HMRC defends employment status tool

CEST is designed to be used only if a contract exists and if there is no mutuality of obligation, no contract will exist, according to HMRC. Mutuality of obligation means that the individual agrees to carry out the work and the engager agrees to provide it.

HMRC was responding to concerns about CEST raised in the IR35 forum, a group of taxpayer representatives and professional advisers who meet regularly with HMRC to discuss the operation in practice of the intermediaries' rules, known as 'IR35', which affect the way personal service companies (PSCs) are taxed. The rules require the PSC to account to HMRC for income tax and national insurance if the individual would have satisfied the test to be an employee if he had contracted directly with the client rather than through the PSC. CEST is designed to help PSCs to determine whether they are caught by the IR35 rules.

"The case law tests which determine employment status for tax purposes have been around for many years. The fact that they have proved difficult to distill into an online status tool in a way that satisfies both HMRC and contractors, will be a concern for businesses who engage contractors through PSCs," said Chris Thomas, an employment tax expert at Pinsent Masons, the law firm behind Out-law.com.

"Although businesses which use PSCs are not currently liable for determining the employment tax status of the individual behind the PSC, this will all change if the government goes ahead with proposals to extend its public sector off payroll working rules to the private sector. If this happens engagers will be responsible for determining tax status and will be liable to account for tax and to bear the added cost of employer's national insurance contributions. Businesses who engage contractors through PSCs need to consider how they will manage this risk," Thomas said.

In its response to the IR35 forum, HMRC says: "Where work is provided and remuneration is paid we will assume that there is mutuality of obligation and that a contract exists. We will consider whether this is an employment contract or a contract for services. We will be sceptical of an assertion that no mutuality of obligation - and logically no contract – exists in these circumstances," it states.

HMRC said that where a worker is engaged on an assignment by assignment basis this "may be a relevant factor, but will not be determinative".

The HMRC guidance quotes the decision of Lord Justice Underhill in the case of Arada v Windle, where he said: "there are some circumstances where a worker works intermittently for the employer, perhaps as and when work is available. There is in principle no reason why the worker should not be employed under a contract of employment for each separate engagement, even if of short duration."

"Whilst there may well be cases where the nature of the contract does effectively create mutuality, HMRC's approach of automatically assuming that the mere existence of a contract and the provision of work (presumably however uncertain and irregular) creates mutuality seems a bit of a leap from the case law," said Chris Thomas.

"Whilst that approach might be consistent with 'worker' status, it is generally considered that mutuality for employment purposes requires something more – an ongoing obligation on the engager to provide work and on the individual to accept it. This highlights once again just how thorny the issue of status can be and the limitations of the CEST," he said.

Other factors which need to be considered in determining employment status include the level of control the client has over the contractor and whether the contractor has to provide the services personally.