With four months to go until IR35 legislation is implemented across the private sector in the UK, the UK tax authorities (HMRC) released the updated version of their online Check Employment Status for Tax (CEST) tool this week. This post will walk you through the following:
What has Changed?
Whilst there were 39 changes in total made to the CEST tool, there hasn’t been significant changes overall to the test. The aim of the latest changes seems to be geared more towards trying to provide clarity and enabling the tool to be used in situations where the worker may still be unknown.
There are now seven distinct sections within the CEST tool, and a lot of the questions have been simplified and/or additional clarity and guidance has been provided to assist in answering the questions. Unfortunately, the HMRC does not flag these updates in a clear and obvious way (such as on the landing page of the CEST tool). However, they do issue all changes via the Employment Status Manual, which can be located here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/updates.
About You and the Work
The very first question ‘what do you want to find out’ is possibly the most complicated question within the tool. Regardless of which response is answered, it will bring the user to the same set of questions. It is not immediately clear from the HMRC website why this question has been added. In our view, the question is aimed at delineating situations where an individual is required versus a service or piece of work (which could require IR35 consideration).
The remaining questions are very straight forward. As the end-client you are the hirer, and the tool now attempts to verify whether the hirer can deploy someone who is trading as a Limited Company, Partnership or Unincorporated Body or not.
By default, a contractor won’t have office holder duties. However, this is something that the hirer will need to clarify to ensure accuracy when completing the tool.
Substitute and Helpers
The CEST tool provides a lot more clarity on this section describing what is and what isn’t a substitute. Within this question and some of the latter questions there are also additional options rather than a straight ‘Yes’ or ‘No,’ as well as an expanded description against each possible answer. However, the main difference in this section is that the right of substitution questions are not “golden” questions, whereby answered in a certain way take the user to the end of the test without having to answer all other questions. Now, irrespective of how this set of questions are answered, all later questions are asked to the user.
Again, within this section there are ‘substantive changes’, where there are no longer immediate returns of ‘outside / inside’ from singular ‘Yes / No’ inputs. There are now multiple ‘No’ answers with varying reasons. What is interesting in this section is the HMRC states the control test (one of the primary employment status tests) has decreasing relevance if the work is highly skilled, and cites the example of an airline pilot in guidance notes.
Worker’s Financial Risk
This section has now been further broken out in to six questions with much more more clarity provided for the client responding to the questions. Fundamentally, financial risk is assessed by understanding the costs a worker might face in order to undertake the engagement, the remuneration type (such as hourly/daily or fixed price, etc.) and whether a below par piece of work would lead to lost revenue.
The re-wording on these questions has provided additional clarity than on the previous version of the tool. However, the intent of the questions is still to understand the level of integration within the end-user organisation.
Should the client not have already identified a worker, then the remaining questions are not asked. This section is the most significant change to the tool, and it has been added to gain a clearer understanding of whether the individual is truly in business under their own account. It looks at factors such as exclusivity and any restrictions that may impede the worker from seeking additional current as well as future work. Ownership rights, available working time and a series of contracts are also considered. The client will need to have knowledge of the contract, which will be signed with the worker.
Interestingly, the HMRC says it will stand by a determination issued by the hiring organisation, even if the hirer does not know who the worker is. However, the HMRC recommends that once the worker’s identity is known, the tool should be used again if the worker disagrees with the determination at which point the additional questions about the worker are asked.
Comment and Analysis
Overall, when compared to the previous CEST tool, it is a step in the right direction. It will form the cornerstone of the Status Determination Statement process for many organisations. The new version is certainly more detailed than the previous version, and by taking out the so called “golden” question on the right of substitution/personal service means all questions must be answered — this will give it a more robust feel. There is also a section at the end that allows the user to see/review all responses and make amendments as required before moving through the declaration process. The new version of the tool also looks in greater depth at the contractual terms that the worker will be engaged under, placing greater weight on employee like restrictions (for example non-compete clauses and intellectual property rights).
According to HMRC, the CEST tool has been ‘rigorously’ tested against case law by officials and external experts. And the new guidance that accompanies the tool is reflective of this (such as using a sports pundit and TV presenter as a type of worker).
The HMRC has stated that they will stand by the results of the previous version of CEST, providing the information is true and accurate and a reflection of what happens in reality. The point being, clients are not required to automatically retest roles with the new version, although it may be their wish to do so (and this would be a wise course of action where any outside determinations have previously been given, but the additional questions around contractual terms could have a significant bearing on the result). Furthermore, it is worth reiterating for any outside determinations, a secondary review process takes place (using alternative methods to CEST) as this strengthens the position that reasonable care has been taken.
All clients should now have an IR35 readiness plan in place. The legislation will apply for any workers who are trading through a Limited Company, Partnership or Unincorporated Body in the UK, and will be paid after April 6th, 2020.
Any clients looking for additional information should reach out to their PRO client services representative or contact PRO at +44 (0) 203 633 3912 or email at email@example.com
Disclaimer: The content in this blog post is for informational purposes only and cannot be construed as specific legal advice or as a substitute for legal advice. The blog post reflects the opinion of PRO Unlimited and is not to be construed as legal solutions and positions. Contact an attorney for specific advice and guidance for specific issues or questions.