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.”
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