Being almost a year to the day that HMRC asked me to be one of the beta testers of the new Employment Status Service (ESS) tool, it seems like a good point to reflect on the tool, as well as the legislation the tool was designed to support.
The ESS tool was brought in as a replacement for the old Employment Status Indicator tool, and was introduced primarily to support the new public sector IR35 rules that came into force from April 2017.
Increasingly, we see new tax legislation rushed in under tight timetables, leaving limited time for consultation with the individuals, businesses and advisors that are impacted by the changes. This was certainly true with the introduction of the public sector IR35 rules and my testing of the ESS tool.
I was given access in mid-January 2017 and the tool went live in March 2017. This gave myself and others involved in the testing a little over six weeks to understand the tool, undertake adequate testing and feedback our comments to HMRC. In the same time frame, HMRC would then need to consider our feedback and instruct the ESS tool developers to make the changes required.
The result of this limited time frame is that we have an ESS tool that remains unchanged from what was originally produced by HMRC, and a tool that unfortunately is not fit for purpose.
I recently had a case that illustrates the flaw in the ESS tool, and simultaneously the wider flaw in HMRC’s approach to consulting the profession and stakeholders impacted by new legislation perfectly.
A NHS trust had a consultant Radiologist employed full time with them, whose responsibilities included reporting on MRI/CT/X-ray images. Due to understaffing and increasing workloads, the radiology team have outsourced some of this work and some of the workload has been undertaken by the existing staff.
Approximately 20 Consultant Radiologists are currently being paid additional sums of monies through our payroll for extra work undertaken. The work is purely voluntary and is paid for a flat rate per each report produced. No patient contact takes place during the reporting process. To take up the work, the consultant could choose to do work at any point during their free time and only need to be able to access the trust’s IT systems – which can be done remotely.
One of the consultants asked to be paid outside of payroll, through his own company and he believed he should be outside of the scope of the new public sector IR35 rules and provided a completed ESS result in support of this.
The ESS tool and answers to the questions were as follows:
Has the worker already started this particular engagement for the end client?
How does the worker provide their services to the end client?
As a limited company
Is the worker or their business an office holder for the end client?
During this engagement, has the worker’s business arranged for someone else to do the work instead?
No – It has never happened
Would the end client accept the worker’s business sending someone else to do this work instead?
Has the worker’s business needed to pay a helper to do a significant amount of the work?
Can the end client move the worker to a different task or project than they originally agreed to do?
No – that would need to be arranged under a new contract or formal agreement
Once the worker starts the engagement, can the end client decide how the work is done?
The worker decides how the work needs to be done without any input from the end client
Can the end client decide the schedule of working hours?
The worker decides their own schedule
Can the worker choose where they work?
No – the task determines the work location
Result: Outside of IR35
Having reviewed the position, myself and the trust agreed with the answers the worker had provided, and confirmed the arrangement was not contrived. If the ESS result is to be believed, HMRC will then stand by the result and not enquire into the IR35 position of the engagement.
Cue a lot of head scratching from myself and my colleagues. This ‘engagement’ is nothing more than an employee performing ‘overtime’ under their existing employment. Furthermore, 20 of the individual’s colleagues were doing the exact same role under the same terms and conditions and were receiving their income for the work as overtime payments as part of their employment.
How could such an engagement ever be considered outside of IR35? HMRC’s own suggests that an inspector should scrutinise scenarios where the worker is performing work similar to other employees in the organisation, or where an individual has recently left an employment with the employer and returned as an independent contractor.
This scenario goes one step further than an employee leaving and returning, or a contractor performing a task similar to that of an employee. The individual is performing the same duties concurrently as both an employee and contractor. The ESS result quite clearly goes against all logic, best practice, HMRC’s own guidance and indeed case law used to consider employment status.
In a somewhat unique scenario for FCTC, I found myself advising the client that I believed the engagement is caught for IR35, when HMRC themselves are advising the engagement is outside of IR35. I couldn’t recommend that the trust make the payments under the engagement outside of IR35. A difficult piece of advice to deliver when the client and their ‘sub-contractor’ have an ESS result showing HMRC deem the engagement not to be caught by IR35.
This case study demonstrates the importance of HMRC engaging with stakeholders and allowing sufficient time for proper consultation on new legislation.
This case study is just one issue, with one supporting tool, for one piece of legislation. Surely better dialog from the outset with the profession and stakeholders would make new legislation and the tax system work better for taxpayers and HMRC alike.