How HMRC can help simplify employment status

10 Aug 2018 By Susan Ball

The UK tax authority’s digital tool designed to help employers has run into technical difficulties recently. Susan Ball explains why

A recent report revealed that following a 14-month investigation, HM Revenue & Custom’s (HMRC) Check Employment Status Tool (CEST) is “routinely” misleading the self-employed, coming to “the wrong conclusion in almost half of cases”. 

HMRC released its IR35 tool CEST in March 2017 among the rollout of off-payroll public sector rules. Consequently it places considerable reliance on CEST to help it administer those rules and to whom they apply. However, despite its importance, CEST has faced consistent challenges since its launch and, in June, HMRC published a document following questions from the IR35 Forum.

The document confirmed the CEST tool did not explicitly look into mutuality of obligation (MOO) when determining whether someone’s employment status. HMRC considered that, for any contract to exist between an employer and worker, MOO will already need to be established.   

MOO is one of the fundamental factors that needs to be taken into consideration according to the legislation, so the fact that it is omitted through CEST, shows its limitations as a tool.

While CEST has been changed slightly over the last year, even research commissioned by HMRC conceded the system can be improved upon, given it does not reach a decision in all cases.

The simple fact is that courts do not always reach the same decision on the status of workers. The recent Pimlico Plumbers and Christa Ackroyd cases show that current tests are largely based on case law is continually developing. Any digital tool based on the law as it stands will run into difficulty, unless it incorporates significantly more questions about employment status. 

Currently most people completing CEST only get asked around 16 questions, when judgments themselves run for many pages and hours of analysis before any decision is reached. No matter how good the tool is, it would not have the same level of detail as a full review by HMRC or tribunal assessment where both parties are quizzed on the relationship.

Extending the public sector rules to the private sector is described in HMRC’s May consultation document as the government’s "lead option which will effectively tackle non-compliance". However, the government acknowledged in the consultation document that the public sector “faced challenges” in implementing the rules and has asked for views on whether the design of the reform and the implementation process could be improved. 

One option has to be a statutory CEST test just for those working via an intermediary. It could perhaps look to use the current supervision, direction and control tests included in the agency rules or it could even go back to the business entity tests previously developed for IR35 compliance. It would certainly make it easier for engagers to make a decision and result in fewer appeals. The problems that are currently being highlighted would then be removed. 

The problem is that it is estimated that an additional £410 million of income tax and National Insurance Contributions (NICs) has been collected as a result of the public sector reforms. 

Additionally, according to Office for National Statistics (ONS) data, the number of contractors and others working on a self-employed basis in the UK is now close to five million, meaning further change will be required. The government and HMRC simply cannot afford to let that potential amount of tax revenue go unrecovered.

The earliest date possible for extending the current rules to the private would be April 2019, but as the current mood suggests, the government has been listening to those highlighting these problem areas and the timescales needed for proper implementation. April 2020 is now far more likely, with a possible phased approach based on the size of business or payment. 

Susan Ball is head of employers advisory services at national audit, tax, advisory and risk firm, Crowe.

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