Off payroll - decision time

In my ongoing series of articles tackling off payroll compliance, I have been examining how an engager can put themselves in a strong position in advance of any third party intervention - particularly given that HMRC are building up their compliance activity in this area. 

We’ve already considered how to understand who you have working in your business (the discover stage); now it’s the turn of “determine” – how do you ensure that you have made the correct status decision?

The first question most people ask is “should I use HMRC’s status tool, CEST?” 

The answer to this question is simple enough – yes, just not on its own! The advantage CEST gives you is that HMRC have said that they will stand behind the answer it produces if you’ve used the tool properly.  So, if you are confident that you can support the answers you have put into CEST and its told you that the worker is not employed for tax purposes, surely that’s the end of the matter? 

Erm, no.  Sorry!  You see, the difficulty is two-fold.   CEST tends to sit on the fence when the going gets tough.  It will often produce an “unable to determine” answer for the less straightforward cases.  HMRC’s promise to stand behind the result produced is also contingent on them agreeing with the answers you’ve provided and I’ve plenty of experience with them seemingly reaching a different view on status and then challenging the answers provided by the engager for me to feel that you can only rely on CEST if the answer is pretty obvious anyway.  So it’s of limited use for the more challenging decisions and should never be the only tool used. 

You therefore need something more than CEST. but what? 

• An external tool – this could be helpful if you have lots of assessments that are not straightforward but make sure that you choose the supplier wisely. You’re liable for any PAYE/NIC underpayments if HMRC disagree.  If any assessment is insurance backed, check that you fully understand the circumstances under which they will pay out and the limits of any coverage, otherwise you might find that you are left holding the baby when HMRC come calling. Do your homework when selecting the supplier.  Do they have a track record in employment status advice, are they regulated, are they more interested in selling additional services to your workforce than protecting your business? 
• Your own checklist or version of CEST.  Dangerous unless you have a very capable, well trained team of people conducting status checks. 
• External advisors undertaking all status assessments or at least providing an escalation process.  Having someone else do all your status checks could prove expensive, so you might want to use them only to check the more complex cases.  Probably the best choice, particularly if undertaken in conjunction with one of the first two choices.  In other words, an external provider undertaking a full review of the thornier status decisions, leaving you to use CEST, your own checklist or a status assessing company to carry out the day to day assessments. 

Whichever method(s) you chose, you should review the process regularly to ensure that: 

• everyone is trained to the correct level. 
• you can show that similar roles produce similar status decisions. 
• you are up to date on case law and HMRC guidance. 
• you review individual workers regularly/when renewing contracts as a status decision is not a “one off”.  
• you have a clear process for recording the decisions made and the reasons behind it. 
• you carry out periodic sample checks. 

Never base your decision solely on what the contract says.  You must always examine how the worker actually carries out their duties and your expectation of the worker, those of any line manager, client and the worker themselves.  You may also have to revisit the position once the worker has started to check that nothing has changed. 

Never accept someone’s word on their status.  “here’s one I made earlier” might work for Blue Peter but could open a world of pain for you if you don’t independently assess the status for yourself.  Contractors can try and persuade you to treat them as self-employed (“I have only ever been self-employed”) even if the way that you want to work with them means that PAYE applies.  There is nothing wrong with examining whether things can be changed to get to a point where everyone is happy with self employed tax status, but remember that you will be liable to any PAYE/NIC underpaid if HMRC disagrees.  Ensure that any decision is fully documented and robust. 

Check that you have a satisfactory appeals process in place?  In my experience, workers tend to vote with their feet if they don’t agree with your status decision, but you need to ensure that you record, track and respond to any challenges within the statutory timelines, not least as HMRC will look at this when they consider whether your processes are fit for purpose. 

And, finally, take a good long look at your processes every three years as an absolute minimum.  Its too easy to get comfortable with the system such that no-one takes a step back and checks whether its still fit for purpose.  What worked well when implemented might not be the right thing forever. People get complacent, some learn how to game the system, so don’t be afraid to check before HMRC do!