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ESS Tool Hasn’t Nailed It

by Contractor Weekly

contractor weekly

HMRC’s off-payroll tool goes live

After playing around with the format, HMRC last week launched its much anticipated Employment Status Service (ESS) tool.

The tool is primarily designed for those working in the public sector and can be used by contractors, public authorities and agencies alike. By answering a series of questions surrounding, what HMRC believe to be the key areas of employment status, the tool will provide a decision regarding the workers’ status, which can be relied upon provided the questions have been answered honestly.

GUIDANCE CHECK EMPLOYMENT STATUS FOR TAX

How it works

After answering a couple of questions enquiring as to whether the engagement has started and how the worker provides their services, e.g through a PSC, the user is asked if the worker is an office holder. The accompanying explanation states that “an office is a permanent, substantive position that exists independently from the person who fills it. Holding office includes board membership or statutory board membership, or being appointed as a treasurer, trustee, company director, company secretary or other similar statutory roles.”  All clear? Of course not, it’s as clear as mud because there is no statutory definition of an office holder, so we are left to rely upon its interpretation by the courts.

A ’yes’ answer here automatically brings the test to a halt and places the contract inside of IR35. Yet the tax rules for IR35 in respect of office holdings, that were changed in April 2013 to bring them into line with the NIC rules, only apply for tax where there is a requirement for the personal service of the worker. This question, therefore, should naturally follow the personal service question which immediately follows.

Personal service

This is the golden bullet and a positive answer here will swiftly give rise to the tool concluding that the engagement falls outside of IR35, provided the contractor remained responsible for paying the substitute.

The question asks, ‘Would the end client accept the worker’s business sending someone else to do this work instead?’ and explains that this is someone who:

  • Is equally skilled, qualified, security cleared and able to perform the worker’s duties
  • Won’t be interviewed by the end client before they start
  • Isn’t regularly engaged by the end client
  • Will do all of the worker’s tasks for that period of time
  • Will be substituted because the worker is unwilling but not unable to do the work

It is clear that HMRC have designed this question in an attempt to stifle a positive response and take the user deeper into the tool. Many public sector organisations may well insist on meeting a prospective substitute to satisfy themselves of their suitability. Whilst that does not amount to an interview it could easily be confused as such by the public sector.

Fellow contractors working on the same project won’t be able to substitute for one another because of the third criteria.

Substitution will often only be contemplated and accepted when a contractor is unable to carry out the work, e.g because of illness or holiday. HMRC have however put this test in a straightjacket by imposing the requirement that the freelancer must be “unwilling” to do the work rather than incapable. Such an approach however flies in the face of the judgment in the employment case Express and Echo Publications Ltd v Ernest Tanton (1999), a case which is referred to in HMRC’s own Employment Status Manuals. Here, the employment tribunal found, as a fact, that a clause in an unsigned ‘agreement’ genuinely reflected the true agreement between the parties. That clause stated:

“In the event that the contractor is unable or unwilling to perform the services personally he shall arrange at his own expense entirely for another suitable person to perform the services.’

Mr Tanton therefore had an obligation to provide and pay for a suitable substitute should he be unable or unwilling to provide the services personally and led the judge to conclude this was wholly inconsistent with a contract of employment.

Note the requirement was for Mr Tanton to be either unable or unwilling not simply unwilling as HMRC have sought to redefine the substitution test.

Substitution is not the only feature that will disprove a requirement for personal service of the contractor. The ability to sub-contract some or all of the services or to engage assistance to help with the work will serve this purpose and there is a question regarding helpers.

Right of control and financial risk

All is not lost by answering ‘no’ to the personal service questions as this will then lead to a series of questions concerning the key elements of the control test. Reasonably positive answers here will then lead to the question, ‘What items does the worker have to buy for this engagement that they can’t claim as an expense from the end client or an agency?’ These are described as expenditure that is necessary for the completion of the services because they aren’t provided by the end client and don’t include expenses incurred by having to work away from home. This immediately excludes the cost of non-commuting travel, meals and accommodation, yet these expenses are mentioned in this section of the tool. This can only mean that such expenses would qualify where they are met by the PSC when the contractor is working at a secondary end client site, ie other than the main site, and only when the company isn’t entitled to reimbursement.

Dependent on how these are answered, then the user may be confronted with further questions in respect of:

  • Basis of payment
  • Correcting defective work
  • Integration
  • Employee type benefits

Mutuality of obligation (MOO), an integral feature of an employment contract, does not appear to feature at all. No surprise there however, as HMRC’s extremely narrow interpretation of this concept means that MOO is present in every single contract, regardless of its nature.

Results

Once the tool has gathered sufficient information it will produce a result which can then be printed off for the user’s reference.  HMRC will not keep a record of this for security reasons so it is vital that a permanent record is retained.

There is then a warning that any attempt to manipulate a contrived result will be viewed as deliberate non-compliance which can result in penalties ranging from 20 -100% of the lost tax.

Finally, HMRC remind us that they can review a person’s taxes for up to 20 years but fail to point out that this time limit is only applicable in cases of, what is essentially, fraud or evasion. Normal time limits are four years, rising to six years where carelessness is the cause of lost tax revenue.

This is yet another example of HMRC not investing sufficient time to produce an effective solution