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An online tool designed to help public sector organisations ascertain if contractors should be taxed in the same way as full-time employees is error-prone and unfit for purpose, it has been claimed.
HM Revenue & Customs’ (HMRC) Employment Status Service (ESS) launched on 2 March 2017, and is designed to help contractors, and the public sector organisations who hire them, work out if they should be taxed in the same way as salaried workers or off-payroll staff.
The launch coincides with HMRC’s anti-tax avoidance IR35 reforms coming into force on 6 April, which will see public sector organisations assume responsibility for deciding how limited company contractors should be taxed for the first time.
At present, the onus is on contractors to declare themselves “outside” of IR35, to avoid being taxed in the same way as a permanent employees, and to conduct their business in a way that does not risk them being considered one.
While the roll-out of ESS is designed to bring a degree of clarity and certainty over how contractors should be taxed, research carried out by online information portal, ContractorCalculator, suggests its results are – in some cases – at odds with the UK’s employment laws
This is based on the outcome of a number of tests the organisation carried out, which saw it feed data relating to 21 high-profile IR35-related court cases into ESS. In 27% of cases, the tool returned an “unknown” result, and has passed some contractors as operating inside-IR35 when they are not.
Dave Chaplin, CEO of ContractorCalculator, said the tool is failing in its duty to bring clarity and assurance to contractors concerned about how their tax status may change once the IR35 changes are applied.
“With only a few weeks to go before the IR35 reforms come into force, HMRC’s tool is nowhere near fit-for-purpose, and HMRC could be handing out employment status decisions to contractors, agencies and public sector hirers that are wrong – or simply leaving them in limbo land,” he said.
“For an organisation to assess its tax risk on such a shaky implementation presents a huge risk to projects and ultimately the bottom line.”
Read more about IR35
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Instead of relying on ESS, Chaplin said contractors and public sector organisations should for forgo it completely and consider having their tax status reviewed and confirmed by qualified lawyers instead.
“The public sector is in complete chaos, and it’s about to get worse as contractors are handed either the wrong result or no result at all.”
The CEO of Leicester-based professional indemnity provider Qdos Contractor, Seb Maley, has also called into question the accuracy of the ESS tool’s results, before outlining the issues associated with taking a tick-box approach to IR35 classifications.
“IR35 is a complex issue. It takes expertise and the ability to look at each case individually to be confident of an accurate decision. It’s hard to see how a one-size-fits-all approach like this can be completely reliable,” he said.
“With little time until changes to IR35 in the public sector are enforced, it’s concerning that HMRC’s new tool has only just been released. Changes are imminent, and there isn’t much time to iron out any teething problems.”
Public sector tax concerns
Public sector IT contractors, speaking on condition of anonymity to Computer Weekly, have expressed misgivings about the accuracy of the tool’s findings, with several questioning its ability to understand the nuances of their individual working arrangements.
The timing of the launch has also emerged as a key area of concern for contractors, given the go-live date fell just a month before the controversial IR35 reforms come into effect on 6 April.
In a blog post, published ahead of the ESS launch, Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), said this would leave a very small window of opportunity for contractors to test the tool’s accuracy.
“So unless it’s perfect, thousands of engagements will be assessed inaccurately,” he said.
“If the tool is flawed, it will undermine the whole enterprise, and there will be no time to amend it because the government has waited until the eleventh hour to publish.”
He also claimed some public sector organisations have already ruled all workers inside IR35, in the absence of ESS, prompting a mass exodus of contractors.
Indeed, as previously reported by Computer Weekly in October 2016, an IR35-related clampdown on contractors resulted in around 30 leaving the Ministry of Defence agency, the UK Hydrographic Office, at the end of August 2016.
At the time, the IR35 reforms were still under consultation, and a question mark still remained over whether or not the government would push ahead with their plans, causing industry watchers to question why the UK Hydrographic Office (UKHO) had decided to take such a hard line on off-payroll workers already.
In a statement to Computer Weekly, an HMRC spokesperson said the tool and the IR35 reforms, are being introduced to ensure parity in how much people get paid and taxed for doing the same job within the public sector.
“Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, however it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens," the spokesperson said.
“Like all tax changes, we are monitoring their effect to make sure they work effectively and fairly and we have yet to see any cause for concern.”