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HMRC’s new employment status indicator
19 June 15 | By: Jas Jhooty
HMRC has revamped its employment status indicator (ESI). What’s new, can you rely on it and, most importantly, is it worth using?
emTax are pleased to announce that we have recently entered into a partnership with ContractorCalculator to offer a free online IR35 testing facility available to contractors, Public Sector Bodies and all other interested parties.
The testing facility to date has provided free IR35 reviews to over 6,500 contractors.
HMRC’s Employment Status ServiceHMRC’s Employment Status Service (ESS) has been live for approximately two months and it has been tested extensively in conjunction with our new partners, ContractorCalculator. During this time the status results of 558 real life contracts have been compared asking contractors the result they obtained from HMRC’s ESS and then comparing that result with the result they achieved through the independent IR35 testing service. The findings are that:
- The ESS fails to determine the IR35 status of contractors in 14% of clear cut cases
- 29% are receiving passes from the ESS, whom should fail IR35
- Incorrect assessments run the risk of enabling unintended tax avoidance
Our conclusion is that HMRC’s ESS simply cannot be trusted. 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 our opinion that there is a gaping hole in its programming logic.
Even more worrying, almost a third of contractors are being passed by the ESS when they should clearly fail, meaning HMRC may be negligently facilitating tax avoidance!
Having initially claimed it would be bound by the outcome determined by the ESS, recent reporting has indicated that IT contractors working within HMRC who their tool says should pass IR35, are being told they are to be treated as inside IR35.
Considering the above evidence, it should come as no surprise that we do not advocate that anybody rely on HMRC’s flawed ESS.
Increased contractor costsWe also conducted an analysis and determined the daily rate rises required by contractors to earn the same income if they were pushed to being inside IR35:
- £250 daily rate increases to £332 – 33% rise
- £300 daily rate increases to £397 – 32% rise
- £400 daily rate increases to £498 – 25% rise
- £500 daily rate increases to £650 – 30% rise
- £700 daily rate increases to £828 – 18% rise
- £1,000 daily rate increases to £1,229 – 23% rise
Contractors falling within the new regime will have to increase their rates by between 17% to 33% to be no worse off than they were before. Most cash-strapped budget holders simply will not be able to afford these additional costs.
The only way that they will be able to keep their contractors and their vital skills without substantial costs is by establishing their status using independent compliance solutions before taking the necessary steps to ensure they stay outside IR35.
Free online IR35 test
As a viable alternative to HMRC’s flawed ESS, we can offer an accurate free online IR35 testing service that has been fine-tuned to align with the case law , asks 101 questions, and provides the same results as each of the 21 historical IR35 court cases. Our IR35 Test considers all of the pertinent factors to offer a range of results which are either a Pass, Borderline Pass, Borderline Fail or Fail.
How emTax can help
For all IR35 Test outcomes other than an outright Pass, we can provide advice on how to change your contracts and/or procedures which if followed will result in a strong Pass the next time the test is taken.
If required, a 30+ Page Test Report, Pass Certificate and independent sign-off sheet can also be obtained that can all be used as effective evidence should you find that you are ever subject to an HMRC enquiry.
With the extension of the scope of the new intermediaries legislation expected to be expanded to include the Private Sector within the next year or so, this is an invaluable free service that will help to protect all employers and help them to keep their contractor costs under control.
Go to the following website https://emtax.ir35testing.co.uk/TakeTheTest to take the IR35 test free of charge or contact us if you require any more information about this service.