CEST and Construction: Getting Employment Status Right

Employment status is one of the most important compliance issues facing construction companies and contractors today. IR35 legislation places an increased responsibility on businesses to correctly determine worker status, and tools like the HMRC CEST checker are often used as a quick way to find out someone’s status.

However, while this handy tool can help guide decisions, they don’t always give the full picture. This is especially the case in construction, where working arrangements can sometimes be complicated.

In construction, projects often involve multiple contractors and subcontractors, which can make employment status more nuanced. Getting this wrong can result in HMRC investigations and damage CIS compliance. With this in mind, properly understanding the CEST tool is essential for construction businesses.

At Contractwise, we’re experts in CIS and always protect contractors and subcontractors with a range of leading services. In this article, we’ll take a closer look at the CEST checker and its pros and cons.

Read on for more information…   
 

What is IR35?

IR35 is the UK tax legislation that is used to prevent ‘disguised employment’. It applies when a contractor provides services through an intermediary, like an umbrella company, but works in a way that would be considered employment if the intermediary did not exist. In these cases, HMRC may treat the contractor as an employee for tax purposes.

The legislation rules ensure that workers who behave like employees broadly pay the same tax and National Insurance as their peers. IR35 focuses on factors like control, substitution, working relationships and more. In 2021, this legislation was reformed and now sees that medium and large private sector companies are responsible for determining contractor status. Getting IR35 wrong can lead to significant tax liabilities and penalties.  

What is the HMRC CEST tool?

The HMRC Check Employment Status for Tax Tool, or CEST as it is more commonly referred to as, is an online questionnaire that is designed to help determine employment status for tax purposes under IR35 and off-payroll working rules. It asks users several questions about working arrangements and then generates results that inform whether someone works inside IR35, outside IR35 or if it is unable to determine a result.

This tool is intended to help businesses assess contractor status quickly and accurately. However, it is not legally binding and is only as accurate as the information that is inputted. This means it does not always reflect the full reality of working arrangements and sometimes may miss important context that could play a significant role in employment status decisions.

How to use the CEST tool?

The CEST tool is extremely easy to use if you follow these steps:

• Gather contract details: Before beginning the assessment, gather all the details you need about the contractor, including the contractor agreement, working practice details and information about supervision, substitution and working controls.
• Access the tool: Go to the HMRC website and navigate to the Check Employment Status for Tax Tool.
• Select the worker type: Choose whether the worker operates through a limited company, partnership or as a sole trader.
• Answer working relationship questions: You will be asked questions about substitution rights, supervision, direction, control and more.
• Review answers carefully: It is important not to make mistakes, so ensure all responses reflect actual working practices and not just the contract working.
• Submit and review the result: Submit all the information, and you will get a result. This will be either inside IR35, outside IR35 or unable to determine a result.
• Keep records: Make sure you save the results and evidence that support your decision, as you may need it for compliance purposes.

Why is it important to get employment status right?

Getting employment status right is integral for a whole host of reasons, including:

• Avoid HMRC penalties: Incorrect status decisions can result in large backdated tax bills, interest and penalties. HMRC can investigate historic claims if it believes employment status is inaccurate.
• Protect your reputation: Compliance failures can damage your reputation with agencies and contractors, potentially even affecting future opportunities.
• Protect contractors: Having the correct status can help ensure workers receive the appropriate treatment when it comes to tax and employment rights.
• Reduce financial risk: Misclassifying an employee can result in unexpected liabilities and hefty fines, so getting it right by using the tool is extremely important.

Why you shouldn’t rely on the CEST tool alone?

While the CEST checker is a handy tool, it should not solely be relied upon for several reasons, including:

• It relies too much on substitution: The CEST tool places significant weight on substitution rights. However, real-world employment status cases are determined using multiple factors, not just substitution.
• It only provides an 80% outcome: The CEST checker only provides a clear result 80% of the time. This means that 20% of the time, it cannot determine someone’s employment status. This means businesses will have to go elsewhere to make sure they are compliant.  
• It doesn’t always show the full picture: The tool is unable to capture every nuance of working relationships and solely relies upon the information the user provides. Often, construction projects involve layered levels of subcontracting, which have changing work scopes. This means the tool does not always reflect real-world working relationships.  
• Complicated questions: CEST questions can be complicated and sometimes difficult to interpret. This means users can perceive the same questions differently and may come to different conclusions. This increases the risk of inconsistency, and without specialist knowledge, it can mean people input answers incorrectly.   
• It doesn’t mention mutuality of obligation: Mutuality of obligation is a core employment status factor that CEST always assumes exists. This can skew results and fail to reflect genuine contractor relationships.

Getting employment status right is essential for construction companies, and here at Contractwise, we’re here to make sure you’re fully compliant at all times. This includes the Construction Industry Scheme (CIS). We provide a range of services to clients across the UK, including payroll audits and eliminating the risk of HMRC reclassification. For more information, contact our expert team today.