Technical Officer LITRG and Chartered Tax Adviser
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Employment status tool is good for the low paid

Meredith McCammond from LITRG is encouraged by HMRC’s recently enhanced CEST tool and its role in preventing the miscategorisation of low-paid workers as self-employed.

16th Dec 2019
Technical Officer LITRG and Chartered Tax Adviser
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There has been wide criticism of earlier versions of HMRC’s check employment status for tax (CEST) tool. However, HMRC has now enhanced it, with help from the low incomes tax reform group (LITRG).

For many of LITRG’s constituents, the new version is an improvement. It is certainly better in terms of helping hirers or workers with a general tax status query and in particular, it helps workers identify when they are being falsely self-employed (ie treated as self-employed when it is clear that the true nature of their engagement is that of employment).

Disadvantages of false self-employment

We see many queries to our website that suggest false self-employment is on the rise, the effects of which can be detrimental and far-reaching.

Example

This is a real example of a query LITRG received:

“My job is as a leaflet distributor. I was initially PAYE, but my employer has informed me that I am now self-employed. I have undiagnosed learning disabilities and require step-by-step help with what to do in order to pay tax and National Insurance that is due. My sister is trying to help me, but we really do not know where to start. I do not have a business, but my employer says that I am now self-employed. Am I a business? What form should I be filling out to work out my tax and NI?”

Those who are falsely categorised as self-employed miss out on employment rights and the certainty of having their taxes dealt with under PAYE.

Also, if a person is treated as self-employed for tax purposes, they are likely to declare themselves as self-employed for universal credit purposes, which is an arguably a less generous and more burdensome route to obtaining that benefit.

Much false self-employment appears to be intentionally foisted upon workers in order to drive down the engager’s costs and responsibilities, especially employers’ National Insurance (NIC).

However, some is accidental – when those taking on workers simply don’t understand the rules and distinctions. With appropriate awareness-raising and signposting, the new version of the CEST tool could help in both scenarios.

More accessible

One of the criticisms of the old CEST tool was that it tried to do too much.

In particular, it wasn’t clear how to access the part of the tool that dealt with general employment status queries. This was via the third question: “How does the worker provide their services to the end client?” The user needed to choose: “as a sole trader”, whether the worker was a sole trader or not.

The very first question of the enhanced CEST tool means that people can access the part of the tool that they need from the outset.

Plain English

LITRG was concerned about the language used in the old CEST tool, some of which was at grade 12 in a reading age checker, the same reading level as required for the Harvard Law Review.

There was also a very problematic technical question about “office holders”. That question still exists but at least the phrase has been put into quotation marks to help show that it has particular meaning and doesn’t just mean whether or not you work in an office!

Better results

The new CEST tool is more approachable and user-friendly, and the language is easier to understand than the previous version. This, in turn, means the results should be more reliable as they should be based on more accurate information being used as inputs into the tool.

The output at the end is now well laid out. For workers, it tells them to download a copy and show it to their engager – something LITRG specifically asked for.

Limitations

There are still some limitations with the tool as far as low paid workers are concerned.

The CEST tool only looks at employment status from a tax perspective, not from an employment law perspective. Usually, a person who is employed or self-employed for tax law will be employed or self-employed for employment law – but not always.

The CEST doesn’t cover “worker” status. It is therefore unfortunate that we have heard of workers being referred to use the HMRC tool in order to help them determine their employment law status.

Further work needed

Identifying false self-employment is only part of the story for workers. HMRC needs to develop and publicise a clear protocol for dealing with false self-employment.

It is simply not good enough for HMRC to advise those presenting in false self-employment arrangements to look on gov.uk, talk to their employer or complete the self-employment pages of a tax return. What those people really need is a clear pathway to support, and for HMRC to take action against their unscrupulous engagers.

We will continue to raise these issues with HMRC.

Replies (4)

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By tonyaustin
16th Dec 2019 11:59

Tell that to all the highly paid contractors who want IR35 abolished, which will mean employees being forced to use companies if they cannot be treated as self-employed. We need a clear reliable unbiased way of easily distinguishing between employed and self-employed so that everyone, employer / employee or client / contractor, is treated fairly and can arrange their tax affairs to suit their circumstances. It also needs to be enforced properly and fairly so that people are not suddenly hit with unexpected liabilities, accumulated over a number of years.

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By raybackler
16th Dec 2019 13:30

The new CEST tool is still inaccurate as far as establishing employment status, because it can't and probably never will be capable of following case law. What is needed is simplifications of the tax system to cover tax and employment status.

There are two points of view raised, with the low paid and with highly paid contractors, but the newer status of 'worker' also needs to be considered for the low paid. Again, I don't think the CEST tool is the answer for these two groups at opposite ends of the employment spectrum, who face different issues and have different resources to challenge their status.

I can't imagine any low paid employee, such as a leaflet distributor, filling in the CEST tool and trying to hand it to an Employer to insist that they are taxed under PAYE. With the very low paid, it is often the unwillingness of the engager to incur the costs of running a payroll, rather than avoiding Employer's NI that is the issue. The only thing that will work here is if the Employer is forced to operate a payroll by HMRC with the employment and tax status pre-determined as 'worker'. This would cover all engagements where there is no obligation to provide continuous work, such as occasional leaflet distributors or seasonal workers.

The low paid need protecting from being classified as self employed against their will. They won't have the resources to challenge their status, nor the funds needed to keep accounts and complete self assessment tax returns.

For someone classified as a 'worker', the employer has to operate a payroll under PAYE, but does not provide the benefits of employment, although they do pay Employer's NI. This gives both the worker and the employer engagement flexibility.

Highly paid contractors are shunted down the route of forming limited companies because the engager wants to avoid Employer's NI, auto-enrolment pensions and other staff benefits. These contractors have now been hit by the new dividend tax, which is a 7.5% penalty that begins to bridge the gap with Employer's NI. Why not just increase the dividend tax for Close Companies and do away with IR35 altogether? IR35 has time and time again been set aside by the tax tribunals, although not in every case. It is a complete waste of resources for all concerned. It is best avoided by reforming the taxes due from Close Companies. Why not increase the Dividend Tax so it matches the Self Employed NI rate of 9%?

The simplification for the low paid would make enforcement by HMRC easy for any worker who complained about being forced into self employment. The simplification for IR35 would avoid clogging up the tax tribunals and give certainty to all.

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By SteveHa
16th Dec 2019 14:06

Quote:
The output at the end is now well laid out. For workers, it tells them to download a copy and show it to their engager – something LITRG specifically asked for.

Given that many, if not the vast majority of these workers will not have employment protections anyway, since they are likely to be short term contracts and within the two year limit, I see many simply losing their jobs if they try this.

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7om
By Tom 7000
16th Dec 2019 14:13

You don't actually think anyone's uses it do you. Any FD worth his salt will simply ban contractors. Its what I would do. Why take the risk?

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