Are public sector contractors to have their La-La Land moment with the IR35 reforms?

Contractors relying on the HMRC Employment Status Service (ESS) tool to determine their IR35 status within the IR35 reforms coming into force in the public sector are at risk of having a La-La Land moment.

They could be given a false IR35-pass by HMRC’s ESS tool only to find out later that in fact it should have been a fail. But, unlike the Oscars, this won’t mean not winning an accolade: it could mean a whole world of financial misery.

Why do we say this? Well, because ContractorCalculator, working with our legal experts, have put the current Beta version of the ESS Tool through its paces, and it appears to be handing out pass results despite what you put in.

Our sources confirm that HMRC is already aware of this issue, and that many agencies and service providers have also brought it to the taxman’s attention.

Every historic IR35 court case passes the HMRC ESS Tool

To robustly test HMRC’s ESS tool, we put all the significant IR35 court cases – 21 in total - through the tool. We conducted 22 test runs, because to do this properly the JLJ Services split case requires two tests. Our expectation was that the tool would match the court’s rulings and that 12 of the contractors concerned would be evaluated as caught by IR35.

Every single test passed. All 22. Not one of the landmark IR35 court cases failed the HMRC ESS tool.

So, we then decided to put through some test cases, choosing answers that aligned with a contractor who was:

  • a business as usual worker
  • a role-based tail-end Charlie
  • not on a project
  • moved about from task to task
  • with fixed hours
  • told what to do, and when and where.

This is a classic case that should fail IR35, wouldn’t you agree?

And the answer? Passed IR35.

Our conclusion now aligns with something we heard recently – only a rumour – that the online test is not yet actually linked to a logic engine.

Our thinking is that this surely must be true, or it’s not fit-for-purpose.

How is the Beta? And how is HMRC getting on?

What else can we say about HMRC’s ESS tool?

The substitution area is missing the whole concept of fettering – whether the client has a right to reject a qualified substitute. This concept is crucial to IR35. Five of the court cases had substitution in place, but it was fettered; F S Consulting Limited vs McCaul, Future Online, Netherlane Limited, Alternative Book Company Ltd, JLJ Services. But because the tool does not check for this, when we ran our trial HMRC determined that the contractor was outside IR35. Paragraph 84 in the recent Pimplico Plumbers case neatly explained how substitution should be evaluated - HMRC needs to take note.

Of even greater concern is that substitution appears to have been isolated entirely, and doesn’t seem to considered when reaching a final conclusion. This is both contrary to the case law and a rather large task to fix with time runnning out.

But that’s not the worst of it. There are even greater issues: The questions are poorly constructed. In many areas case law concepts are not examined, or are not in enough detail. Little is included regarding mutuality of obligation (MOO), which is one of the ‘irreducible minimums’ that needs to be established to prove an employment relationship exists.

“The tool is simply not fit for purpose,” warns Martyn Valentine of IR35 specialists The Law Place, who helped examine the tool. “It appears at this stage to be nothing more than a survey, and not actually hooked up to any decision making engine. We put some terrible IR35 scenarios through the tool and everything passed. Something clearly isn’t right.”

Can HMRC’s ESS tool be saved?

At this stage, with only a few weeks to go before the public sector IR35 reforms come into force, HMRC’s tool is nowhere near being fit-for-purpose. We can’t see how HMRC is going to be able to offer to guarantee the IR35 status result based on the test’s answer. Because if the taxman does this, it won’t align with the law and so won’t mean anything. It would be like handing out dodgy MOT certificates and then later clamping down on drivers who used them.

And if HMRC goes live with this version, it will be handing out employment status decisions to contractors, agencies and public sector bodies that may be reversed when the tool is corrected. What will be the process if HMRC insists everyone has a retest? Will the stakeholders all be liable for back taxes?

Following seven years of investment into our IR35 test, we have repeatedly warned the taxman that a robust online test could not be developed within such a short timeframe.

And for the record, our test accurately predicts the correct result of all 21 court cases. It was part of the proof pack we provided to the underwriters of the insurance that is available for those that pass the test. Since its recent relaunch we’ve helped test over 2,500 contractors – for free.

Not only was HMRC being wildly optimistic with its ESS tool timeframe, but the objective of providing certainty in all cases is unachievable.

And now the public sector is in complete chaos. Vital projects designed to secure the delivery of front line public services are faltering following an exodus of contractors (see the Register). Highly skilled knowledge workers are, unsurprisingly, refusing to accept blanket decisions by risk-averse clients that are slashing incomes by a quarter.

Last year when HMRC explained its intentions, we were widely quoted as saying that building a tool that worked in time to provide that level of certainty was “Disneyland thinking”. We were right then, but brace yourself now for La-La Land.

Published: Tuesday, February 28, 2017

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