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Following the announcement on 7 January 2020 that there would be a review of IR35 before the off-payroll changes for the private sector come into effect, the way Government has subsequently confirmed that the rules apply from 6 April 2021.
Businesses and organisations will be required to prepare and issue Status Determination Statements (SDS) to contractors engaged via personal service companies. In making those assessments leading to the SDS, many will turn to HMRC’s Check Employment Status for Tax (CEST) tool.
Since being launched at the time of the public sector IR35 reforms in 2017, CEST has evolved both in response to feedback from users and tax professionals as well as tracking some aspects of recent Tribunal decisions on employment status. In particular it is noted that inputting the details of the Albatel case (where it was held to be outside IR35) into CEST at the time resulted in a determination of deemed employment. Our contemporary Tax Journal article covers this in more detail.
HMRC has consistently stated that CEST will continue to develop and the latest version was released in late 2019. As with previous versions of CEST the initial questions are concerned with identifying on what basis the questions are being completed, through what medium the worker in question is operating and whether they hold an office position at the end client. However, this background section asks no questions to establish in which industry the worker is operating: this is a missed opportunity as it would give scope to reflect the fact that certain industries (such as film and TV production) have derogations from the standard employment status tests.
Having established the parameters, the questions progress to the substantive employment status questions. While HMRC has designed the tool to be used by non-tax professionals, it should be noted that most of the questions do not contain separate supporting guidance or examples to help the responder understand the context of the question.
The first series of substantive questions addressing the key employment status tests concerns personal service. Unlike previous versions of CEST where, if the worker had an unfettered right of substitution, there would be no further questions asked, the current version still continues.
Next follows questions concerning control. While there have been some tweaks to how the questions are phrased, the questions remain quite broad and continue to use terms which can carry different tax interpretations to their ordinary general usage such as “task” and “location”.
CEST then moves on to cover financial risk, in particular, what costs the worker is responsible for (although for no obvious reason, the current version states “equipment” does not include IT hardware such as laptops and tablets). There is also a new question relating to materials but it is not immediately clear why it is being asked: as with all the questions, HMRC has not disclosed the weighting attached to each one in reaching a decision.
Having covered personal service and control, it is worth noting that the third key employment status test of mutuality of obligation (MOO) is not expressly covered. However, the new version of CEST does contain some questions that hint at addressing mutuality of obligation in the context of the contract itself under the “Business on own account” section. Sadly, the questions still do not expressly address whether or not there is an expectation that work will be offered, nor that there is an expectation that offered work will be accepted. Instead, the questions in this section are mostly concerned with whether the worker is able to work for other organisations, owns the intellectual property rights arising from the work and whether the worker has been self-employed before.
Furthermore it must be noted that the “Business on own account” section in CEST falls away if the hirer/agency answers no to the question “Does your organisation know who will be doing this work?” so potentially CEST can still make a decision without even considering MOO.
One of the main criticisms of CEST in the past has been that it does not cover MOO at all. In response to this negative feedback and HMRC’s approach generally to MOO, in December 2018 HMRC published a paper setting out its position. Essentially, HMRC considers that mutuality exists where a contract is in place and it is worth noting that the introduction page to CEST now states “There must be a contract in place to see whether the engagement is classed as employment or self-employment. The tool assumes there will be one in place.” This comment is not helpful, especially because the absence of a contract does not and has not prevented the tribunals and courts determining whether the relationship is one of employment or self-employment.
Having completed the questions, CEST produces a determination as to whether it considers the worker to be employed/inside IR35, self-employed/outside IR35 or it is “unable to make a determination”.
HMRC has stated in the past it would honour determinations issued by CEST if it undertakes a subsequent enquiry, but this is only on the basis that the answers were provided in good faith and there is no change to the circumstances, arrangements or working practices on which the answers were given. However, it was reported in November 2019 that HMRC refused to stand by CEST determinations issued to NHS Digital and instead proceeded to raise assessments for £4.3m. It is noted that the current version of CEST does not, either at the start of the programme or on the output page, make reference to HMRC honouring the decision generated.
Overall, the updated CEST is an improvement on previous versions but questions still remain as to its reliability, not just in the context of MOO but also in relation to HMRC’s approach to determining and policing employment status. Businesses that choose to use CEST, should do so with care and be aware that it may not always be able to provide a conclusive answer.
For help and advice on all employment status issue, please get in touch with your usual BDO contact Nick Duffin or Rob Woodward.
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