Fresh concerns raised over HMRC’s online IR35 status tool

HM Revenue & Customs (HMRC) has again come under fire over its Employment Status Service (ESS) tool, which was first introduced in April to help contractors get to grips with recent changes to IR35.

According to contractor bodies and legal experts, the tool is ‘wholly unfit for purpose’ and is unable to accurately determine whether or not contractors are liable under new IR35 rules.

The comments come despite HMRC’s insistence that the online service has been improved, following previous concerns raised in April.

Under new IR35 rules, public sector organisations such as recruitment agencies are now held responsible for determining the IR35 status of their contractors.

This effectively means that, if the public sector organisation deems a contractor to be inside IR35, that contractor will be taxed in the same manner as an employee – which could result in an inappropriate amount of tax incurred.

HMRC’s ESS tool has been designed to provide greater clarity around the IR35 status of contractors – but legal experts have raised serious concerns that, despite recent improvements, the tool is inaccurate as it ‘deviates dangerously’ from case law.

One point raised is that the ESS tool completely omits one of the most common tests of employment status – known as mutuality of obligation (MOO).

This is despite the fact that MOO tests are one of the key IR35 tests of employment used by a tax tribunal or Court to establish employment status – i.e. whether a contractor can be considered a ‘disguised employee’.

Other critics have voiced concerns that the ESS tool threatens to encourage wishful thinking amongst contractors, effectively placing them at risk.