We have discussed the problems caused by the very different tax treatment of employees and the self-employed many times in this bulletin. But how do you know whether somebody is an employee in the first place?
Ultimately this is a question of applying the law to the facts and even apparently straightforward cases can take hours or days of a tribunal’s time where there is need for status to be formally determined.
Of course, it is not practical for everybody’s status to litigated, and in general people have to make their own decisions and hope that if the position were ever investigated by HMRC, perhaps years later, they would not have made the wrong call.
Over the years HMRC has made various attempts to help people make the right decision, from the early days of printed guidance through to various online tools. These are of course helpful but only if they give the right answer.
HMRC has recently published an analysis in which it puts the facts of some recently published decisions on status through its online CEST system and compares the results to the conclusion reached by the tribunal.
Of the 24 cases in the sample the CEST gives the same result as the tribunal in 22 instances, but there are 2 where the tool concluded that the individual was employed but the tribunal found that they were self-employed: there were no cases where the decision went the other way.
A 90 per cent success rate is probably as high as any simple online test can be expected to achieve given that employment status is such a difficult area, but there are concerns that the test is excessively weighted towards factors which would point to employment and does not give enough emphasis on matters such as mutuality of obligation which might point the other way.
Critics suggest that this is deliberate. Engagers in the public sector now bear the responsibility for accounting for tax on deemed employees working through service companies (and there are proposals to extend this to the private sector). And if some workers who are arguably self-employed are treated as employees by those engaging them because of excessive caution built into the tool, HMRC is unlikely to object.
Employment status is one of those areas which requires a hard and fast binary decision to be made along a spectrum of many shades of grey. The reality is that in borderline cases the distinction can seem almost arbitrary.
No diagnostic tool is every going to be perfect and while some of the criticisms of the CEST methodology seem well-founded it is hard to think that any easy-to-use tool could ever be 100 per cent reliable. The real solution is to reform the tax system so that status ceases to play such a fundamental part in determining how much tax is payable.