The evolution of IR35, and whatever IR35’s successor might be, makes monkeys of us all. IR35 is designed to identify disguised employees and tax them accordingly. Currently, to determine a contractor’s IR35 status, you apply the known tests of employment – such as control, substitution and mutuality of obligation. These tests, their applicability and relative weighting are based on case law.
Here’s when it goes wrong for contractors. Case law is like evolution – it progresses at a steady state, then it leaps forward in stops and starts, and sometimes it shoots off in a different direction or even reverses. Just as suddenly, a whole sub-group can be rendered extinct after a sudden catastrophic event.
The uncertain nature of case law and its ongoing evolution is what leaves many contractors in legislative limbo. At the extreme ends of the scale, you have contractors who are obviously not employees and are well and truly in business on their own account. At the other extreme you have disguised employees, permtracting their way through life or leaving work employed on Friday to come back contracting with their former employer on Monday. And between these two lies a huge grey area.
ContractorCalculator analysed the decision tree that determines IR35 status, plus the hundreds of employment status decisions that make up case law, to create our online IR35 test, the evidence led us to create an 11-point scale. This includes clear fails (scores 1, 2 and 3), borderline fails ( 4 and 5), borderline (6), borderline passes (7 and 8) and clear passes (9, 10 and 11). And because the evolution from 1 to 11 is incremental, that rather led me to think of the incredibly powerful ‘Ascent of Man’ image, in which humans evolve from monkeys, through progressively more-developed stages, to homo sapiens.
Implementing IR35 is a process of determining whether a worker is at one extreme a ‘monkey’, or at the other extreme, ‘human’, which leaves everything in between. Our online IR35 test asks 53 questions that cover all the relevant areas of case law to determine a contractor’s IR35 status. A judge will go through a similar process when examining evidence. However because of the complexity of the case law and the many shades of grey, very few contractors reaching court lose against HMRC. And the results of our online IR35 test, now taken by thousands of contractors, place many in the borderline bracket of being neither monkey nor human!
The tests as they stand are far too complex. Too many of those in the grey area are on HMRC’s radar and shouldn’t be, while too many of those on the radar who really are disguised employees get away with it because the complexity of the tests, when used effectively by an expert, can work in favour of those who are not true contractors.
A much simpler solution is required. But that’s not easy. To get a picture of the conflicting ideas and interests at play, you just have to look at the debate raging on AccountingWeb, to which I have contributed, and the hugely convoluted suggestions for simplification that have appeared in response to Rebecca Benneyworth’s prompt for contributions.
Right now we know HMRC is out there fishing for contractors with an incredibly complex IR35 net that is full of holes; not surprisingly, the taxman is catching almost no-one. Perhaps the best approach is to change the net, make it easier to land some big fish and forget about the small fry, because the cost to snag them one by one outweighs the benefit.
Better might be to address the big issues with simple rules based on certainties like length of contract or previous employer – that would instantly tackle disguised employee issues like the Monday-to-Friday syndrome and long-term permtractors. Applying such rules consistently and fairly would not only catch disguised employees and leave true contractors to get on with running their businesses, but would also result in the Treasury bringing in more taxation from those who should be paying it.
Is this approach totally fair? Possibly not, but it’s a practical solution that will catch the naughty monkeys and leave genuine contractors to get on with what they do best – contracting and contributing to UK plc.