The recent Budget contained three announcements which will impact small businesses from April 2018 concerning; national insurance (since amended), the dividend allowance, and MTD reporting. Our most recent email covered all three points in more detail. We also shared news of HMRC’s relaunched employment status tool. It’s not as useful as it might be.

`Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Employment status tool

For the last 17 years, individuals who provide their own services through an intermediary, and the businesses who engage them, have struggled with the intermediaries legislation known as IR35. The key issue is how to determine whether a particular engagement is within the IR35 rules.

From 6 April 2017 the burden of deciding whether the worker is caught by IR35 falls on engagers in the public sector, rather than the personal service company. Engagers in the private sector are not affected for now.

To help the public sector body make this decision HMRC has produced a new employment status service (ESS) tool. This is an enhanced version of the employment status indicator (ESI), which could not be used for IR35 checking purposes.

The new ESS tool can be used by the any of the parties to the contract; the worker, the agency or the engager. It’s use not restricted to contracts involving a public body.

The ESS will provide one of three answers:

  • inside the IR35 legislation
  • outside the IR35 legislation
  • unable to determine the tax status of this engagement

The third option is not much use to anyone. However, the first two answers may be helpful as HMRC has promised to be bound by the decision of the tool, if accurate information was provided when answering the ESS questions.

The problem is that the ESS tool itself is not very accurate in its analysis. It doesn’t cope with the situation where the worker has multiple concurrent customers. It also doesn’t question how the work is done, which is a key indicator of whether the engager controls the worker. The ESS tool also fails to address the question of mutuality of obligations between the worker and engager.

The use of the ESS tool is anonymous, so you can test it without fear of your answers being recorded on an HMRC file with your name on it. If you get the desired result, record that alongside the questions you submitted. If you don’t get the desired result, and you are not a public body, ask our employment status experts for a more nuanced opinion.