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Making status determinations (part 8)

Updated 15 December 2023

Read Purpose, scope and background (part 1) of these guidelines, if you have not already.

You should read these guidelines alongside existing off-payroll working guidance. They are not designed to be used in isolation, or to create an end-to-end process for organisations to comply with the rules.

Your organisation should apply the guidelines to reflect the complexity and scale of your own off-payroll working engagements. Use these guidelines to help make informed decisions, based on individual circumstances.

Give feedback on these guidelines using the survey we’ve created.

Once your organisation has identified a worker who falls within the scope of the off-payroll working rules, you must consider their employment status for tax purposes.

There is no statutory employment test. The principles for determining status have been established based on decisions made by the courts over a number of years.

These are the same principles you would apply to determine the employment status for tax of workers that do not supply their services through their own intermediary.

Your organisation should apply these principles to determine the deemed employment status of your off-payroll workers — in other words, whether an engagement is ‘inside’ (deemed employed) or ‘outside’ (deemed self-employed) the rules.

Read more about employment status principles and how to apply them in HMRC internal manual ESM0500.

Decision making infrastructure

It’s important to consider who in your organisation is responsible for making off-payroll status decisions. This will vary from one organisation to the next, depending on its structure and the size of its off-payroll population.

Typically, the hiring manager will be a key person in this process, but it’s likely that others will be involved too.

The hiring manager is the person in your organisation that requires the services of the worker, and will often act as their line manager. In larger organisations this person may be known as the vacancy holder. They will often act as the contact point between your organisation, and the off-payroll worker.

For many organisations, the hiring manager is often the primary decision maker, as they have a detailed understanding of what the off-payroll worker’s duties will be, in practice.

Some larger organisations may use procurement teams. These teams should work closely with the vacancy holder, to ensure that their knowledge and understanding of the role is captured. This is an essential part of employment status decision making.

Some organisations have a central team or a single named individual responsible for making or overseeing all status decisions. Experts from this central team will either:

• make status determinations alongside hiring managers who know the particular facts of an individuals engagement
• check hiring managers’ decisions for consistency

Where a central team is responsible, this may involve people from different parts of the organisation working together. For example:

• Human Resources (HR)
• hiring managers
• procurement teams
• legal and tax managers

Organisations may also choose to take advice from external tax advisors. If you take advice from external advisors, your organisation remains accountable for the status decision.

However your organisation decides to structure the decision making process, you should make sure that all individuals and teams with responsibility for making status determination decisions are:

• well trained
• have appropriate guidance to refer to
• are aware of any escalation routes, if decisions are difficult or finely balanced

What to consider

Once you’ve identified the correct people within your organisation that need to be involved in deciding the employment status of off-payroll workers, it’s important that they all understand their role within the process.

Anyone who has to make status decisions will need to consider all relevant information and documents, to make sure these decisions are robust. They should always base their employment status decisions on the facts of the particular engagement. They should not base their decision in any way on commercial pressure to arrive at a particular employment status outcome, either to:

• satisfy a particular worker
• widen the pool of available workers

Remember that written terms might not provide an accurate reflection of the true agreement between the parties, for example where:

• they’re inconsistent with working practices
• they’ve been varied by verbal agreement
• they do not contain enough detail
• they’re inconsistent or contradictory with other written terms
• they’ve changed over time

When making status determinations, some (but not all) of the things you should consider are:

• the day to day working arrangements for the workers (hiring managers can often help with this)
• your organisation’s procurement policies and procedures
• other policies your organisation has which may influence your status decisions, for example HR, IT and security policies

You should also consider contracts used in the procurement of off-payroll workers. These may be contracts directly with the worker’s own intermediary, or contracts with an agency who supplies the worker to you. In most cases these will be written contracts, but in the absence of these, there may be verbal contracts and implied terms and conditions to consider.

There are specific rules for the tax and National Insurance contributions treatment of certain types of workers. Read more about these specific occupations in HMRC internal manual ESM4000.

Decision making tools

Most organisations use some kind of system or tool to help them make their off-payroll status decisions.

HMRC’s Check Employment Status for Tax (CEST) tool is a free resource which your organisation can use for this. There are also other tools commercially available from third parties, that you can use to determine a worker’s employment status.

Some organisations choose to use the CEST tool alongside third-party tools. Your organisation is responsible for any liabilities arising from incorrect determinations made by a third-party tool. CEST is the only tool where HMRC will stand behind the determinations made, as long as the information you use to make the determination remains accurate, and is in line with HMRC’s guidance.

You can use the tool again if:

• there’s been a change to the terms and conditions of an existing contract or service agreement
• there’s been a change to the role or working practices
• the information you originally provided is no longer accurate

You do not need to know who the worker is to use the tool — you’ll still get a result. You can use the tool again when you know the worker’s identity.

Information you need to use the CEST tool

You’ll need to know:

• details of the contract
• if and under what circumstances your organisation will accept a substitute worker
• the worker’s responsibilities
• who decides what work needs to be done
• who decides when, where and how the work is done
• how the worker will be paid
• if the engagement includes any corporate benefits or reimbursement for expenses

You’ll need to make sure you involve all relevant individuals when you gather the information to answer these questions. This may include:

• your HR team
• your hiring managers
• your tax team
• representatives of any agency you are using to fill the role

You may also need to obtain information from the worker. You’ll only be able to answer certain questions about the worker’s wider business activities, once you know who that individual worker is.

It’s important that anyone in your organisation involved in the process of making status decision understands the questions that they are answering when using the CEST tool. 

Read more about how to use the CEST tool in HMRC internal manual ESM11000. This manual goes through each question the CEST tool asks, and explains how the answers align with each of the employment status indicators.

There is further detailed information about these indicators in HMRC internal manual ESM0500.

The provision of personal service by a worker is an essential feature of an employment relationship, so it’s important that you get this right.

HMRC has seen instances where contracts contain a substitution clause, when the reality is that this would be unlikely to, or never, be used in practice. It’s important that the answers you give reflect the reality of the engagement. We have seen cases where the contract allows for substitution, but includes clauses that allow the client to reject a substitute for a variety of reasons. This has led to clients putting incorrect answers into the CEST tool.

For example, this can include the need for the client to carry out checks and vet the proposed substitute, to make sure they have the:

• qualifications or skills that the client requires
• required level of security clearance for the role

When considering the issue of substitution, pay particular attention to whether a right to reject a substitute exists, and if so, whether substitution would be practical for the engagement. If the client can reject the substitute, this indicates that there is some requirement for personal service.

Read more about personal service in HMRC internal manual ESM11040.

Results

The CEST tool provides the following determinations based on the information you give:

• off-payroll working (IR35) rules apply
• off-payroll working (IR35) rules do not apply

In some finely balanced cases, you may receive an ‘unable to determine’ result. When this happens, you should review your answers. The tool will provide you with a link to guidance, and tell you how to contact the Employment Status and Intermediaries helpline. The helpline who can provide support in answering the questions in line with HMRC guidance. Answering the questions on the worker’s wider business activities can also help to reduce ‘unable to determine’ outcomes.

If you then decide the answers do not accurately reflect the terms of the engagement, you should undertake a new CEST tool determination. 

You should not manipulate your CEST tool answers to reach a definitive outcome. The tool is not designed to produce an outcome in every single case. ‘Unable to determine’ is a valid CEST tool outcome.

HMRC will only stand behind outcomes from the CEST tool as long as the information you use to arrive at the determination is accurate and follows HMRC’s guidance. Read more in HMRC internal manual ESM11000.

If you consider your answers to be accurate and the CEST tool outcome is still ‘unable to determine’, you’ll need to further examine the terms of the engagement, alongside the employment status manual, to reach a status decision.

You should keep the record of the CEST tool ‘unable to determine’ result. Record your decision and the reasons for the conclusion you reach with reference to the employment status indicators, as evidence of undertaking due diligence.

You can ask for further advice through your organisation’s internal escalation routes, or an external tax advisor, to help with these employment status decisions.

Example 1

This is an example of an organisation effectively using CEST, combined with robust processes, to make sure it produces accurate status determinations.

A medium-sized organisation has a process for any new recruitment where the off-payroll working rules may need to be considered. The hiring manager uses the CEST tool before the role is advertised. This gives any off-payroll workers applying for the role an indication of what their employment status is likely to be.

Hiring managers that engage off-payroll workers are well trained on the off-payroll working rules. They understand where to find guidance and support, if they need it. The organisation’s processes direct the hiring manager to contact the tax team in cases where they receive an ‘unable to determine’ CEST tool outcome.

Once they have an indicative CEST tool result, the organisation advertises the role and starts to interview suitable candidates.

When they’ve chosen someone for the role, the organisation establishes if the successful candidate will be providing their services through their own intermediary. If they are, the hiring manager contacts the worker and asks them additional questions. They use this information to go through the CEST tool fully.

The organisation’s tax team review the second CEST tool result. They follow up any queries or concerns about the outcome with the hiring manager, to make sure that the information put into the CEST tool is accurate. The organisation cannot complete the recruitment process for an individual working through their own intermediary, if they do not have the second CEST tool result from their tax team.

The organisation saves a copy of the CEST tool outcome for their records. They print out a copy of the determination for the worker, and give this to them on their first day.

Example 2

This is an example of an organisation producing inaccurate status determinations, due to insufficient knowledge and ineffective systems.

A medium-sized organisation has a small contractor workforce, and little experience in deciding employment status for tax purposes, for off-payroll workers.

It buys an ‘IR35 solution package’ from a third party company. This provides them with a suite of documents, and some generic accompanying guidance. The organisation designs and implements a process for making status determinations, based on these documents.

The process invites the off-payroll workers to review the documents and guidance, then complete the CEST tool to reach a status determination. Every off-payroll worker determines themselves as self-employed for the purposes of the off-payroll working rules. Different workers, under the same contract and doing the same role, reached the same conclusion, based on different responses to the same questions.

The organisation did not purchase the provider’s additional training or ongoing support packages. They did not critically challenge how robust the package was. They also failed to take advice from their tax advisors on how suitable the package was, or how to implement it. Because of this, the organisation did not address these inconsistencies, or sufficiently challenge the CEST tool outcomes.

The organisation took each worker’s determination at face value. Whilst the CEST tool was used as part of the process, the resulting decisions the business made were inconsistent with each other. The CEST tool results were arrived at without considering HMRC’s guidance on the employment status indicators.

A HMRC compliance check found that the business had exposed itself to significant liabilities because of this approach.

Role-based determinations

In most cases, your organisation will be required to make individual status assessments for each individual worker who falls within the scope of the off-payroll working rules, considering that worker’s role and the specific facts.

However, a client can make a determination for a group of off-payroll workers, sometimes referred to as ‘role-based determinations’, as long as they are, both:

• engaged under the same contractual terms and conditions
• operating under the same working practices

Blanket determinations

A blanket determination is where a determination is made for a group of workers who have different terms and conditions or working practices, without considering their individual circumstances. For example, deciding that all off-payroll workers are deemed employees, without considering the circumstances of the engagement.

A blanket determination is not:

• a client deciding to move all its off-payroll workers across to direct employment
• a client deciding that all their off-payroll workers should be engaged through umbrella companies that treat them as employees
• a role-based determination, where all workers are under the same contractual terms and working arrangements

HMRC do not accept blanket determinations. A client that has applied blanket determinations will not have taken reasonable care in making its determinations. We may consider the use of blanket determinations as deliberate behaviour when considering the penalty position.

Example 3

This is an example of an organisation correctly using role based status assessments.

A public body engages 5 agile scrum team members and a scrum team leader, to support an IT project they’re developing. The 5 team members all do the same work, in the same way, on a daily basis, but the team leader has additional responsibilities. All 6 workers are engaged on the same contract as ‘agile workers’.

The 5 team members are on the same contractual terms, and work in the same way. The public body makes a role-based determination for them. Although the team leader is engaged under the same contract, their day-to-day responsibilities are different from the others. Therefore, the public body makes an individual assessment for the team leader, based on the specific facts of their engagement.

Example 4

This is an example of an organisation failing to take reasonable care, by using a blanket determination.

An organisation has moved from small to medium-sized, and must apply the off-payroll working rules for the first time, from the start of the next tax year.

They identify that they have 3 long-standing workers who work through their own personal service companies. They also use an agency to supply typically one or two short-term workers at a time, as required.

In preparation for applying the rules, they have conversations with the 3 long-standing workers about the planned changes. 2 of them state that they will walk away from their roles, if they are to be taxed like employees. The management team make a decision that they will treat the 3 long-standing off-payroll workers as self-employed for tax, but will assess the agency-supplied workers using the CEST tool.

This is a blanket determination for the 3 long-standing workers, because the organisation has not considered their working practices and terms and conditions.

During the next tax year, one of the agency-supplied workers, who has been treated as a deemed employee, discovers this and makes a referral to HMRC’s fraud hotline. HMRC open a compliance check into the organisation’s off-payroll working arrangements, and find that the 3 workers have not been fairly assessed.

HMRC concludes that the 3 workers should have been treated as deemed employees since the start of the tax year. The organisation explain that the decision was made for business continuity reasons. HMRC determines that the behaviour was deliberate, and significant penalties are due, which cannot be suspended due to the organisation’s deliberate behaviour.

Revisiting status determinations

There may be circumstances where there are material changes to the working conditions or the contractual terms of an off-payroll worker. This might mean that the original determination no longer reflects the reality of the engagement.

In these circumstances, your organisation must reconsider the original determination to see if it still stands.

Working conditions may change gradually over time. In these cases, you should consider the date that the facts of the engagement changed sufficiently to have an effect on the employment status decision. Read a relevant example of this.

Hiring managers are often important in identifying changes. These may be identified as a result of receiving a disagreement.

Many clients also undertake regular reviews of their status decisions. This may be a random sample of decisions. Others choose to review all of their off-payroll decisions on a regular basis. The exact scope and frequency of this exercise varies from one client to another, depending on its size, and how many off-payroll workers it engages.

If any review of an earlier decision results in a change of status for the worker, your organisation should prepare a new status determination statement. This new status determination statement should make it clear what date the revised decision is effective from, and should be cascaded to all relevant parties. Read the Record keeping section of these guidelines, for details of the records your organisation should retain when you complete such a review.

Read more about revisiting status determinations in HMRC internal manual ESM10012.

Example 5

An example of an organisation having robust steps in place to make, record and monitor their status determinations.

A tax manager has overall responsibility for making status determinations for the off-payroll workers of a large organisation, working closely with hiring managers. The tax manager has a strong understanding of employment status indicators. The hiring managers understand the day-to-day responsibilities of the organisation’s off-payroll workers.

All hiring managers that engage off-payroll workers have been trained in the process of recruiting off-payroll workers. The organisation has a simple flowchart of the process on its intranet, for reference. When a hiring manager identifies the need for an off-payroll worker, they consult the flowchart. This directs the hiring manager to contact HR, who carry out all the background administration. HR arrange a meeting between the tax manager and hiring manager, who provides a job specification, if one is available.

The tax manager and hiring manager work through the CEST tool together, to reach a conclusion on the off-payroll worker’s employment status. The process works the same whether the hiring manager has just identified a role, or has a specific individual in mind. In exceptional circumstances, where the tax manager is unable to reach a firm decision on employment status, they might consult the organisation’s external tax advisers for support. In practice this rarely happens.

The tax manager shares the CEST tool output with HR. HR are responsible for issuing the status determination statement directly to the worker by email, and to an agency if appropriate. They keep email delivery receipts as evidence that they’ve passed on the status determination statement. They also email a copy to the hiring managers. The HR team save all relevant records in secure folders for internal audit purposes.

The HR team notify the finance team that the role has been considered under the off-payroll working rules, and the outcome. As a failsafe, the finance team cannot enter a new supplier on their systems, without the appropriate signoff from HR.

The organisation does not have open-ended contracts with its off-payroll workers. If the hiring manager wants to use the same worker again under a new contract, a new determination is made, to make sure that decisions stay up to date. If any contracts run for over a year, HR prebook a review in the tax manager’s calendar, 11 months from the contract start date. The tax manager will then decide whether a light touch or a full review is most appropriate.

The next section of the guidelines is Status determination statements (part 9).