IR35: Employment status tool test driven
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.
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:
- 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?
- Personal service – Whether the worker is obliged to provide the services personally
- Control – How, what, where and when the work is done
- 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
- 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.
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 , 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
Having gone through the questionnaire numerous times, it is apparent that the ESS tool completely fails to address the issue of mutuality of obligations (MOO). The test versions of the ESS tool assumed that MOO was present by the very fact that the tool was being completed. This (incorrect) assumption appears to be carried over to the live version. Such a significant flaw calls into question the veracity of the tool.
The ESS rightly seeks to establish the position with regards to control by asking just four questions:
- Can the end client move the worker to a different task or project than that they originally agreed to?
- Once the worker starts the engagement, can the end client decide how the work is done?
- Can the end client decide the schedule of hours?
- Can the worker choose where they work?
HMRC’s lack of emphasis on ‘how’ the work is done is evident, which in my opinion, is the most important aspect of control. Even where the answers indicate that the worker decides how the work is done, the ESS tool does not bring you outside of IR35 simply based on the control answers. For a discussion on the importance of control with regards to IR35 see our newsletter of 10 February 2017.
Any online questionnaire is going to struggle to determine the borderline cases. Given that case law on IR35 is finely balanced between HMRC wins and losses this is understandable.
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What is not understandable however, is HMRC’s failure to grasp the law, ignorance of major factors like mutuality of obligation (which they have been scolded for by the judiciary in the past) and the fact that the ESS tool betrays HMRC’s position on employment status which is not consistent with the case law.
In short, if you put the facts of the engagement through the ESS tool and you get an “outside IR35” result then keep the results, store them safely but do not assume that HMRC will not look beyond the results to verify the facts that you have input.
On the other hand, if you get an “inside IR35” result this will not necessarily mean that the engagement is inside of IR35 because the tool reflects HMRC’s view of employment status which is not in accordance with the case law.
To come to this conclusion is disappointing, given that contractors, agencies and end clients were assured that the ESS tool would provide valuable guidance to those grappling with the off-payroll IR35 legislation. Our advice to those grappling with the off-payroll rules for the public sector is to speak to the experts.
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...