Check Employment Status for Tax

HMRC's online IR35 tool, Check Employment Status for Tax (CEST), is currently in public beta. It was previously named the Employment Status Service (ESS).

The ‘Check Employment Status for Tax’ tool ​(CEST) is an online tool by HMRC which presents a series of questions in order to help determine your employment status for tax purposes, i.e. determine your IR35 status.

The CEST tool was developed for the off-payroll working rules introduced for the public sector in April 2017, in order to assist public sector bodies with determining their contractors’ IR35 status’ under the new rules. Whilst developed for the public sector, HMRC have encouraged its use in the private sector as well.

The tool has received a number of criticisms, particularly in the early development as it was continually adjusted and launched far too close to the deadline of implementing the new rules, but there are greater issues with the CEST tool than its timeliness.

HMRC's tool has been heavily criticised by a number of industry professionals. The below are some of the key issues we have with the CEST tool's use for determining IR35 status but are not definitive.

1. Lack of key status tests

   Despite common misconceptions, HMRC do not decide what determines employment status – IR35 is based on historic case law, and HMRC’s criteria is only their interpretation of it. Omitted from the CEST tool is one of what is considered the three key status tests as set out in the case of Ready Mixed Concrete Ltd v Minister of Pensions and National Insurance (1968) – Mutuality of Obligations.
   
   In a webinar for the NHS, a HMRC spokesperson claimed that this omission was purposeful in that they believed it was irrelevant for public sector contractors, despite their encouragement of its use for all contractors.
   
   

2. Over-reliance on substitution

   Whilst some status tests hold more weight than others, and this can be said for the right of substitution, HMRC seem to have placed so much importance on the Right of Substitution test that you will likely pass or fail the tool based on these questions alone. In the courts however, a Judge will not make their determinations based on a single test, but in relation to the contract as a whole.

    

3. Discrepancies in criteria

   In the right of substitution questions which hold so much importance in the CEST’s IR35 determinations, there is a key discrepancy with the criteria which must be met for a substitute to be considered genuine.
   
   The initial question asks of any actual provision of a substitute during the engagement, which must be provided when “the worker was unwilling but not unable to do the work”.
   
   The following question poses the hypothetical right to provide a substitute, which would be “being substituted because the worker is unwilling or unable to do the work”.
   
   This discrepancy in wording is crucial, as it not only changes the situations considered acceptable, but also demonstrates the lack of care and understanding in generating the questions. This element of the criteria for a substitute has likely been included when considering the case of Express and Echo Publications Ltd v Tanton and the Employment Tribunal case of MacFarlane v Glasgow City Council.
   
   The relevant contract in the Tanton case included a positive contractual clause for substitution, which the contractor exercised regularly and “exceptionally” and was ultimately deemed self-employed based largely on this strong pointer;
   
   "In the event that the Contractor is unable or unwilling to perform the Services personally he shall arrange at his own expense entirely for another suitable person to perform the Services."
   
   In the case of MacFarlane, the workers had the right to substitute but the right was limited in that the workers could only provide a substitute when they were unable to work (and not when unwilling) and could only use a substitute from the Council's register. HMRC seem to have misinterpreted this in the tool to mean that providing a substitute because you were unable to work is unacceptable evidence, when in reality, it is the limitation of not being able to provide a substitute when unwilling which caused the right to be deemed insufficient in demonstrating self-employment.
   
   

4. Limitations in digital determinations

   Despite the supporting text given on the CEST tool, in our experience, many questions still require a conversation with the contractor or end client to ensure the relevant answer is being given.
   
   Another limitation of the solely digital nature of the tool, is that context is not provided. In the same sense in that the supporting notes are not always sufficient to omit the misunderstanding of questions, sometimes an answer is not always straightforward, and a determination can be made based on whether an individual’s circumstances could likely be defended in an enquiry. The survey style of the CEST tool however, does not allow for this.
   
   The CEST tool only provides a determination in 85% of uses, according to HMRC in the IR35 Forum held on 17^th July 2017, leaving 15% to read through guidance and/or call the IR35 helpline to try to find a determination. It is not yet clear how many of these eventually were given a determination by HMRC or how many were left to make an educated, or perhaps uneducated, guess.

With the introduction of the public sector IR35 reform, Qdos developed a compliance management system for recruitment agencies and end clients engaging contractors in the public sector. Due to the rules, the system is available to public bodies and agencies who invite their contractors to undertake the process. It is not directly available to contractors due to the nature of the new rules.

• Our questionnaire is more comprehensive than HMRC’s online test, including all of the recognised status tests, reducing the risk involved.
• Our questionnaire provides a free text field for every question asked, enabling the contractor to provide further information and context surrounding each answer – an important element which ensures we assess each engagement in its entirety.
• Our assessment does not rely on digital logic, but is assessed by an experienced consultant, ensuring a genuine and fair view on each engagement.
• Whilst HMRC’s online test can generate inconclusive results (encouraging the user to read the extensive Employment Status Manual and/or contact the IR35 Helpline), we will always make a justified decision on borderline cases.
• Our digital platform provides all parties involved with complete transparency and minimal administration, reducing the cost and resource burden involved, and providing the contractor with some peace of mind.

If you are a recruiter or hiring manager looking for more information on this system, please visit www.qdoscommercialservices.com