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A worker checking her employment status for tax

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Check employment status for tax

Want to check employment status for tax? Thanks to IR35 and the penalties for an inaccurate status determination, it’s critical that you do – whether you’re a worker who needs to know their engagement’s status, or a recruitment agency or end client who needs to know a worker’s engagement’s status.

In this blog, we’ll share our expertise on the legislation and the various reforms and changes it has undergone. You’ll also discover exactly what ‘employment status’ means and how contractors specifically can check theirs.

Understanding employment status and IR35

What is employment status?

Employment law dictates that there are three types of employment: employee, self-employed, or worker. However, in tax law there are only two: employed and self-employed.

It’s important to note that there’s no statutory definition for somebody who is self-employed for tax purposes. However, it is considered to be the state of working for oneself as a freelance or the owner of a business rather than for an employer. A self-employed person runs a business for themselves and takes responsibility for its success or failure. Naturally, genuine self-employment is subject to all the usual status tests which we’ll cover in this blog.

A contractor can be self-employed, operate their own limited company, and be taxed as such. This is only allowed if they’re operating ‘outside IR35’. If their engagement is ‘inside IR35’, they would be employed for tax purposes. While workers can still operate their own company, they would be taxed at the equivalent employee rate but won’t receive any of the employee benefits and protections.

How does employment status relate to IR35?

IR35 is a tax legislation introduced in 2000. You may have heard it referred to as the ‘off-payroll working rules’ or ‘intermediaries legislation’ too. The legislation aims to prevent the issue of ‘disguised employment’, where a worker would effectively work in the same way as a permanent employee but receive the tax benefits of being self-employed. A contractor’s engagement is either ‘inside IR35’ (i.e. employed for tax purposes) or ‘outside IR35’ (i.e. self-employed for tax purposes).

Initially, workers needed to determine the status of an engagement and therefore check their own employment status for tax purposes. However, from April 2017, the responsibility shifted to the end client for public sector contracts only. These reforms were extended to the private sector in April 2021.

That said, the end client isn’t always responsible for status determination. If the client is entirely overseas or a ‘small business’ as defined by the Companies Act 2006, then the responsibility may still lie with the worker. Our research found that around 30% of contractors are in this category, so it’s still important to know how to assess IR35 status.

What are the tax implications?

Employment status for tax purposes dictates whether you’re paid a gross rate (i.e. your engagement is ‘outside IR35’) or if you’d pay PAYE rates on the gross sum (i.e. your contract is ‘inside IR35’). As a result, being employed for tax purposes is less tax-efficient than being self-employed for tax purposes.

How do I check employment status?

There is no simple answer to this question. To check your employment status for tax purposes, you’ll have to assess your engagement against several different factors. The main ones are the following:

  • Personal service: A key part of this is the right of substitution, and whether you have a right to provide a replacement to perform the service you’re performing.
  • Mutuality of obligation (MOO): In its purest form, MOO refers to an obligation for the client to give you work, and you to do it. It’s far from simplistic, so you’ll need to consider this factor in more detail to understand if the engagement is subject to it or not.
  • Control: This relates to the autonomy you have over the services you deliver to the client.

There are many other factors, such as whether you’re at any financial risk or you bring your own equipment to an engagement for example.

As you can see, there’s a lot to get your head around when it comes to checking whether an engagement will fall foul of the off-payroll working rules. To check employment status for tax purposes, we suggest using a combination of digital tools and IR35 expertise. One such tool is HMRC’s Check Employment Status for Tax (CEST) tool – although we wouldn’t recommend it as it has had its controversies…

Employment status tools: The CEST tool

What is the CEST tool?

The Check Employment Status for Tax (CEST) tool is HMRC’s tool. It gives HMRC’s view on employment status for tax purposes using the information that users provide.

It was originally introduced in April 2017, shortly before the public sector reforms. As these changes meant that the responsibility for determining an engagement’s IR35 status now lay with end clients in the public sector rather than contractors, it aimed to help these public sector bodies do so. However, there’s no obligation to use it for determining your engagement’s IR35 status. You don’t even have to use a tool at all, strictly speaking.

Nonetheless, we’d always recommend that the end client or contractor use a tool where appropriate or seek specialist support when it comes to determining the status of an engagement. While the only guidance to contractors is to carry out reasonable due diligence in determining status, we suggest doing more than the bare minimum. Otherwise, you may risk penalties (more on that later in this blog).

Is it a good tool for contractors?

The CEST tool has come under intense scrutiny for several reasons. The House of Lords even found the tool “not fit for purpose”.

A recent FOI request made by Kingsbridge found that, in 22% of cases, the CEST tool can’t find a determination for whether an engagement is ‘inside’ or ‘outside’ IR35. It has been mooted by the Employment Lawyers Association that the tool doesn’t accurately reflect case law – something echoed by almost all advisers in this space.

The CEST tool seems to have become progressively worse over time, too, with many public sector bodies receiving tax bills in excess of £300m for incorrect determinations when using it. While we’ve received confirmation that ‘CEST 2.0’ will finally arrive in autumn 2023, HMRC has confirmed that it hasn’t changed its view on employment status – meaning issues surrounding MOO will still be present. This version may improve the user experience, but it doesn’t seem likely that it will fix all the problems.

What other third-party tools are available?

Our research revealed that half of businesses don’t trust the CEST online tool. That’s why many seek other support – either in the form of an IR35 expert, another tool, or a combination. Our own IR35 Status Tool provides the best of both worlds.

Employment status tools: Kingsbridge IR35 Status Tool

What is the Kingsbridge IR35 Status Tool?

Our tool will ask you between 29 and 34 yes/no questions to establish a rounded view of your contract and working practices. It then gives you a determination and comprehensive report. If your case is borderline, our in-house IR35 experts will conduct a manual review. The tool takes a hybrid approach – with comprehensive questions and opportunities to provide contextual notes so we can produce an accurate SDS document.

We strongly recommend that you don’t just review the status of your engagement, but get your written contract reviewed too. It’s key that these reflect your working practices. If there’s a change in these or you start a new engagement, you should seek external help with a contract review. This is especially important as it impacts the IR35 status of the assignment, even if it’s with the same company.

Is it a good tool for contractors?

We’re the only IR35 solution provider that uses a blend of an automated review process with in-house consultancy support for borderline cases. This is so that you receive the most accurate IR35 result and guidance possible.

What’s more, our Head of Tax, Andy Vessey, designed the tool. He has over 40 years of experience and has defended more than 550 IR35 investigations successfully.

How much does it cost?

It costs a worker only £50+VAT. It also comes free if you choose to use our IR35 Protect insurance cover.

Is it an IR35 tool for recruitment agencies and end clients too?

Yes. For end clients, our IR35 Status Tool provides a platform to accurately look at and determine status. Recruitment agencies can offer clients peace of mind and their own account access to the tool should they not want to engage contractors due to financial risk to their company. Insurable determinations and a built-in resolution process also make our tool the number-one choice for many businesses across the UK.

Common pitfalls: What to watch out for

What are the risks of misclassification?

If you’re responsible for determining your assignment’s IR35 status and you get it wrong, you could potentially face an IR35 inquiry. There doesn’t need to be a reason for this – HMRC has the power to launch an inquiry for investigations up to four years in the past. And this number goes up to six years if you’re ‘careless’. If HMRC suspects fraud, this number increases again – to 20 years.

What are the financial implications?

Following a successful HMRC enquiry, you’ll need to pay HMRC all the tax and National Insurance Contributions you would have paid for an ‘inside IR35’ engagement. There may be interest in addition to this, as well as a hefty penalty of up to 100% of the taxable amount. This makes understanding your obligations when it comes to checking the engagement’s status even more crucial.

FAQs: All your questions answered

What happens if I have multiple engagements?

It’s possible to be working on simultaneous contracts with different statuses – one can be ‘inside IR35’ and one ‘outside IR35’. You’d be an employee for tax purposes for the ‘inside IR35’ contract and pay Income Tax and NICs, and self-employed for the ‘outside IR35’ engagement and pay taxes in accordance with this.

How often do I need to check IR35 status?

Every time you have a new assignment or there’s a change in practices to a contract. This is the case even if the work is for the same business. It’s best to consult an IR35 expert when you need to review contracts – this will limit your chances of falling foul of the IR35 or off-payroll working rules.

What should I do next?

You should first figure out if you’re the one to determine the status of your assignment. The client has an obligation to tell you. If this responsibility does lay with you, then it’s recommended you use a dedicated tool and contact IR35 specialists such as ourselves.

Talk to our IR35 experts

As you can see, it’s incredibly important that you correctly assess employment status for tax purposes so you can avoid any repercussions from HMRC. Here at Kingsbridge, we’re happy to support you – get in touch with our IR35 experts if you need further guidance.

Additional resources

If you’d like further information about the off-payroll working rules and determining employment status, here are a number of our helpful resources: