Revenue builds Employment Status Indicator tool
We have had several reports recently that the Inland Revenue were in the process of developing an ‘intelligent’ tax status software system that would enable the public to determine whether they were on contracts of service (employed) or contracts for services (self employed).
I have been talking to senior Revenue staff at Somerset House and it has been confirmed that such a system is in development. A Revenue spokesman, Phil Hogan, confirmed that:
“The software …….is known as the 'Employment Status Indicator (ESI) Tool'. The ESI is being developed to cover employment status across all areas of trades where workers are engaged directly. The tool is not however designed for situations where the intermediaries legislation (IR35) applies. It is part of our enabling activities to improve upon the extensive guidance we provide.
The ESI once fully developed will provide an Inland Revenue opinion on the employment status of a worker, or group of workers; based on the answers given to a series of factual questions. It will give consistent advice where the facts are the same and it should further improve our customer service by speeding the process by which employment status decisions are given. It will also make better use of our employment status specialists' time, as they will be able to concentrate on the most difficult and borderline cases.
Our intention is to initially roll out the tool internally to our staff during this year. We are also looking at the possibility of subsequently introducing an internet version of the ESI that will be directly accessible by workers themselves, their engagers or agents so that they can self-determine employment status. But there is no timetable set down for this external version.”
However, some demonstrations are being held in February for groups involved in the Construction Industry Scheme (CIS) – such as Professional Tax bodies and major users of contractors - and it appears that the main drivers for this development are the proposed revisions to the Construction Industry Scheme (CIS). These were originally being discussed with a view to being introduced this year but the implementation date was put back until 2006 in the recent Pre Budget Review.
Amongst the changes that are due to be introduced eventually will be a new requirement for contractors to make a declaration to the Revenue that the employment status of their subcontractors has been considered. This will be very difficult to implement unless there is clear, consistent and objective guidance available as to an individual’s tax status – such as might be provided by this system.
The comment that it will not be used in connection with IR35 will be seen by some as an indication that IR35’s days are limited. However, having been responsible for developing a software system for providing guidance on IR35 status myself, I suspect that the main reason why it is not designed to address IR35 issues is that these are too complex to deal with effectively by way of what must always be a relatively simplistic tool such as this. There are too many personal issues that need to be taken into account in determining IR35 status. Any software that tries to cater for all the potential factors that can affect IR35 status can only provide very broad indications of status and become too unwieldy for ease of use if it tries to deal with every possible variation of contractual and personal circumstances.
An initial report from someone who saw the recent demonstrations indicates that there is still a lot of work to do to make the system totally fair and unbiased, but that it has promise. On the scale of ‘intelligent’ systems it seems that it is currently well short of ‘Mensa’ level but it is at least better than totally ‘thick’!
UKTECH will try to keep readers updated as this system develops.
Kevin Miller, MA FCA