The Revenue has confirmed that large UK businesses can rely on its ‘Check Employment Status for Tax' (CEST) tool when making status determinations under the IR35 rules. As we’ll hear, it means there is now a compelling reason for large businesses to use the tool when making IR35 determinations.
A reminder. The employment status of a worker determines how they are taxed, and the law governing this is commonly referred to as ‘IR35’. On 6 April last year the burden of that determination switched from workers to businesses in many cases, and, around that time, HMRC released its CEST tool. The online tool enables businesses and workers to answer a number of questions about a particular working arrangement and, at the end, it delivers one of three results. First possible result, that IR35 applies, and the person is deemed an employee for tax purposes. Second possibility, IR35 does not apply, and they are self-employed for tax purposes. Third possibility, the tool is unable to determine the issue.
The Revenue’s position, that large businesses can rely on CEST’s result, was made clear in updated guidance about when large businesses need to make a notification of an uncertain tax treatment. HMRC has confirmed that a status determination using CEST will be considered to represent HMRC’s known position as long as the information is accurate, and the results are not “achieved through contrived arrangements”. If the business follows the CEST determination, there would then be no requirement to notify - large businesses are required to notify HMRC where they have adopted an uncertain tax treatment, which will be a treatment contrary to HMRC’s “known position”, under new rules introduced on 1 April this year.
Tax expert Penny Simmons has commented on this for Out-Law. She says ‘Although CEST has been widely criticised – it fails to provide a determination in 15% of cases and is less effective in complex cases – nonetheless she says all businesses, whether large or small, should still use CEST as part of a robust IR35 compliance process, although in complex cases, she says ‘it may be advisable to use a combination of CEST and expert judgment’.
So why is Penny encouraging the use the tool when we know it fails to provide a determination in 15% of cases? There is absolutely no compulsion to use CEST, so what the advantage of using it? Earlier Penny joined me by video-link, and I put that question to her:
Penny Simmons: “I’m going to caveat what I say in the sense that the article I wrote, Joe, is very much talking about the use of CEST by large businesses because the updated guidance from HMRC that they've published in the context of other tax rules, tax rules to notify the Revenue about uncertain tax treatments, those new rules only apply to large businesses. The reason why, if you like, I'm endorsing CEST, or not endorsing CEST but I'm encouraging businesses to use CEST as part of their IR35 compliance programmes, is because the fact that the Revenue, again, has put into guidance that it considers CEST the right tool for making status determinations. They talk about CEST in this guidance as what they call a ‘known position’ but the fact that the Revenue is, yet again, endorsing CEST is another very powerful, persuasive reason why large businesses simply shouldn't be ignoring the CEST tool. Notwithstanding that, we know there are limitations, and we know that it can be ineffective, and we know that in 15% of cases it won't necessarily give you an answer when you need an answer. The fact that the Revenue is endorsing it, I think is a really important reason why businesses should include a CEST determination as part of that IR35 compliance programmes.”
Joe Glavina: “Many businesses hire a lot of contractors; some have hundreds of them all doing very similar work. So, can the business save time by doing group determinations? And, the other point, is this work that HR would be expected to do?”
Penny Simmons: “Two very good questions. In terms of group determinations, the short answer is you probably can't do them and the reason I say that is because the Revenue’s guidance on IR35 has been quite clear for some time, actually, that they generally wouldn't accept a group determination. They have said that if there are a group of contractors that are on the same terms, and we're not just talking about the same contractual terms when we talked about this, before, Joe, but we're talking about the same terms in reality, so what actually happens in practice in relation to those individual contractors working practices? Well, if you've got a group of contractors who really are on the same terms, then yes, it might be pragmatic and justifiable to make a group determination using CEST for that group of contractors, but I would proceed with caution if I were looking to make group determinations because, for the most part, individual contractors won't have exactly the same terms both in writing and in practice and therefore group determinations won't necessarily be valid and won't satisfy the Revenue that a business has taken reasonable care when making those determinations.”
Joe Glavina: “And what about the other point, Penny? Is this work that HR should be conducting in your view?”
Penny Simmons: “This is one of those classic questions where I say it depends, really. It depends how the business organises itself; it depends what the business's HR function looks like, what its procurement function looks like. It may well be that HR is best placed to be making status determinations under IR35 but, at the same time, it may actually be that the managers, or the procurement team, who are onboarding those contractors are best placed to make the determinations. Often it depends simply how a business structures its onboarding processes for individuals who are coming off-payroll. So, sometimes the HR teams are only responsible for contractors who are being paid through payroll, through PAYE, whereas those who might be onboarded and not paid through payroll initially, before the IR35 determination is made, their onboarding process would be dealt with by procurement, or other parts of the business, in which case those parts of the business would be better place to make those determinations.”
Penny’s article on this is called ’IR35: HMRC backs use of ‘CEST’ tool by large UK businesses’ and is available from the Out-Law website. We have put a link to it in the transcript of this programme.