HMRC Employment Status Service tool - How accurate is it in determining the IR35 risk for contractors?

There's no doubt that, within a very short span of time, HMRC developed Employment Status Service (ESS) tool to determine the IR35 risk contractors face. While we acknowledge that the Employment Status Service (ESS) tool is certainly a positive step forward, what concerns us is the accuracy of the results produced by this tool.

The one question that mainly bothers contractors is, does it actually help determine the IR35 risk for contractors? Does HMRC take guarantee of this tool's accuracy? (probably not!). To be perfectly honest, we did some test runs; and the results were certainly not impressive.

With the recent IR35 changes, things have become more complex for contractors working in the public sector. It has caused great inconvenience to not only contractors working in public sector space, but also clouds of uncertainty are looming over the contractors working in the private sector too.

We got in touch with some of the most experienced people in the contracting industry to find out their views on the HMRC ESS tool. We contacted Paul Gough (Managing Director, Intouch Accounting Limited), Chris Bryce (CEO, IPSE - the Association of Independent Professionals and the Self Employed), Matt Fryer (Senior Tax and Compliance Manager at Brookson Ltd) and Pramith Naidu (Operations Manager, Bradleys Accountants Ltd). Here's what they've had to say:

Chris Bryce, IPSE Chief Executive said: “HMRC developed the ESS tool to help public sector organisations make accurate determinations, but many appear to be ignoring the results or failing to use the tool and simply declaring all contractors inside IR35, which even HMRC didn’t expect.

“We warned the Government this would happen, as public sector bodies were always likely to take the ‘easy’ route of a blanket and risk-averse approach to the legislation. Some end clients are simply not properly assessing each engagement on its merits as they are meant to. As a result, many contractors are choosing to leave the public sector, which will no doubt hit the delivery of public services and important projects in many departments including the NHS and Defence. IPSE is deeply concerned about this and we will continue to bring this to the attention of the Government at the very highest levels.”

Paul Gough, Managing Director at Intouch Accounting Ltd said, whilst on the surface the question is valid I am afraid it does not pass the “real world test”. The biggest reasons for it not being a sensible question are that (1) It depends who is completing the test and (2) whether anyone in the public sector is being allowed by Government to engage based on the outcomes. What appears to be the case is that public sector engagers are being forced to override and ignore any answers derived from the ESS under instructions from above.

Blanket instructions from Government telling Public sector bodies to determine status based on job title and standard contracts make the existence of the ESS little more than a joke. If this collective abuse by HMRC’s masters undermines the ESS then who can really claim to be surprised?

If the boot were on the other foot I think that contractors should be outraged at the abuse of the system by HMRC and insist on a level playing field, in order to make it fairer for all the honest flexible workers in the public sector. (Sounds familiar doesn’t it?) Is it not Government abusing the vulnerable by using its influence to create false employment?

Contractors feared that the questions would be biased in favour of HMRC but this is not our understanding. The questions themselves appear fair (even though there is little mention of the mutuality of obligations we love so well) but remain open to subjective responses.

Real world issues still exist surrounding: when, how frequently and by whom the ESS is this supposed to be completed, how can its outcomes be challenged?. Further the “get out of jail free” substitution card is a double-edged sword unless workers, engager and agents know the real differences between a substitute and a “replacement”.

Well who knows? I smile at the irony of HMRC rushing through these changes that encourage agencies to push vulnerable or confused workers back into low risk, but unsuitable Umbrella solutions. Especially as for the last 18 months HMRC have been happy to see them leave. Poetic.

As long as Public sector bodies such as the MoD, NHS and those covering education continue being told by the powers that be, that their workers are to be defined as “employed“ (within IR35), before during or after completing the test, what’s the point in wasting time with the ESS tool?.

On the subject of the subjectivity in completing the test then turkeys don’t vote for Christmas, meaning contractors are always “looking on the bright side”, at a half full glass through rose coloured spectacles and why would anyone assume Fee Payers will accept transfer of debt risk, when they can hide behind the line of least resistance?

I believe in the tooth fairy, I believe in the Easter bunny but the efficacy of the ESS - Not so much.

According to Matt Fryer, Senior Tax and Compliance Manager at Brookson Ltd (one of the leading contractor accountants and umbrella service providers), "HMRC’s new Employment Status Service tool is a positive step forward when compared with the old ESI tool and the failed Business Entity Tests. The tool is a useful aid to contractors and hirers (working in both the public and private sector) as HMRC will stand by the outcome subject to one important caveat; that is that the information entered is correct. Given this caveat it is important for parties relying on the outcome to ensure that they fully understand the questions being asked and seek information from the person most likely to know the answer – which may be the worker or the end client. So, whilst the tool is a useful aid I would still recommend that a third party opinion is sought from a suitably qualified IR35 specialist."

Pramith Naidu, Operations Manager at Bradleys Accountants said, "The ESS follows a simple Q&A format where the questions vary as per the user responses. The tool doesn’t go into much detail while asking questions for it to be regarded as an equivalent of a legal advice. The result derived from the tool would not guarantee that the IR35 rules will not apply as it would still be subject to actual working practices for the contractor. It’s quite evident that the conclusions are not concrete. This has left the contractors in a fix – and that’s unfortunate"