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Markel Tax

19 Apr 2021

HMRC’s Employment Status Tool: Will it protect your SDS?

With the new Off-Payroll Working Rules now in place, it poses the question of how are medium-to-large enterprises making their decisions for contractors IR35 status? As we have previously advised the legislation provides that ‘reasonable’ care must be taken making a decision.  So, what better tool to use then HMRC’s own Check of Employment Status for Tax tool more commonly known as CEST?

CEST provides contractors and hirers with a result on whether the rules do/do not apply based on a series of questions in relation how the Personal Service Company operates. While HMRC have publicly stated they will stand by a CEST result where it has been accurately completed, it is also noted that a CEST result could not be relied on as evidence in the case of RALC Consulting vs HMRC.

Personal Service

The case law test is ‘do you have the right to send a substitute?’ and the important factor here is the right to. The CEST tool only seems to be concerned if a substitute has been sent and if the Hirer can reject. The Hirer should be able to reject on the basis that the substitute isn’t suitably skilled and qualified to avoid a replacement being any person.  CEST doesn’t address the whole issue on this area by giving options for explanation of refusal of a substitute meaning the decision could contribute to an inside result. It seems to be a very ‘yes’ or ‘no’ scenario.

Mutuality of Obligation

The CEST tool does not seem to cover mutuality and this is one of the important tests when determining IR35 status. It asks no questions surrounding obligation on either party to accept or provide work or rights of termination. HMRC’s own ESM0543 states:

“The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

  • that the engager must be obliged to pay a wage or other remuneration, and

  • that the worker must be obliged to provide his or her own work or skill.”

The House of Lords in Carmichael vs National Power highlighted the importance of mutuality of obligations in determining employment status, and many commentators informed HMRC of this omission in its tool when consultation was called for on the IR35 legislation.  Yet this is important factor remains notably absent.

Control

This is perhaps the one area which does seem to be fully covered by the CEST, however even here it does not seem the tool accurately follows the case law guidance.  Case law is clear that the most important factor when looking at control is the manner (i.e. the how), yet the CEST seems to give this equal weighting to the “what”, “when” and “where”.

Final thoughts

As mentioned above, HMRC have stated they will stand by a CEST result.  At it states:
HMRC will stand by the result produced by the service provided the information is accurate and it is used in accordance with our guidance.

 It is worth pointing out that HMRC’s guidance on the use of CEST spans 35 separate ESM sections, and it is clear HMRC consider all of these must be read and understood prior to using CEST.

In our opinion, while CEST may be of some benefit to the few, simple, supply chains, it does not provide an accurate result for the majority of contracting chains.  IT simply doesn’t allow for sufficient detail to be provided over the nature of the services and real-world complexities of contracting. 

Speak to our team today

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Markel Tax’s FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What’s more, we are able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.

Tagged HMRC IR35 Construction
Next article in series

19 Apr 2021

What can we learn from Kaye Adams’ IR35 victory?