Employers should communicate with contractors to understand their employment status

Public sector HR departments have been advised to treat the results from HMRC’s online IR35 status tool with a pinch of salt, as it fails to take into account input from contractors. 

Since April, freelancers in the public sector have had their employment status for tax purposes – known as the IR35 rules – determined by the organisations that hire them. There have been concerns that contractors are leaving the public sector because their earnings are being adversely affected by IR35 decisions. 

HMRC’s Employment Status Service (ESS) tool was designed to help businesses establish the employment status of contractors, but critics have questioned its accuracy.

“It is hopeless,” Dave Chaplin, chief executive and founder of Contractor Calculator, told People Management. He said that when Contractor Calculator compared the outcomes from the tool to 21 IR35 tribunal cases, it found it to be “wildly inconsistent and unable to determine IR35 status 38 per cent of the time”.

Chaplin said the limited questions asked by the tool were far removed from how judges approached employment status, noting that modern employment status lay on a spectrum. “We have repeatedly warned HMRC that a robust online test could not be developed within a short timeframe and now we are seeing it unravel,” he said. ”The tool is not fit for purpose and a whole rethink of the legislation is needed. Not for the first time, the taxman is doing contractors a disservice and HMRC needs to stand up and hold itself accountable for its shortcomings and the impact this is having on the public sector and the valuable flexible workforce.” 

Meanwhile, Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed, said: “The questions – and multiple-choice answer options – are not binary and are open to interpretation. There is no way to ensure the tool is being completed evenly across organisations, let alone across the public sector.” 

An earlier survey of 732 contractors by specialist tax adviser Qdos Contractor revealed that almost nine in 10 (88 per cent) do not believe public sector bodies and agencies are able to make accurate IR35 decisions without their input.

Seb Maley, Qdos Contractor’s CEO, said the decision to hand public sector clients the responsibility for setting IR35 status has “understandably left the vast majority of contractors feeling helpless. 

“It is now up to largely inexperienced public sector clients and agencies to make potentially career-defining IR35 decisions, but how can one make a well-informed, accurate decision on employment status without consulting contractors?” 

Tom Hadley, director of policy at the Recruitment & Employment Confederation, added that because only contractors and their line manager know specific details of work assignments, it is “very difficult” to make informed decisions about IR35 status without their input. “Recruiters are therefore likely to take a risk-averse approach and determine that IR35 does apply, even if the contractor disagrees.”

This is not the first time contractors’ concerns over the new IR35 rules have been brought to the fore. Previous research from Qdos Contractor found that the prospect of IR35 rules being extended into the private sector topped contractors’ list of concerns. People Management previously reported that recruiters believe the regulations could be extended into the private sector  “as early as spring 2018”.

An HMRC spokesperson said: “The ESS has been extensively tested with the largest public bodies and stakeholders affected by the changes. While we will not oblige customers to use the service, HMRC will stand by its results where correct information has been inputted in line with the guidance.”

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