Monday, January 16, 2006



HMRC’s Employment Status Indicator (ESI) tool went live on 19 December 2005. This is an interesting concept. It seems to be a computerised decision tree to help someone who engages or proposed to engage a worker to work out his employment status.

I was pleasantly surprised to find that it does not automatically come up with the answer that the person in an employee. Indeed, when I trailed the beta version I put through it all of the cases in the office where HMRC are arguing strongly that the person is an employee and it either came up either with the answer “self-employed” or “we don’t have enough information to decide”. That suggests that it is a useful tool. Unfortunately it also suggests that using it won’t avoid the problems with HMRC that normally arise in relation to status.

I cannot recollect a PAYE visit on a client who used self-employed people to carry out routine work where HMRC did not challenge the status of at least one of such people. If I assume HMRC want to collect the right amount of tax at the right time (which they are constantly telling us is the case) there is something very strange about that.

I want over the next week or two to look in detail at the ESI tool, but first want to start with its own status. It is heavily caveated. “Outcomes will be based purely on the information you provide”. This is obviously reasonable. Or is it? It is reasonable if the questions you are asked elicit the information that is needed to make the correct decision. But as there is no “additional information” box and the questions are very general, is it reasonable not to tell you that the questions are in fact aimed primarily at construction industry subcontractors and if you do not work in the construction industry the questions asked may well not be those that are needed to elicit a reliable outcome?

Then comes the big caveat. “This version of ESI will not only provide an indication of employment status. It will not give a definitive or legally-binding opinion”. So what’s the point of using it? HMRC are not even prepared to say that if you use it and answer all their questions honestly they will not penalise you for having done your best.

What is likely to happen? I don’t know, but my guess is that when you get a status enquiry the first question you will be asked is whether you use the ESI tool. If so, did you follow its answer? If not (to either question) why not? If you used it and got the answer that the person is self-employed – yes, it is very definitive, it does not say “probably” self-employed – I suspect that you will be told that it is purely an indicator and the question it asks are not exhaustive so it is now the Officer’s duty to discover the overall facts.

Or perhaps you won’t be asked if you used the tool. The conditions of use include the statement that “HMRC routinely carries out compliance activities. In the course of these activities we will check that the working arrangements reflect the information provided.” What does this mean? The tool is anonymous. You don’t have to give your name and address. How will they know you have used it? I don’t know. Perhaps the above note is a bluff. Or perhaps not. If you use the tool it creates an ESI Ref (mine was 14 digits). So perhaps HMRC have sent a “cookie” to your computer that tells them who you are and tells your PAYE District that you have used the tool and that they ought to look at people that you claim to be self-employed.

It should also be noted that the Conditions of Use state, “Where the …terms [of the written document] have been varied by agreement or by practice…then the information entered into ESI may reflect the terms of the contract, what the parties carry out in practice, or a combination of both”. This is not in accordance with the law. The leading case is a Privy Council case (the Privy Council is made up of the members of the House of Lords Judicial committee and hears appeals from courts of other Commonwealth countries), Narich Pty v Commission of Payroll Taxes of New South Wales. What the Privy Council said there is that where there is a written contract status must be decided on one basis alone, namely by considering the terms of that contract. The only exception is where what happens in practice evidences an agreed variation. That is very different from looking at what happens in practice irrespective of whether a departure from the contract is something that has been agreed, or it is something that one of the parties has unilaterally imposed and the other puts up with.

In this context why is the above statement part of the Conditions of Use, not part of the introductory explanation? Could it be that by making it part of the Conditions the user of the ESI tool is agreeing not to invoke the legal position?

Robert W Maas


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