As I understand it, and as my first CPL CAA flight testing officer told me, a flight test is the only situation in which both can log PIC if the candidate is successful in passing that flight test.
If you think about it, if you were successful in the flight test, then the examiner didn't have any input into your decision making or have overal command of the flight, hence your P1 fits.
In IR situations, I believe you still have to be within the validity period for the flight to be PIC otherwise it is P1S, as you would have to be exericsing the privilage of the rating.

How can two people be PIC on the same flight?

The next alternative is obvious: Neither can log PIC time.

You know there'll be a rule somewhere to prove it.

But who cares? Just chuck it in your logbook as whatever and move on .....

OMG: I can't believe you said that, AB.

The law cares and the law is about safety.

The law says the time is logged as PIC time by the ATO, as dual by the pilot under test, as ICUS by the pilot under test, as PIC time by the pilot under test if s/he passes, as dual by the pilot under test if s/he fails, and as PIC time by neither.

Safety!

Wash you mouth out Bob, how dare you insist that anything should be simple and logical....

What's safety got to do with filling a log book in?