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Employed or self-employed? HMRC updates guidance

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1st Nov 2008
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HMRC has withdrawn leaflet IR56, replacing it with the following fact sheets:

  • ES/FS1 (aimed at workers) and
  • ES/FS2 (aimed at employers/contractors)

HMRC's Employment Status Indicator tool (ESI) has not been updated since April 2007 and its effectiveness in practice depends upon who you are:

Employers can obtain a HMRC ‘view’ of the employment status of workers by using the ESI. It says that provided the answers given to the ESI questions accurately reflect the terms and conditions under which the services are provided at the relevant time of the contract, HMRC will be bound by the ESI outcome where the engager or their authorised representative provides copies of the printer-friendly version of the ESI Result screen, bearing the 14 digit ESI reference number, and the Enquiry Details screen.

Employers should also retain a copy of the written contract (if available) in relation to the engagement which the print-out refers along with any other documentation relied on when completing the ESI.

Workers can obtain a HMRC ‘view’ of employment status by using the Employment Status Indicator (ESI) tool. However, this will provide a general guide only which would not be binding on HMRC.

Alternatively, HMRC's Status Inspectors may be able to express an opinion on employment status in accordance with COP10.

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By MikeBellisimo
04th Nov 2008 10:02

A one way bet
Clint:
But in that case any challenge by HMRC would be made against the employer anyway, so the employee

You are correct. If I were to use the tools that reach a determination tha the highest amount of tax will be paid then HMRC will never challenge that - even if my determination was in error.

If I reach a determination of self-employment then HMRC may challenge that - even if my determination proves to be correct. The problem is that proving it may involve significant costs - more than the tax differential.

HMRC will challenge the employer but the money it will take will be out of eithe retained or future earnings - and so money that can no longer be paid over and so the net effect is a reduction in income even if the legal entity who is investigated is different.

I find it irrating that HMRC will use a tool to justify over-collection of tax but will query the tool if it justifies a lower amount of tax being collected.

I think it is inequitable to expect a taxpayer to make a tax determination which is subject to penalties (for perceived errors) if HMRC is unwilling to be bound by it's own advice. There tools are basically saying:

"Pay the correct amount of tax"

"How much is that?"

"We don't know. But if we think you are wrong we'll fine you"

"Can you help me pay it?"

"Yes, but we might be wrong and if we are we will fine you"

"Thanks!"

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By AnonymousUser
03rd Nov 2008 17:37

Not so sure I understand these points
Mike Whittaker ... HMRC have never disputed that, as a question of fact and law, the "IR35 contractor" is employed by his service company, so I have no doubt that they will continue to accept that this is the case if the ESI tool says so. That does not absolve the service company of the obligation to impose the IR35 adjustment to its PAYE returns if the contractor would have been employed by the end client but for its imposition as an intermediary.

Mike Carter ... If you decide, as a result of applying the ESI tool, that you are an employee, HMRC will never challenge that, whatever the validity of the conclusion, as therein lies the greater tax take. The self assessment taxpayer's decision to rely on the ESI tool is only practically exposed to a challenge if he decides that he is self employed. But in that case any challenge by HMRC would be made against the employer anyway, so the employee is still (broadly) immune (OK not entirely, but near as dammit).

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By mikewhit
03rd Nov 2008 14:03

Not so sure
It says that provided the answers given to the ESI questions accurately reflect the terms and conditions under which the services are provided at the relevant time of the contract, HMRC will be bound by the ESI outcome

I bet they won't - what if a Ltd co contractor's employing/service company applied the test, and found she was employed by the service company.

Now HMRC comes along and tries to apply IR35 - will it be bound by the "fact" that she is "officially" employed by the service company and hence cannot be a deemed employee of the agency client ?

Or is it just another "pointer" ...

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By MikeBellisimo
03rd Nov 2008 12:55

Self-Assessment - Hah!
So if you are a worker who is ensure how to reach a status determination for tax purposes HMRC will give you some guidance which is not binding - so may presumably be inaccurate or misleading.

If HMRC cannot give you definitive guidance as to how to determine satus how on earth are you expected to self-assess????

If your assesment differs from the non-binding determination then surely penalties cannot be due in the event of a disagreement since penalties pre-suppose information is available to reach an accurate determination and HMRC by offering non-binding general pointers are saying that an accurate determination may not be possible.

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