ContractCalculator.co.uk have voiced their concerns regarding HMRC’s Employment Status Service (ESS) tool which is used to assess the status of contractors to determine whether they come under IR35 legislation.
ContractorCalculator’s analysis of ESS has shown that the assessments are inconsistent and might also be facilitating tax avoidance due to incorrect assessments. 29% of cases are receiving passes from ESS where they would otherwise fail IR35 assessment.
CEO of ContractorCalculator, Dave Chaplin said: “It’s no wonder there is so much chaos in the contracting market. The most frustrating thing is this could all have been avoided if HMRC had actually listened to stakeholders.
“Instead, HMRC attempted to fast-track the reforms and has consequently failed to deliver on its promise to provide an accurate compliance solution. Nobody trusts the ESS – and it appears not even HMRC.”
ContractorCalculator compared assessments from ESS to IR35Testing.co.uk which has been developed over a number of years and asks a total of 101 questions to ensure an accurate assessment.
Since its new launch in February, over 6,000 contractors have been tested with IR35Testing.co.uk. Of these, 558 have also been tested with the ESS tool. The results were compared and it was revealed that 29% of contractors who passed ESS ended up failing IR35Testing.
Chaplin has highlighted the concerns voiced by many in the run up to the new IR35 changes and said: “This hard evidence firmly backs up what agencies and providers have been saying for months – that HMRC’s tool simply cannot be trusted.”
The analysis found that HMRC can’t determine the status of 24% of contractors. Of these, IR35Testing found that 60% of them should have been either clear passes or fails.
“Bizarrely, many contractors who either clearly pass or clearly fail IR35 are receiving an ‘unknown’ decision from the ESS. If the ESS can’t decipher the more straightforward cases, it reinforces expert opinions that there is a gaping hole in its algorithmic logic.”
As the tool may be wrongly determining the status of workers, this means that HMRC will be inadvertently helping people to avoid tax because according to ESS they’ve passed the IR35 test.
“Even more worrying, almost a third of contractors are being passed by the ESS when they should clearly fail, meaning the taxman may be negligently facilitating tax avoidance,” Chaplin added.
HMRC’s contractors left confused
Of the IT contractors that work for HMRC, the ESS says that they should pass IR35 and therefore should not be affected by the changes. However, recent information has suggested that HMRC has determined that all of their IT contractors are within IR35, contradicting the outcome of their own tool.
“The legislation hadn’t even gone live by the time HMRC appeared to break its promise to ‘stand by the tool’. If the taxman has a free license to overrule its own tool, how are contractors supposed to have any faith in the decision it gives?” Chaplin said.
HMRC have said that there are only two circumstances that would lead them to challenge the ESS decision which are if they believe the questions have been answered incorrectly or if they believe the arrangement is contrived.
Chaplin believes this confusion only proves that the tool is not sufficient enough to be used to determine the status of workers. “Are HMRC saying that its own contractors who built the tool don’t know how to answer the questions properly? Or that they themselves hired them using contrived arrangements? I don’t think so. Either way it’s nonsensical and it shows that HMRC don’t even appear to trust their own solution.”
Have you been left confused by an IR35 decision? Have you used the ESS tool yourself? Please share your thoughts and experiences in the comments section!
Want to learn more?
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.