HMRC’s ESS tool fails to create peace.

IR35 reforms are less than two weeks away, becoming law on 6th April 2017. With projects being abandoned, and contractors leaving the public sector in droves it is no surprise that contractors, agencies, clients and providers are becoming increasingly vocal about the problems that HMRC’s badly implemented reforms are causing them.

In the main, clients and agencies are unprepared and the public sector as a whole is in chaos. HMRC are very much to blame for this. Despite experts telling them it was impossible, they promised last year to build the holy grail of AI systems in a matter of months - namely, a system that could provide 100% accuracy on employment status.

Not only did they attempt the impossible, they gave themselves little time to do it, and what they have delivered was late, and does not work. Their ESS tool simply isn’t fit for purpose. We recently put the ESS tool to the test against all 21 of the historical IR35 tribunal cases. 27% of them returned as "unknown" when they should have been clear passes, and 10% passed despite failing when put in front of a judge. Even more worrying is that 30% of tests that failed using our own assessment tool - www.ir35testing.co.uk - passed with ESS. Ironically, one has to ask, are HMRC now promoting tax avoidance themselves?

It has been argued (by ourselves) in the past that an "unknown" result is legitimately required and is valid in some cases. This is because employment status isn’t binary and lies on a spectrum. The problem with ESS is that their unknown results show no correlation to being “borderline” and appear sporadically along the spectrum. So much for certainty. This is no help to contractors, agencies and public sector bodies at all.

The problem with ESS is that their unknown results show no correlation to being “borderline” and appear sporadically along the spectrum.

All these findings just reinforce the argument from within the industry that the ESS tool has now caused more harm than good. It’s lost credibility within a few weeks of public launch, and whilst HMRC claim it is correct and they will stand by the result, it is now being considered unfit-for-purpose and not even useful as advisory.

It has to be highlighted that HMRC naively took on a gargantuan project when they decided to build their tool in under a year. We have been refining our assessment tool for 7 years and the answers to each and every one of the 100,000 plus users has informed our latest AI version. HMRC were always likely to fail. When we examined the code of the tool, the basic underlying algorithmic structure doesn’t seem to align with how experts determine status. It’s missing keys areas, has questions with no basis in law, and what weightings there are bear little resemblance to the actual law. HMRC have clearly demonstrated that when it comes to interpreting employment case law - they don’t understand it. But that’s nothing new - just read some of the IR35 court judgments and you’ll see judges correcting them time and time again.

When we examined the code of the tool, the basic underlying algorithmic structure doesn’t seem to align with how experts determine status.

For HMRC to fix their tool isn’t going to be easy. The structure, questions and rules all need an overhaul - which means almost starting again. This will take them probably another two years. And how will they do this? Are there going to be interim releases going forward and a battle cry for all contractors to retest? It’s nonsense.

While we wait to see what happens, the fallout continues to be huge within the public sector. There are still a worrying number of contractors who haven’t assessed themselves, and for those who have using the ESS tool, and got a pass, they are the Neville Chamberlains of modern day contracting - “I have in my hand a piece of paper”. No one cares.

There are still a worrying number of contractors who haven’t assessed themselves, and for those who have using the ESS tool, and got a pass, they are the Neville Chamberlains of modern day contracting.

These reforms need to be postponed for six months to allow the public sector to get ready whilst alternative compliance solutions are used. This is a time to keep public sector workers and contractors within the system, not chase them out with inaccurate and dubious results.

About Contractor Calculator - We’ve been online and independent since 1999. Still owned by founder and former IT contractor Dave Chaplin, the site has grown dramatically since then to become the expert guide to contracting. The team have created a free independent IR35 testing tool to enable contractors and agencies to ascertain their IR35 status. Developed with input from employment law status experts, the IR35 Test was first released on ContractorCalculator in 2009 and has already been used by over 100,000 contractors. To reduce your risk of investigation and tax liabilities visit www.IR35testing.co.uk to take your free test now.