The use of labour-only subcontractors in the construction industry is standard practice. You get a big project, you need extra hands, but you don’t want to employ, so you bring in some subbies. Not unusual.
But as you start to work with those subbies more frequently, you find yourself creeping into some grey areas. And those grey areas could lead to HMRC questioning their employment status.
You might not want to employ them, and they might not want to be employed. But what you want and what they want isn’t really relevant, because if HMRC reclassifies them as employees, you’ll be facing some hefty costs.
Fortunately, HMRC has created a handy tool to help you determine employment status.
Unfortunately, it’s pretty shit.
What is CEST?
The Check Employment Status for Tax (CEST) tool gives you HMRC’s view of a worker’s employment status, based on the information you provide.
You answer a series of multiple-choice questions about how you work (or want to work) with your subcontractors. After you’ve completed the questions, you get one of the following outcomes:
- Employed for tax purposes for this work
- Self-employed for tax purposes for this work
- Off-payroll working (IR35) rules apply
- Off-payroll working (IR35) rules do not apply
- Unable to determine
It’s worth noting that the tool was originally designed for public sector organisations to determine IR35 status. It was not designed for construction businesses to determine the employment status of their subbies. And, while it has now been updated to cover private businesses, it’s still far from foolproof.
And even though HMRC claim they will stand by all determinations given by the tool, this comes with a disclaimer:
“This would not be the case if the information you have provided was checked and found to be inaccurate.”
It doesn’t matter whether you deliberately give false answers or not; the issue is whether your answer is accurate. And if HMRC decides it isn’t, you don’t have a leg to stand on.
That was the case in 2019 when NHS Digital was hit with a £4.3m tax bill despite having used CEST to assess the employment status of its contractors. They felt they had provided accurate information, HMRC disagreed.
And there’s more:
HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties.”
In other words, entering sham contracts with payroll companies to make it look like you operate in a certain way won’t work either.
The positives of CEST
Before you disregard the CEST tool completely, there are some positives. Completing the questions will help you understand a little more about what HMRC looks at when determining employment status.
You can also use the tool to provide a bit of guidance. For example, if you have been thinking about employing a subbie full-time and CEST determines them as ‘employed’, then it’s probably time to put them on your permanent payroll.
And if your result comes back as undetermined, that’s a good indication that you’re straddling a few grey areas and need to speak to an expert (like the guys at HardHats).
But you should only use the tool as a guide. Because as much as HMRC have tried to make it accurate, even they admit, it isn’t always reliable.
The problem with CEST
Part of the problem is that CEST only asks a limited number of questions and overlooks some of the key considerations used to determine employment status. For example, mutuality of obligation isn’t covered by CEST, despite being one of the things HMRC look at when they investigate employment status.
As there are only a limited number of questions, there are only a limited number of possible answer combinations. Despite this, some of these combinations deliver an ‘unable to determine’ outcome – surely that’s a red flag in itself?
Another reason the tool isn’t reliable is the ease with which you can go back and amend your answers to get the outcome you want. What use is a tool that let’s you manipulate your outcomes?
By all means, use the tool as a guide, but don’t rely on it too heavily. If you are unsure whether your subbies should be employed, don’t leave yourself open to risk.
How to determine employment status (and keep HMRC happy)
It is up to the contractor, not the subcontractor, to determine employment status. If HMRC decides to reclassify your subbies as employees, you’re the one liable for the costs.
Doesn’t matter whether you pay them through a third party, whether they have a CIS card, whether the CEST tool says they are self-employed. If your relationship is employer-employee, they should be on your PAYE.
But that doesn’t mean you should rush into employing all your subbies just to be on the safe side.
If there is a genuine business reason for the working relationship you have with them, you can work with subbies however you want. But it’s important you accurately document this relationship.
You can do this via a payroll company, but there is a risk. If HMRC does come calling, they won’t simply take a contract at face value. They will check whether it matches up with reality. If the contract is a sham, it will be exposed. And more often than not, it’s the contractor that takes the hit, not the payroll company.
If you’d prefer not to take the risk, then get your own bespoke contracts in place. Better still, get your own bespoke, insurance-backed contracts in place with HardHats.
We’ll document your working relationship so that if HMRC ever opens an enquiry, they won’t misinterpret your subbies as employees. And in the unlikely event they do reclassify your subbies, we’ll cover any costs, including NIC, tax and penalties.