HMRC has released an updated Check for Employment Status for Tax (CEST) service, used to find out whether a contractor or employer should be classed as employed or self-employed for tax purposes, and in-line with IR35 legislation.
On 6 April 2020, IR35 rules, which currently apply to the public sector, will also come into force in the private sector. The tool was originally created in March 2017 by the government to check employee statuses.
Criticisms had been levelled at the tool since, with many saying that it is not fit for purpose, often not delivering a definitive answer in cases where the employment status is more borderline or challenging.
HMRC said that it would enhance the CEST tool before the IR35 reforms were rolled out to the private sector, and this update looks to have confirmed that commitment. The UK’s tax body reportedly consulted stakeholders to help guide the update, and rigorously tested against case law and settled cases.
Accurate input of data
Susan Ball, employer solutions tax partner at RSM, said: “It is understood that around 30 questions have been updated or included and that several industry bodies and reportedly more than 300 stakeholders were asked to use the new version and feed in comments. Until now CEST produced an answer in only 85% of cases.
“The new tool has also been rigorously tested against case law and settled cases by officials and external experts. After answering a series of questions, the CEST tool will return a judgement on whether IR35 legislation applies or not. Questions cover worker’s duties, substitutes and helpers, working arrangements, financial risk, worker’s involvement and contracts (including if working for others).”
Accurate input of data is still necessary for the CEST tool to function as required, and for organisations that employ a large number of contractors, an internal audit of the current workforce is a good first step.
Under IR35 legislation, a contractor whose relationship with a company resembles an employee in all but name is required to have the same tax deducted from their payslip as a standard employee.
“It must be remembered that CEST is the only tool that will produce a result that HMRC will stand by – provided the information input is accurate and the tool is used in accordance with guidance,” warned Ball.
“While CEST has generally been accurate in cases where the employment status is reasonably clear, it has been criticised for not providing a definitive answer in more borderline or challenging cases, particularly in certain sectors. For example, it would be helpful if HMRC could now issue new ‘Film, Television and Production Industry Guidance Notes’ last updated in 2012.”
Work for accountants
Accountants are in a strong to position to guide business clients on IR35. With the criteria with which HMRC uses to determine a contractor’s employment status a complex issue, accountants have the expertise needed to understand and advise on the issue.
Speaking to Accountancy Age in October, Blair Adams, a partner in the employment team at Law Firm Winkworth Sherwood said that accountants will be involved in a similar way he has been as a lawyer, in helping business clients with status determinations and also accounting for the fees that may be incurred.
He said: “Accountants will help, just as lawyers will, with status determination, with the challenge process, with the sort of preparatory work as well – analysing contractor populations from large companies. Accountants are also good at coming up with new ideas and new solutions, so maybe we’ll see some new solutions.”
The impact of IR35 will also likely affect accountants. Adams thinks that IR35 rules will likely lead to people looking to find further ways around the legislation, potentially leading to the creating of more umbrella companies.
Adams said: “I get the feeling from talking to people in the recruitment industry, that the new solutions will largely be based on umbrella company intermediaries – so almost putting more intermediaries back in the chain. I’m not sure that’s necessarily healthy, but I think there’s a lot of work for accountants, because it’s largely tax-driven, which is why there will be a lot for lawyers as well!”
This is the sort of behaviour HMRC is hoping IR35 rules will crack down on, and it will hope that a better CEST tool will enable businesses to make more accurate status determinations, and re-assess their workforce and potential over-reliance on contractors. However, for those businesses who use large numbers of contractors, the skills of an accountant will more than likely be required to advise.
Good-timing
Ball believes that the updated tool will be welcome by those planning to use it, as it gives them time to get their affairs in order before the deadline, now just 20 weeks away.
She said: “Many engagers we have spoken to are planning to use CEST as part of their process ahead of the new off-payroll/IR35 rules commencing in April 2020. The fact the new version is out now is helpful in that regard as it allows engagers time to assess and check if indeed it will work effectively for them. If not, or if it’s only part of the process, it will provide time to look at what other methods might be needed to make sure they make correct status assessments ahead of the new rules in April 2020.
“With just 20 weeks to go before the new rules come it is helpful and pleasing we have it now. We look forward to the HMRC technical guidance being issued as soon as possible once the election is over and the final legislation to enable engagers to effectively finalise their processes and procedures ahead of the start date on 6 April 2020.”