IR35: Employment status tool test driven

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Mark Taylor of Chartergate Legal Services test drives HMRC’s new employment status service tool, which is designed to help public sector bodies, workers, and agencies determine whether a contract for services is within IR35 or not. 

Scope

It is important to understand the scope and standing of the employment status service (ESS) tool:

  • It is voluntary – there is no requirement for the end client, the personal service company (PSC), or any other party to complete the questionnaire
  • It is anonymous – the party completing the questionnaire is not required to provide any information that could identify them and HMRC will not keep a record of the information that is entered
  • It is binding – HMRC will stand by the result given by the tool, unless a compliance check finds that the information provided isn’t accurate. This is a huge caveat as it allows HMRC significant scope to backtrack from the “result”. Furthermore, it is a salutary reminder that HMRC will want to verify the facts inputted into the tool, and are likely to do so where they consider the result to be dubious
  • It is (potentially) penal – HMRC will not stand by “results achieved through contrived arrangements designed to get a particular outcome” and where this is the case, completing the ESS questionnaire will be treated as “deliberate non-compliance” with “higher penalties”. This is understandable as HMRC guards against those that seek to manipulate the results of the ESS tool

How it works

The ESS tool is split into five main sections:

  1. Background – These questions provide HMRC with the nuts and bolts of the engagement. For example; who is completing the questionnaire and has the engagement started?
  2. Personal service – Whether the worker is obliged to provide the services personally
  3. Control – How, what, where and when the work is done
  4. Financial risk – Whether the worker provides equipment and/or materials, how the worker is paid (for example hourly, daily or weekly rate) and whether and how the worker has to remedy any defective work
  5. Part and parcel – How integrated (if at all) the worker is in the end client’s organisation. This covers issues including; what benefits the worker receives (for example sick pay), whether the worker has any duties akin to an employee (for example hiring and firing the end client’s staff), whether the worker interacts with the end client’s customers and how the worker would identify themselves to the end client’s customers

When completing the ESS it is not necessary to answer the entire bank of questions, if the answers provided at a particular section indicate conclusively that the engagement is outside of IR35. Of course, this is only a plus point if the tool is accurate.

Is it accurate?

There are three potential outcomes of the ESS tool:

  • Inside the IR35 legislation
  • Outside the IR35 legislation
  • Unable to determine the tax status of this engagement

The third outcome leaves the user in limbo, and is not much use to contractors, agencies or end users, but it will be the likely outcome for borderline cases. This is frustrating given HMRC’s promise that they will be bound by the decision of the tool. In reality, the borderline cases are the ones that are likely to be challenged by HMRC, and then expert legal advice from those that have experience of arguing IR35 will be crucial. 

Personal service 

The ESS tool rightly identifies that if the worker is not obliged to do the work personally (for example; they can send a substitute) then the worker is outside of IR35. However, HMRC’s view on what constitutes a lack of personal service is far too simplistic, and it fails to account for the Court of Appeal decision in Pimlico Plumbers v Smith [2017], a case that is only a month old. I have set-out in greater detail why HMRC’s approach is wrong in the Chartergates newsletter of 7 March.

Mutuality of obligations

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About Mark Taylor

About MarkTaylor

Mark Taylor is a director and co-founder of Chartergate Legal Services who specialise in tax, VAT and employment law.  Mark has a law degree and later completed his masters in employment relations law at Leicester University.  Mark has successfully represented hundreds of clients in the employment tribunal and employment appeal tribunal. Mark continues to lecture nationally on employment law and employment status matters to accountants, the recruitment industry and intermediaries. Chartergates are experts in IR35, employment status and contentious tax disputes.

Replies

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09th Mar 2017 16:11

I would endorse Mark's comments wholeheartedly. I test drove the ESS using my own situation as a Ltd Co sole practitioner acting for some recent clients. Since the tool is driven by the new rules for assessing one-man service businesses, this seemed like a reasonable test.

It told me I fell within IR35, which is complete nonsense. It failed to ask key questions (eg, how many clients at any one time, and could I choose which one to work on, and there are others) and is clearly unfit for purpose.

It should be withdrawn until it has been shown to work properly.

Thanks (8)
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13th Mar 2017 10:34

Looking back on past "rules" it was quite simple.

That if a contractor is shown only to work for one client then PAYE should apply.

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13th Mar 2017 11:40

@davidbrewster. This interpretation raises the problem that almost all new enterprises work for one entity at outset. It may be better for a time limit to be inserted.

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16th Mar 2017 20:34

The tool seems only to be concerned with IR35 and not with employment status in general. Is it applicable where there is just a worker and a client, i.e. the worker is an unincorporated entity?

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