HMRC raise more questions than answers on employment status

Sarah Hewson worries that HMRC’s attempt to explain matters has muddied the waters rather than giving businesses greater clarity as to how the notification of uncertain tax treatment (UTT) rules interact with employees and employment status

Under the UTT regime, certain large businesses must notify HMRC of uncertain income tax positions taken in Pay As You Earn (PAYE) returns which are due to be filed on or after 1 April 2022. 'Tax advantage' is broadly defined and includes the avoidance of an obligation to deduct or account for income tax. This means that avoiding an obligation to operate PAYE counts as a 'tax advantage' even where tax is paid on the relevant employment income through self-assessment.

Employment Status and the Uncertain Tax Treatment Regime 

In August 2022, HMRC made two changes to its manual giving guidance on the notification of uncertain tax treatment (UTT) regime.

As a reminder, broadly the UTT regime requires large businesses to notify HMRC where they either make a provision in their accounts for tax potentially due and/or the treatment is not in accordance with HMRC’s known position where the tax advantage exceeds the specified threshold, currently £5 million. The notification requirement applies to returns required to be made on or after 1 April 2022.

Amalgamation of tax advantage across the employee population

The first change clarifies HMRC’s position that, where unrelated individuals are employed by the same organisation under the same terms and conditions and the same approach is taken for a specific item for those employees, then the tax advantage needs to be amalgamated to determine if the threshold has been exceeded in the relevant period.

While this helpfully confirms the view of many advisers, it is noted there is no expansion on what is meant by ‘the same terms and conditions’. Employment contracts for different categories of employees are often subtly different, such that they are not on the face of it ‘the same’. Perhaps a better interpretation would be ‘materially the same’, but even this is not without its challenges. 

Seemingly HMRC’s expectation is that the total tax advantage (primarily PAYE and National Insurance (NI) where there is an associated PAYE advantage in the employee context) for all employees should be considered where the advantage arises from the same ‘uncertain’ position taken by an employer. 

Arguably, a simpler first step would be to consider if the total tax advantage for a particular position in the relevant period exceeds the £5 million threshold. Where the total is below this threshold (which is likely to be the case for many employment tax positions taken), this nuance need not be considered further. Where the tax advantage materially exceeds the threshold, then notification would likely be required in any case. Accordingly, employers should only need to consider the meaning of ‘the same terms and conditions’ in a limited number of circumstances for actual employees. The lack of clear guidance in this regard is likely to mean different employers take a different approach, but time will tell if this becomes a material concern to HMRC.

Where this vague statement may cause issues is as regards those deemed as employees for tax purposes but not falling to be employees. Whilst this is of particular relevance to the second change (addressed below), given that the terms of such contracts are often individually negotiated, applying the above is likely to be particularly challenging. The first complexity is HMRC's reference purely to ‘employees’ in the above update. While it could be assumed they intend this to encompass deemed employees, it would perhaps be helpful if this were explicitly stated.

Even if it is accepted that this extends to deemed employees, arguably no contractor is engaged under the same terms and conditions such that the facts are not ‘substantially the same’. Accordingly, the tax advantage arising from each engagement needs to be separately considered, rather than amalgamated, for the purposes of the £5 million threshold. For the reasons outlined below, it is unlikely that this will be a concern for most businesses but the lack of clarity, when the purpose of the change was presumably to give further clarity, is far from helpful.

CEST tool output represents HMRC’s known position

The second change is clarification that:

“The outcome of the HMRC Check Employment Status for Tax (CEST) tool, where the result is not indeterminate, and the information provided is accurate… [represents HMRC’s known position]”.

This is supported by a new section entitled ‘Employment Status’, which includes an additional example demonstrating this point as well as clarifying that HMRC’s known interpretation of the law is as set out in its guidance manuals.

I have a number of concerns in relation to the above, the first of which is how the above clarification as regards the CEST output interacts with the requirement to amalgamate any tax advantage across the employee population for the purposes of considering whether the £5 million threshold has been met. The example does not abate the concerns outlined above as to establishing which amounts need to be amalgamated given the assumption that, 

“The £5m threshold is met.” 

There is no explanation as to how this has been met. And in my experience there are few contracts where the PAYE/NI in point would in and of themselves meet this threshold. As such, if it is accepted contractors are generally not engaged under ‘the same terms and conditions’, it is difficult to see how any approach taken for the vast majority of contracts for services would ever need to be notified (given that the tax advantage in a relevant period for any particular contractor would rarely reach £5 million).

Anyone who has tried to undertake an employment status assessment and/or provide advice in this regard is all too familiar with how complex the tests are and the difficulty with applying these to the particular facts and circumstances. This is perhaps best demonstrated by the increasing number of appeals to the Upper Tax Tribunal, Court of Appeal and, in some cases, the Supreme Court where the initial employment status conclusion has subsequently been overturned.

HMRC’s view, as outlined in their guidance, is precisely that, their view and is not always a view shared by advisers, experts and the Tribunals/Courts. Further, application is somewhat subjective and dependent on the specific facts. Whilst it is worth noting that the UTT rules are intended to apply to uncertainties in interpretation of the relevant law as opposed to the application of that law to particular facts (with the ‘uncertainty’ in employment status in the main arising from the application of tests derived from case law to a specific set of facts), the line between misapplying HMRC’s interpretation of the law and evaluating how that applies to the specific facts is somewhat opaque and may not be a distinction made by either HMRC or businesses.

It is also worth noting that the Employment Status Manual (ESM) has very detailed guidance on the application of employment status tests themselves for tax purposes along with a separate section as to how these aspects should be considered for the purposes of the CEST tool. Only the latter is referenced in the front page of HMRC’s CEST tool, and even that is only referenced in a throw away manner noting “… you may want to view further guidance on using the tool…” rather than drawing out that this would be helpful/expected. While the tool itself contains some links to the more general guidance, this is not consistent throughout the tool, with a number of questions having no links to further guidance. For the uninitiated, this suggests there are no complexities with the questions where there is no reference to further guidance.

A key example is the question as regards the provision of materials. This question has heavy weighting in the CEST tool and, in my experience, is commonly misunderstood/misapplied by those undertaking the assessment. The fact there is no attempt to draw an assessor’s attention to this complexity is not helpful and could inadvertently lead them to take an approach contrary to HMRC’s published approach, with no knowledge or understanding of HMRC’s published approach, none of which is particularly helpful.

The further issue I take with the example provided is that it assumes the assessor has deliberately disregarded the output of the CEST tool. Such disregard is not ‘uncertain’ but rather a deliberate decision not to comply. These are rather different concepts and to suggest they are in effect the same is concerning. As previously referenced, the rules are complex and difficult to apply. One could interpret this example as HMRC suggesting that a business taking a reasonable approach based on its understanding of both the law and the particular facts and circumstances which may not align to HMRC’s interpretation is akin to deliberately avoiding tax withholding, which is somewhat concerning.

However, for the purposes of the UTT rules, for the reasons outlined above, unless a business chooses to treat all contractors as self-employed irrespective of the output of any CEST assessment, while there are wider concerns with this approach (and HMRC would have other grounds on which to challenge this), if separately considering each contract on the basis it has unique terms and conditions such that no amalgamation is required, it is unlikely any notification would be required under the UTT rules on the basis the threshold will rarely be met.

While HMRC’s attempt to clarify the position is helpful, this is only the case where clarifications do not raise more questions than they seek to answer. In my view these two changes further muddy the waters rather than giving businesses greater clarity as to how the UTT rules interact with employees and employment status. It is hoped that, before any further changes are made, HMRC avails of the expertise to which it has access, including the CIOT. I await with bated breath….

Guest blog by Sarah Hewson, UK Employment Tax Technical Lead, Vialto Partners