The IR35 rules relating to off-payroll workers determine whether a contractor is classified as self-employed or as an employee. It used to be up to the contractor to make this classification. Now, it's the responsibility of the company who pays them.
HMRC continue to notify businesses of their intention to review compliance, which oftencomes with a request to meet so they can observe processes and ask lots of questions.
Our previous , which surveyed 605 mid-sized businesses in the UK, found that less than three quarters of respondents (68%) were confident in their business’s compliance with IR35. With only 25% of these ‘very confident’.
One area of concern is the reliance of many on the HMRC Check Employment Status for Tax tool (CEST) to undertake employment status assessments. Using the CEST tool isn't mandated under the legislation.
When these changes were introduced to the public sector in April 2017 we helped clients navigate the IR35 rules. During this time, a number of challenges that the CEST tool couldn't overcome were highlighted.
On these occasions, our employment tax specialists were able to support clients to comply with IR35. However, because advice was provided on a consultancy basis, costs could escalate quickly, especially where required on an ongoing basis.
To help our clients with IR35, we developed a digital solution that could incorporate our expertise in an accessible and cost-effective way. We created our Employment Status Intelligence Platform (ESIP).
Below, we set out five limitations of CEST that we've responded to with the design of ESIP:
Statistics previously released by HMRC show that only 80% of IR35 assessments run through CEST produce an 'employed' or 'self-employed' outcome. The other 20% return a ‘cannot determine’ outcome, which leaves the user in limbo.
HMRC advise you consult their online manuals, contact their helpline, or seek advice from advisers.
In reality, this is an option for businesses to firstly make their own decision, which may expose them to increased risk. Or secondly, to seek professional advice that can become expensive.
In response to this, ESIP returns an outcome for every single assessment. We also wanted to reflect the fact that employment status is not just a binary decision. There might be different levels of certainty between the outcomes, which is the reason so many instances end up in tribunal cases following disagreement between HMRC and the assessor.
ESIP undertakes two assessments; one for % certainty employed and one for % certainty self-employed. The higher of the scores determines the result, with an associated ‘risk of challenge’ rating.
IR35 risk rating is calculated on the difference between the two status scores - 'employed' and 'self-employed'. Risk of challenge indicates the risk that the decision will be challenged. This is by either HMRC, if a self-employed result, or the contractor, if an employed result.
This lets you analyse your contractor population more fully within the two categories. You can also understand and manage their employment status risk effectively.
“CEST often does not give a conclusive answer. ESIP does, and the breakdown into probabilities of successful challenge is both helpful and easy to understand.”
CFO at a mid-size business - ESIP customer
The person who uses CEST for an IR35 assessment receives an immediate result and the option to edit any answers.
Anyone who has used CEST will know the temptation that exists to amend answers to see how it might rationalise the result. Before long, it's difficult to remember what answer accurately reflects the reality of the engagement and what has been put in as a ‘test’.
CEST can be completed by either the contractor, the end client or the agency. My experience suggests that each of these users will interpret the questions and arrangements slightly differently and likely come out with different results.
One of the key requirements of IR35 legislation is for the end client to demonstrate ‘reasonable care’ in undertaking employment status assessments. This includes processes and controls over who is completing assessments and how the accuracy of input is determined. Something that HMRC will look at closely when undertaking reviews.
We took this into consideration when designing the ESIP assessment workflow. Each completed assessment is peer-reviewed to support demonstration of reasonable care.
1 The assessment is completed by the end client, not the contractor. This is because it is the end client who will be held responsible for the outcome by HMRC.
2 The assessment is completed by a ‘specialist’. An individual at the end client who is closest to the detail of the engagement, such as the hiring manager.
Unlike CEST, the specialist does not initially see the IR35 employment status result. Instead, they submit their answers and the assessment then goes through to an ‘approver’. This is a different individual within the organisation who provides a more independent ‘four-eyes’ review of the answers to ensure accuracy.
The approver can raise questions to the specialist until they are comfortable to approve the assessment and produce a status determination statement. The assessment process is all recorded within ESIP and acts as an audit trail of how the decision is made. Which is useful if it should it need to be reviewed at any point in the future.
We showcased ESIP to HMRC in autumn 2019 as part of their stakeholder reviews of the CEST improvements.
HMRC ran two IR35 assessments simultaneously through ESIP and CEST; one of which came out with the same result. The other came out as ‘undetermined’ by CEST, and a ‘high risk’ result in ESIP, which is as we would expect.
HMRC fed back that they were impressed with the design of ESIP and how it supports the demonstration of reasonable care.
This is a challenge that is often levelled at HMRC: CEST doesn't consider mutuality of obligation (MOO) between the contractor and the end client in its IR35 question set.
HMRC have defended this by stating that they consider that MOO exists in all engagements where there is a contractual agreement to supply and provide work. Therefore, it goes without saying that it's present. However, when this has been tested in tribunal situations, it's regularly considered beyond this assumption.
The ESIP algorithm was developed by our team of employment tax experts. With many years of combined experience in employment status assessments and HMRC approach.
We've designed a question set that covers the various categories that make up employment status This includes MOO, and consideration of the current, prior and future relationship between the end client and the worker.
In addition, we've built ESIP to reflect the approach that we see tax tribunal judges take time and again. It's about building up an overall picture of the engagement and effectively weighing up the factors on either side of the argument before coming to a conclusion.
In contrast, CEST understandably reflects the approach of a tax inspector and takes a less-balanced view to status assessments.
A lot of organisations believe they should be using CEST for IR35 assessment because HMRC have said they will stand behind the results of its assessments. However, it's important to note that HMRC will stand behind the logic that CEST is based on, rather than accept the result without question.
Instead, they will challenge the accuracy and objectivity of the answers given. We have seen these cases go to tribunal on a number of occasions. This highlights again the importance of taking reasonable care when completing assessments, regardless of how they are undertaken.
HMRC guidance is clear that there's no requirement to use CEST for IR35 employment status assessments. Alternative software or professional advice is also an option. Referring back to the fact that CEST has a 20% gap of results, having an alternative option is pretty much a necessity.
We have a lot of confidence in the logic we've built into ESIP. So much so that we've tested it against CEST in the presence of HMRC. We also undertake regular quality testing on the questions and logic. This includes testing tribunal cases as they're released, helping us to provide assurance to our clients that they can trust the expertise on which ESIP is built.
Perhaps one of the biggest challenges of using CEST is that it doesn’t retain a record of the IR35 employment status assessments undertaken.
We've already mentioned the requirement to demonstrate reasonable care as a key part of the IR35 legislation. Businesses will need to demonstrate the processes and controls that they have in place to do so.
When using CEST, this can become a manual process. This creates a lot of admin time when ensuring compliance across the business. Various stakeholders will be involved at different stages, and all documents need to be collated and stored.
With ESIP, we have created a contractor management tool, as well as a tool that undertakes assessments and can be used both for self-employed contractors as well as for those working through intermediaries. All assessments are then stored against the individual contractor record. This includes a full audit trail of the decision showing who undertook the assessment and any dialogue that occurred in reaching the decision. It also keeps a record of the contract and any other documents that are used to inform answers.
ESIP's design means that senior managers in the organisation to know how many contractors are in the business, which departments they work in, and what their current employment status is.
ESIP also acts as a monitoring system and issues reminders for reassessment at either 12 months or on a change of details, whichever is sooner. This further supports compliance with a reasonable care approach with minimal admin for users on an ongoing basis.
“Great tool, which is a lot easier to use than the CEST tool. The GT tool gives us an organisational view of non-payroll workforce, which the CEST tool does not.”
HRD at a large corporate – ESIP Customer
The IR35 rules are notoriously difficult to apply because employment status is such a subjective area. There isn't a clear set of guidelines to follow that determine employment or self-employment. Fortunately, there's a lot of established case law for practitioners to work through.
We've done the hard work in designing the algorithm and platform for you. ESIP provides a comprehensive assessment. It also supports the management of your contractor population and history in a user-friendly, accessible platform.
Perhaps most importantly is the quality of the support that we provided for both ESIP and employment status in general. As one client put it:
“Excellent tool and excellent support!”