HMRC's employment status tool needs to be improved, says tax body

Out-Law News | 03 Jun 2019 | 12:00 am | 2 min. read

The 'check employment status for tax' (CEST) tool that is used in the UK to determine whether the off-payroll working rules apply to a contractor needs significant improvement before the new off-payroll working rules are introduced "if businesses are to make the correct decisions on whether the off-payroll working rules apply", the Chartered Institute of Taxation (CIOT) has said.

The criticism of CEST was included in the CIOT's response to the consultation by UK tax authority HM Revenue & Customs (HMRC) on the operation of the new off-payroll working rules for the private sector, which closed last week. HMRC is looking to improve CEST before the new rules are introduced in April 2020.

Tax rules known as 'IR35' require that employment taxes be paid by people who provide services through a PSC if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

Once the new regime is in force, the engaging business will be liable for determining whether the IR35 rules apply. The engaging will also be required to operate PAYE and pay employers' National Insurance contributions (NICs), unless the contractor has been engaged through an agency, in which the case the agency will be responsible for paying the contractor. The changes will not apply to small businesses which engage contractors through PSCs. Off-payroll working rules have applied to the public sector since April 2017.

Proposals to transfer liability for any unpaid employment tax under IR35 "back to the first agency in the supply chain – and ultimately, where HMRC is unable to recover the liability from the first agency, the end client - where HMRC are unable to collect an outstanding liability from a defaulting party further down a supply chain." were also criticised as part of the CIOT's response.

These remarks echo comments made by Penny Simmons, a tax expert at Pinsent Masons, the law firm behind Out-law.com in its response to the consultation, which closed last week.

"Where there are multiple agencies involved in the supply chain, if HMRC fails to collect outstanding tax from the fee-payer, these tax liabilities should not be capable of being passed up the supply chain to the client." Simmons said. Where the engaging business has "exercised reasonable skill and care in making a status determination and has undertaken comprehensive labour supply chain due diligence, including having reasonable procedures to prevent fraud/tax evasion, it would be unfair to pursue the client for unpaid tax liabilities further down the chain." she said.

HMRC has been advising large and medium sized businesses in the private sector to look at their workforce, including those engaged through agencies and other intermediaries, to identify those individuals who are supplying their services through PSCs. Businesses should then work out if the off-payroll rules apply for any contracts that will extend beyond April 2020.

HMRC has also been advising businesses to start talking to their contractors about whether the off-payroll rules apply to their role.  Businesses should also put processes in place to determine if the off-payroll rules apply to future engagements.