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TWebEd says that HM Revenue & Customs could have done much better - for taxpayers - with its new IR35 Guidance.

Introduction

Last week, HM Revenue & Customs (HMRC) published its new IR35 guidance - see Intermediaries Legislation (IR35). It was eagerly anticipated but I couldn't help feeling quite deflated after having read it - and I did read through it. And in the few days since, my disappointment has soured further.

What this Guidance Does - Apparently

Let's start with the Introduction and what the guidance purports to do:

"It tells you how to work out which risk band you are in. And it tells you what the risk bands mean you have to do. "

I am unconvinced by the second point: I should not be at all surprised if someone who thought he or she should be in the "low risk" category would be less certain about what to do after having read the guidance than beforehand.

In Chapter 3 - What The Risk Bands Mean

"We will use the risk bands to gauge how likely it is that we need to check whether IR35 applies to you. You can use the business entity tests in Chapter 4 to work out which risk band you are in.

This Chapter explains what the risk bands mean you have to do.

High or Medium Risk

If you are in either the ‘high risk’ band or the ‘medium risk’ band, there is a risk that we will check whether IR35 applies to you. And this risk is not low."

So who is doing the risk assessment? And for what purpose? There is much potential for confusion but in a nutshell the different risk bands don't require the taxpayer to do different things. As the guidance itself says, IR35 applies, specifically, to individual engagements. So a taxpayer still needs to consider each engagement as it arises. Arguably, the risk banding exercise serves only to indicate the likelihood that HMRC will want to undertake an IR35 review. Records of the nature of each engagement will have to be kept in any event.

What's the Benefit of a Low Risk Profile?

The guidance also says,

We can Help You with IR35

"The helpline and review service are staffed by HMRC specialists in IR35. Both are independent of our compliance teams – if you ask them about IR35, they will not pass on what you tell them to other people in HMRC.

The specialists can review a contract for you if you want certainty about your position. If you decide to use the contract review service, and we conclude that your contract is outside IR35, we will give you a certificate with a unique number. This certificate will be valid for three years."

So far, so good. But then:

"If, later on, we open an IR35 review, you can give us this number. We will then suspend our IR35 review while we consider all the information. We will close our IR35 review if:

• the contract we reviewed is typical of your engagement terms and conditions
• the information provided is accurate."

Call me naive, but I was expecting something more along the lines of "the certificate will be valid for three years, and we won't darken your door until the three years are up or your arrangements substantially change". Colour me cynical, but what we got instead looks like that certificate provides no assurance whatsoever.

The Scoring

The scoring is as follows:

 So, the higher the score the better. But:

• A home office counts as 0 points - the business premises have to be separate in order to achieve a coveted 10 points
• Professional Indemnity Insurance warrants a measly 2 points
• Spending more than £1,200 a year on advertising - not entertaining - gains a similarly miserly 2 points
• The "Repair at Own Expense" test is an almost-as-stingy 4 points
• You can get 10 points if you've had bad debts ("Client Risk" in the guidance) but only if the bad debt is more than 10% of annual turnover in the last 24 months. I can't help but think most businesses would prefer the money!

There are other tests. Substitution warrants its own section -

Substitution

In my opinion, HMRC reveals its true colours in the section(s) on substitution. Where the contract includes a valid right of substitution, then a parsimonious 2 points are on offer. But if there has been actual substitution in the previous 24 months then that rockets to 20 points. Why the difference? I conclude it's because HMRC knows its case is all but lost if there has been actual substitution, so it might as well give up and go home. Otherwise, the fight goes on.

There is a similar test in terms of using own employees - the "Assistance Test".

Conclusion

IR35 is essentially a test of employed versus self-employed. The tests might apply in different ways but they should nevertheless factor in any decision as to whether or not IR35 applies.

I infer from the absence of a Mutuality of Obligations test that HMRC is wary of it. Likewise the examples of 'Control' in the case study examples (again no specific test but mentioned throughout the examples - perhaps too difficult to isolate). I'd be blowing the dust off Hall v Lorimer. (Lorimer worked from home, as I recall, so he'd be missing out on 10 points straight away!)

I think all parties will agree that the question of 'employed v self-employed' is something of a minefield, HMRC probably thinks it has put a lot of effort into this latest guidance. And there is some art to it. But I fear there will be scant recognition of that effort, from those businesses which contend with IR35; much more, I suspect, from those who put HMRC up to the task. HMRC has succeeded in doing precious little to clear the minefield for small businesses, and whatever resources it committed, it has managed to chart its own course without giving too much away. Which was, I rather suspect, the whole point. There is something of value to be gleaned from reading between the lines. But it could all have been so very much more helpful.