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Spotting the Self-Employed

How SME’s Determine Status of Their Workforce

This month, HMRC published ‘Employment status in SME’s’ – a research study. The research had three aims, namely to:

  • Understand the nature of employment in SME’s;
  • Explore how SME’s determine the employment status of their workers; and
  • Understand SME’s awareness and use of HMRC’s Employment Status Indicator tool, now known as CEST (Check Employment Status for Tax).

HMRC estimates that several million pounds in tax revenue is lost due to getting employment status wrong, which may explain why they commissioned this survey.

Definition of SME

The usual definition of small and medium-sized enterprises (SME’s) is any business with fewer than 250 employees. For the purpose of this research however, businesses with no employees were excluded, so SME should really mean SME employer.


A mixed approach was adopted in gathering the research material which consisted of a telephone survey of just over 1,700 SME’s, and a series of 33 in-depth interviews with SME’s identified as being potentially at risk of miscategorising staff.

Worker mix

Over four out of five SMEs employ any staff on a PAYE basis, with medium-sized businesses, i.e. those employing between 50-249, being the most likely to employ PAYE staff.

A quarter of SMEs use self-employed workers, and this does not vary significantly according to the size of a business.

Just over one in ten SMEs take on individuals via agencies. Again, medium-sized firms are the most likely to go down this route.

Two in three SMEs only take on employees, with 6% only engaging self-employed workers, and 17% using a mix of both.

SMEs use self-employed workers for a variety of job roles, but most commonly for roles in the middle of the occupational hierarchy, such as skilled tradespeople.

Around 22% of SMEs report that employment numbers vary throughout the year due to their business being seasonal.

Employee or self-employed?

The responsibility for determining the status of a worker varies across SMEs. In microbusinesses (companies employing 9 or fewer employees) it is normally the responsibility of the business owner or managing director. In small businesses, the responsibility commonly falls on the company secretary, and in medium-sized firms it tends to be decided by a specialist, such as a finance director or HR officer.

In helping SMEs to determine status, 71% seek advice from an accountant, lawyer or legal advisor.

Half of businesses refer to guidance on the HMRC or GOV.uk websites, and 43% contact HMRC directly.

Some SMEs give their workforce a choice over their employment status but this is only 4%. This however rises to 23% of businesses within the arts sector and 9% in the construction industry.

There are five main approaches that SMEs adopt in categorising status:

  1. Only employing staff under PAYE because this is seen as the safest option, as well as ensuring fair treatment of staff and minimising the risk of HMRC investigation.
  2. Offering PAYE terms by default and only considering self-employment if requested or in exceptional circumstances.
  3. Giving workers a choice. Whilst this is considered more risky, this is often used when recruiting specialists.
  4. Making decisions on a case by case basis. Here the skills required for a role are considered along with the number and regularity of hours, and the lifespan of the employment.
  5. Taking on workers as self-employed by default. This however is less common and tends to be prevalent amongst businesses that are unable to operate a PAYE system or as a trial basis for higher paid roles.

SMEs considered the length of the role and the regularity and number of hours as being key criteria in determining status, but they also took into account a number of other factors that are not required by HMRC such as:

  • Whether an individual has existing self-employed status;
  • Risk to their business;
  • Administrative burden of operating PAYE;
  • Associated costs of PAYE – pensions, holiday pay and training; and
  • Historic or industry standard practice.

Virtually all SMEs were confident they were making correct status decisions, 97% in fact! Where there was lack of confidence this was because of uncertainty created by overlaps/grey areas between characteristics associated with being employed and self-employed.

Employment Status Indicator Tool (now CEST)

Only 25% of SMEs are aware of HMRC’s status tool and only 5% have used it at some point, and a paltry 2% currently using it. Those who do use it are generally positive about it, saying that it is easy to use, questions are easy to understand and makes it easier to reach the right decision. Have these people used CEST recently??

The main reason for using CEST is to address uncertainty over an individual’s work status, particularly in complex cases.

Absolute confidence that the tool will provide the right outcome is not huge, with 35% being very confident, 25% fairly confident and 10% not confident. Uncertain results generated by the tool further erode that confidence and in these instances companies default to classifying a worker as employed.

Suggestions for improving CEST include:

  • Making the link to the tool on the introduction page more obvious.
  • Avoiding complicated terminology and ensuring the tool is written in plain English. If terminology or jargon is required, ensure sufficient explanation of any terms.
  • Ensuring questions have answers that cover all eventual scenarios. Potentially route users based on their category of business so they only answer questions relevant to them.
  • Providing more detailed information about why a status was given on the outcome page.

There tends to be limited awareness amongst SMEs of the information and resources available to them from the government and HMRC should therefore increase that awareness. Familiar tale? Furthermore, businesses would value additional resources being placed at their disposal. In particular, visual and interactive resources which would reduce the amount of reading or provide a substitute for personal interaction. These could include a flow chart to work through a worker’s status, videos, webinars and online training, and forums (online or in person) that allow employers to share their experiences in reaching status decisions.

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