HMRC has launched a new tool designed to help contractors, and those that engage them, decide a worker’s IR35 status.

But with less than a month to go before a fundamental change in the way IR35 rules are applied, some experts have found cause for concern with the Employment Status Indicator tool.

A contractor’s IR35 status is all about whether the contract they are working on should be considered employed or self-employed for tax purposes. The Employment Status Service is supposed to give HMRC’s view of whether a contract is inside or outside IR35.

This will be of particular interest to limited company contractors working in the public sector because, from April, it will be the public sector organisations that decide on IR35 status instead of the individual.

If the tool classes a contract as inside IR35 then, in HMRC’s view, they should be paying tax through PAYE as if they were an employee for that contract.

This could lead to a large reduction in a contractor’s take home pay.

Employment Status Indicator tool

The tool asks questions about a worker’s responsibilities, the nature of the work, management and payment and makes a decision based on the responses inputted.

It is still in a beta stage, and the results are liable to change before April 1^st.

Some industry experts have been finding inconsistencies and errors with the tool including Umbrella.co.uk Director Miles Grady.

He said: “There’s not long to go before the April deadline, but HMRC’s tool still doesn’t look ready for action. The tool has returned inaccurate results based on some tests drawn from case law, and in an awful lot of borderline cases, the checker simply returns a verdict of ‘unknown’.

“Contractors, employers and agencies should definitely check what the tool says now, but the results should not be treated as fact just yet.”

What to do if you are caught out by IR35

If you are a public sector contractor, operating through a limited company and you are caught out by the IR35 legislation, then in most cases the best course of action would be to switch to an umbrella arrangement.

Umbrella contractors receive broadly similar take home pay compared with inside IR35 PSC contractors. They also benefit from in-work employment rights such as access to sick pay, maternity pay and holiday pay.

Umbrella arrangements are also simpler, with the umbrella company handling all your tax and national insurance considerations for you.

For any contractors wanting to switch from a limited company to an umbrella scheme, Umbrella Accountants is offering a FREE limited company closure service to take care of any loose ends.

Contact a member of the Umbrella.co.uk team today to find out more about our umbrella services and to make the switch. Call: 01625 546 610 or visit http://www.umbrella.co.uk/public-sector-contractors.