Reactions to HMRC's ESS Tool and what you can do about your IR35 status

Four months have passed since the release of the ESS tool; here we give you an update on the public’s reaction to it and what you can do about your IR35 status as a limited company contractor in the public sector.

The ESS tool uses algorithmic logic through a series of questions to determine whether a contractor’s assignment falls inside or outside IR35 legislation – in line with the latest public sector reforms.

HMRC recently claimed that the tool was hitting accuracy targets of 80-90%, however some have been arguing against its credibility. It is suggested that some key employment tests are missing from the questionnaire the tool provides, one of these being the ‘mutuality of obligation’ test. This test helps to determine whether a contractor is a disguised employee; put simply if it exists in a contract then this could impact the result of an IR35 test.

The ESS tool has undergone developments since its launch. However, one particular organisation’s analysis of the tool says that it fails to paint a big picture of the contractor’s assignment and ignores case law. HMRC stands by the tool, maintaining that results may be skewed when incorrect information is inputted.

Contractor Weekly revealed in May that a survey of just over 1,500 contractors showed that 85% do not trust the ESS tool; 62% said they had not seen a change in their IR35 status.

With conflicting evidence surrounding whether the tool is in fact reliable or not, it is understandable that a public sector contractor would be concerned whether their IR35 assessment results are sound.

What can you do about your IR35 status as a public sector contractor?

If you are an off-payroll worker in the public sector, how your assignment is evaluated for IR35 is unfortunately out of your hands. It’s up to the public sector body providing your contract to determine your IR35 status. This includes choosing – with reasonable care – how they carry out the test. Clients are not legally bound to use the ESS tool, although they may be encouraged to do so. Other reputable resources may be utilised such as tax status specialists or other online tools.

You may not be able to choose the tool your client uses, but there are a few things you can do to take charge of your career:

1. Get involved

You can play a role in informing your client that there are more options out there to help them accurately assess your IR35 status.

You may also test your IR35 status independently, as this could provide you with evidence should your test result in your being inside IR35. Keeping a record of your own independent testing, plus the results provided by your client, will help in the future should you need to prove your status. It is important to keep in mind that independently testing your own IR35 status could come at your own expense.

2. Get a second opinion

You can also choose to have your contract reviewed impartially by a qualified expert such as a tax status specialist or tax lawyer with a speciality in the contracting industry. These experts may also make a recommendation regarding your contract and IR35 status.

Keep in mind that your client does not have to take into account results that you’ve received from independent or third party assessments, even if you’ve presented your findings to them and asked for them to reconsider. If you are unhappy with their results, you could contact HMRC to review the decision, choose to not accept the contract, or try to negotiate a higher rate. If none of these options are feasible, then it may be worthwhile to consider moving to the private sector, where you are still able to determine your own IR35 status when you have your own limited company.

3. Collect evidence

Keep records of the IR35 test conducted by your public sector client, and store them in a file with the exact contract used in the test. Keep this as evidence alongside any independent or third party IR35 assessments of the contract in order to prove your status in case HMRC chooses to challenge it.

If you are concerned about your IR35 status, remember that there are various options for you to pursue if you are a public sector contractor with your own limited company. Visit our website for more information about IR35 and the public sector, or get in touch with us for a consultation on your accounting options moving forward.

Contact us on 01707 871622 or request a callback.