Uncertain tax treatment – employment status and the HMRC CEST tool

The employment status of a worker determines how they are taxed. This has been an area of increased scrutiny for the government in recent years, given a number of high-profile cases and that it is likely to account for a material percentage of the estimated tax gap of £12.7bn for underpaid income tax and National Insurance Contributions. The area of law targeting disguised employment is commonly referred to as “IR35”.

The fundamental challenge with IR35 is the difficulty in determining the “employment status” of a worker. In advance of changes to the rules on 6 April 2021 (which moved the burden of that determination from workers to businesses in many cases), HMRC released the “HMRC Check Employment Status for Tax” (or CEST) tool. The tool allows businesses and workers to answer a number of questions about a working arrangement, and delivers one of three outputs:

1. off-payroll working (IR35) rules apply (i.e. deemed employee for tax purposes);
2. off-payroll working (IR35) rules do not apply (i.e. self-employed for tax purposes); and
3. unable to determine.

Given the subjective nature of the factors that contribute to a worker’s employment status (which may differ for tax and employment law purposes), it is unsurprising that employment status has been brought within the scope of the Uncertain Tax Treatment (UTT) legislation.

However, what is surprising is that HMRC now consider that a CEST tool output constitutes a “known position” for UTT purposes, where “the result is not indeterminate, and the information provided is accurate”. This means that if the CEST tool is completed and a contrary view is taken, HMRC must be notified. This will enable HMRC to become aware of positions that might be contrary to its view and raises the likelihood for a potential challenge at a much earlier stage.

There are 35 pages guidance on using the tool, many of which require the CEST tool user to make a judgement call as to what should be considered “small” “incidental” “material” “substantial” in the context of control, cost, risk and integration across a range of industries and roles. As such, considering a CEST tool output as a “known position” for UTT purposes seems to indicate a lack of appreciation for the nuances that must be considered when assessing employment status for IR35 purposes.

While “reasonable care” must be taken in applying the IR35 rules, there is no compulsion to use the CEST tool. This change may have the unintended consequence of pushing businesses and workers away from the tool.