It was recently announced that HMRC were rolling out changes to their CEST tool. CEST Can you give us a brief overview of what the CEST tool is?
The CEST tool stands for ‘checking employment status tool’, and it was established by the Revenue to help both companies and professionals in the industry, or rather the accounting world, consider the employment status of individuals based on the Revenue's assessment of the current case law. There's no single test for employment status and the issue has been developed by the courts over a number of decades. The Revenue took the guidance that the courts have given and tried to create a matrix within which they can help you consider employment status – and to be fair to the Revenue, it's been a reasonably comprehensive test.
It considers things like the traditional arguments around whether a genuine subcontractor can send a substitute to do his work, or are there mutual obligations between the prospective employer and the individual? And in the last few years, the focus has concentrated particularly on the degree of control and the level of integration of the individual into a business.
Now, CEST one was introduced a number of years ago and in October this year, they announced a rewrite. So they've changed the platform under which it operates to make it more user friendly and in theory, they're going to enhance the operation of the system.
That signals that the Revenue are still committed to using the CEST tool; they’ve invested a significant amount of money and time in improving it. We haven't yet seen an improvement in functionality, but the basic principles remain the same: it's a vehicle that companies can use to check the employment status of subcontractors within their organisation and importantly the Revenue have always accepted that if a business has used the CEST tool, it’s a very strong argument to say they’ve considered the employment status of their individuals and – assuming they get a positive result – the Revenue are generally happy to accept it. There are always exceptions to that but it's a good step to take for a business.
One example of how easy it is to get on the wrong side of the tool is that a recent new client of EEBS had completed the assessment, and found their subcontractors were classed as employees by the CEST. To cut a long story short, even though they had been through the process – alongside their accountants – they fell into the trap of thinking of the exceptions to the questions rather than reflecting the reality of the engagement – and more importantly, the principles that underpin the engagement.
So, in short unless you are knowledgeable in tax and employment law, and unless you understand the principles at stake then it’s very easy to obtain the incorrect result. It’s important that construction businesses carry out these checks to avoid heavy penalties. That’s where we come in: you can speak to the EEBS team for advice.
What about the connection with IR35 legislation?
In terms of the IR35 argument, there's again recently been a significant amount of discussion about the IR35 issue. Kaye Adams won her case recently, which has been going on for nine years. Bizarrely, it's estimated that the Revenue spent quarter of a million pounds in legal fees to try and recover £70,000 pounds worth of tax.
IR35 was introduced in 2000, but came to prominence again in the last few years when the prospective tax bill was moved under certain circumstances from where it's always been – in other words – it's always been a potential liability of the individual who's using a service company.
Around five years ago, the regulations were changed where, with large engagers, the potential tax liability now sits with them, so it became the focus of attention for larger companies who were worried about the potential tax liability. But the argument about employment status is the same whether it's an individual or an individual supplying his services through a limited company. It's the same basic principles that apply.
Reading opinions on the new CEST Tool, the general feeling seems to be that while CEST is great, it can't always provide determinations, therefore it shouldn't be used in isolation in trying to determine status of work. Common sense or good judgment has got to play a part in making that final decision.
You’re absolutely right and it's always worth taking some expert advice when considering the test. People will often, for instance, consider the exceptions to a question rather than the rule of thumb and that would be clear guidance that we would offer: consider the general rule of thumb around an engagement, not the occasional contradiction to the question.
And in terms of third parties, that's where it becomes I guess a little less clear cut as well. If an umbrella company is used, what part does that play in making that determination?
It depends entirely on the arrangements that were in place. I can obviously only talk about EEBS, but it's quite clear from our history with the Revenue that HMRC are happy to accept that our engagement and our terms are valid and it would pass the CEST tool requirements for the engagement of services by our clients.
