMRC’S Updated ‘CEST’ Tool

Two months after HMRC introduced changes to its ‘Check Employment Status for Tax’ (“CEST”) tool and related guidance, we ask whether the changes have benefited taxpayers and how material those changes are. 

The short verdict: the changes represent a sensible update in terms of usability and transparency, but with the underlying legal framework left untouched, organisations should continue to maintain rigorous compliance practices when assessing employment status.

What is CEST (and what it is not)

CEST is HMRC’s online questionnaire that assesses the factual characteristics of a working relationship to determine whether, for UK income tax and National Insurance contributions purposes, the engagement is more consistent with employment or self-employment. 

Many engagers rely on a CEST outcome when preparing a ‘status determination statement’ under the off-payroll working rules (commonly known as “IR35”). Its primary appeal lies in HMRC’s commitment to stand by the result, provided the questions are answered accurately and in accordance with the accompanying guidance.

Despite its widespread use, CEST has attracted criticism for oversimplifying key elements of the legal tests that underpin employment status. Notably, public sector bodies that have relied on its outcomes have, in some cases, incurred significant tax liabilities, highlighting the risks of treating the tool as a definitive compliance solution.

Why HMRC revised CEST

Two points are central.

Firstly, feedback from users highlighted that several questions were ambiguous or lacked sufficient explanation. In about 20% of cases, CEST returned an “unable to make determination” outcome, fuelling scepticism about its reliability and reinforcing concerns over its limited scope.

There have been a number of key decisions since IR35 was reformed in 2021, the conclusions of which were not reflected in the CEST tool (such as Professional Game Match Officials Ltd v HMRC [2024] UKSC 29 (“PGMOL”) and Atholl House Productions Ltd v HMRC [2022] EWCA Civ 501). The absence of these legal developments within the tool prompted practitioners (and, presumably, HMRC) to question both the accuracy of its outcomes and the defensibility of its determinations if challenged by HMRC. 

The April 2025 refresh has taken some steps to address these issues. While the core decision-making logic remains largely unchanged, the tool’s expanded guidance materials and access to HMRC’s logic matrix represent a meaningful step forward which should be welcomed by taxpayers - despite the limitations that remain.

So, what’s changed? 

The principal changes that will matter to users are:

Multi-Section Flow and Review

The questionnaire has been restructured into up to six discrete sections, each probing a different element of the relationship. Depending on earlier answers, users may not be required to complete every section. Crucially, answers can be reviewed and amended at the end of each section, which reduces the risk of being locked into an early response and helps avoid accidental errors.

 Mutuality of Obligations (“MOO”) made explicit

One of the most welcome updates is the introduction of a dedicated question and guidance section on mutuality of obligation (“MOO”), sometimes referred to as the “wage-work bargain”. MOO asks whether the engager is obliged to offer further work, and whether the worker is obliged to accept it. It is a legal prerequisite for an employment relationship to exist, yet, confusingly, the tool previously assumed its existence in most cases.

That assumption has now been removed. Users are now prompted to consider whether there is an ongoing obligation to offer or accept further work beyond the initial engagement. That prompt brings the tool’s logic more in line with recent case law (including the Supreme Court’s decision in PGMOL) and helps distinguish genuine project-based contracting from arrangements involving ongoing or open-ended commitments. This is an important addition to CEST’s functionality.  

Financial Risk

The update refines HMRC’s treatment of financial risk, narrowing the focus to meaningful, unreimbursed commercial exposure rather than incidental expenditure. The revised guidance illustrates this by way of improved or additional examples:

• Vehicle-related costs: CEST now asks directly whether the worker must fund any costs before being paid – in order to identify whether the worker bears significant financial risk that could lead to a loss on an engagement. Only substantial, unreimbursed outlays (e.g. bespoke vehicle modifications necessary to complete the job, or insurance costs) are treated as probative of self-employment; routine running costs that are reimbursed or covered by the engager (such as standard mileage arrangements) are excluded from the analysis. 
• Equipment Costs: it is now clear that where a contractor must buy equipment to fulfil a contract, but has an agreement that the hirer will buy this back at the contract’s end, HMRC does not regard that expenditure as creating genuine financial risk. In short, significant capital outlay can be a pointer towards self-employment if it is not reimbursed in substance during the engagement. Contractual reimbursement - even if effected at termination - removes that indicium.
• Payment: The updated guidance clarifies that payment structures such as commission-only contracts, along with the financial risk of unreimbursed costs they entail, can be factors indicating self-employment.

Substitution

The updated CEST guidance offers greater detail on HMRC’s approach to ‘personal service’. The substitution questions now focus more sharply on whether the worker’s own skill or labour is truly central to the engagement, while emphasising that personal service remains just one factor within the broader IR35 assessment.

Significantly, the concept of what constitutes a genuine right of substitution has been tightened. To carry meaningful weight, the right must be unrestricted and genuinely exercisable. In addition, simply recommending a replacement who is then engaged and paid by the client is unlikely to meet HMRC’s threshold of ‘genuine’.

More Transparency?

Perhaps the most interesting aspect of the update is HMRC’s publication of the CEST decision matrix. The spreadsheet reveals 72 possible outcome routes, with the largest share, 34, resulting in an “unable to determine” outcome. Of the remaining routes, 33 lead to an “IR35/employed” determination, while 5 indicate “self-employed” status.

Such openness is valuable. Advisers are now able to clearly see how particular combinations of answers drive determinations and where users are most likely to fall into indeterminate territory or an HMRC-favourable outcome. 

Practical Implications for Businesses

HMRC’s April 2025 CEST refresh brings welcome enhancements in clarity and user experience, and provides more transparency around the factors HMRC considers central to determining IR35 status. 

In practice, this means that although the revised tool offers another window into HMRC’s thinking, without substantive updates to its underlying logic or a complete redesign, relying solely on a CEST result risks glossing over the regime’s inherent complexities. As such, in-scope businesses must remain vigilant about the residual risks an engagement can present. 

Businesses looking to improve their IR35 compliance architecture should therefore consider adopting the following best-practice measures to strengthen and complement a status determination:

• Archive CEST results and supporting evidence: Businesses should retain a dated copy of each CEST determination. HMRC now expressly advises that this output, as set out in the result certificate, be preserved as part of a verifiable audit trail in the event of future challenge.
• Include CEST within a robust IR35 governance process: CEST is best regarded as one component of a broader, evidence-led IR35 compliance framework. Organisations may, for example, consider introducing additional protocols for cases where the outcome is “unable to determine” or where the facts are finely balanced.
• Seek specialist advice for complex or borderline cases: Where CEST outputs are ambiguous or the working arrangements sit close to the employment/self-employment boundary, specialist advice should be sought. 

Please get in touch with your usual contact at Bird & Bird to discuss how best to navigate these developments and strengthen your IR35 compliance strategies.