HMRC has released an updated Check Employment Status for Tax tool (CEST) service. The tool can be used to find out whether HMRC are likely to class an individual as employed or self-employed for tax purposes. It works by asking a series of questions about the relationship between the employer and the worker.
The questions cover areas such as whether the worker is an office holder, the worker’s right to send a substitute, the control that the employer has over the worker’s hours, place of work and workplace duties and who bears the costs of the worker’s equipment and other working necessities. HMRC have stated that, provided answers are given accurately and there are no tax planning arrangements, they will stand by the outcome that the CEST tool gives.
The updates that have been made to the CEST tool have been long awaited as CEST has been under review for some time. These changes have been introduced in response to substantial criticisms of the previous version of the tool which did not really take account of the individual’s wider working arrangements. HMRC also wanted to reflect a number of IR35 decisions which have been made since the CEST tool was introduced and in anticipation of the extension of the requirement to deduct tax at source under IR35 to much of the private sector. HMRC has made almost 40 changes to the tool which cover Financial Risk, Worker Contracts and Personal Service. The tool asks for more information if the employer knows how the worker operates but will still provide an answer in cases where they do not have this detail. HMRC does recommend that the tool is used again once the employer has this information but maintain they will stand by this decision even if the employer does not re-check the answer. That will still depend on the information provided being accurate – so if the employer becomes aware that the original information was wrong it would be advisable to re-check the result using the tool.
Mutuality of Obligation
The greatest criticism of the updates at this stage is that they do not take into account the Mutuality of Obligation factor. This is the obligation on the employer to provide work to the worker and the reciprocal obligation on the worker to accept this work. This has been deemed a particular fault of the CEST tool given that mutuality of obligation has been a key factor in determining employment status in a number of recent IR35 tribunals. The fact that the tool appears to assume this obligation exists is not in line with the outcome of many of these cases at tribunal.
HMRC has defended the updates saying that it has worked with more than 300 stakeholders to “make CEST clearer, reduce user error and consider more detailed information”.