Solid evidence has emerged that the ‘in-business’, or ‘gateway’, tests apparently being considered by HMRC as part of future IR35 administration simply cannot work. But is HMRC, the Treasury or anyone on the IR35 Forum taking notice? Let’s hope so, for if these very tests are sanctioned by Forum, they could pitch contractors into a second decade of IR35 nightmares.
Contractors are flexible knowledge workers applying their highly developed skills in a modern knowledge economy. They represent a unique category of worker and business that ‘in-business’ or ‘gateway’ tests can’t tell apart. This has just been proven once again in the ECR Consulting case, which has added a further piece of solid evidence to prove that business tests just cannot work for knowledge workers and their businesses.
The contractor who was the subject of HMRC’s original investigation, Elaine Richardson of ECR, is clearly a highly skilled software expert at the top of her game. Naturally she is paid accordingly, and is a classic knowledge worker running a contracting micro-business from home. HMRC thought not. Despite obvious weaknesses across the broad sweep of the taxman’s case, HMRC pursued a vigorous case against her. In fact, it could be argued that the taxman’s pursuit of Richardson highlights the apparent view of some tax officials that every limited company contractor should pay tax as a disguised employee.
Richardson was found by the tribunal to be outside IR35 according to all the key employment tests. Importantly, she was also found to exhibit all the characteristics of a business. Yet, she was hired by her client, Vertex Data Systems (VDS), to perform tasks that were virtually indistinguishable from VDS employees on the same development team.
So here’s someone hired to do exactly the same as an employee and yet has been found by a judge not to actually be an employee. Huh? How does that work? Being charitable, you can feel a little sympathy for the HMRC inspector who brought the case, because it could superficially have looked like Richardson was a disguised employee. But you don’t have to scratch very far below the surface, as indeed the tribunal did, to see that Richardson was anything but an employee. And there sympathy for HMRC must end.
Control is one of the first and foremost factors HMRC will look for when trying to determine a contractor’s IR35 status, and it tried hard to prove Richardson was controlled by her client, a tactic that backfired. But is it really possible to control a highly skilled, and highly paid, knowledge worker like Richardson? Of course not, because contractors are not like, for example, factory workers on a production line, who are highly skilled in their own right, but still controlled by their employer or hirer to follow strict procedures to the letter.
Richardson was not provided with a set of rules and processes by VDS. She was hired precisely because they did not exist. And she did not require rules and processes because she is an expert at what she does. The tribunal recognised this obvious fact, and even stated that, although Richardson’s project manager Linda Brown claimed to be controlling her, “we do not accept that, even with the qualifications she [Brown] advised us of, that she was able to tell Miss Richardson how to do the work”.
The ruling drew attention to the fact that Richardson was highly paid, very much more so than her client: “The level of payment indicates that Miss Richardson is clearly a knowledgeable computer expert capable of handling complex work.” Why pay an expert a large sum of money and then try to tell the expert specifically how to perform their role? It does not make much commercial sense.
So, based on the published facts of this case, in which a contractor has been hired to perform a role that, on the face of it, is indistinguishable from what an employee at the next desk is doing, how on earth could HMRC create its favoured ‘gateway’ tests? Is it even possible to come up with a set of definitive, objective criteria that could, for example, tell Richardson and Brown apart? And would these tests work fairly and effectively in all circumstances, clearing up the previous decade of confusion of IR35? Of course not.
In our IR35 Solutions white paper, we identified numerous reasons why business tests can’t be applied to highly skilled flexible knowledge workers in a globalised knowledge economy. And if further evidence is required, the draconian Australian personal services income (PSI) rules are an excellent example of the law of unintended consequences.
The ECR Consulting ruling is yet another layer of hard evidence that in-business tests, or gateway tests, should not be the route for HMRC to take if it wishes to better administer IR35 and identify cases to pursue against genuine disguised workers.