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We take a look at the latest developments in the intermediaries legislation. The prognosis is not good.

Introduction

Many readers will know already that the 2017 Finance Bill was pared to the bone, so it might be passed ahead of the General Election. Where we might be in terms of the ‘postponed’ parts, now that we have a hung parliament, is a matter for another day. But one part of the Bill that did survive the cut was Workers’ Services Provided to the Public Sector through Intermediaries – now FA 2017 s 6 and Sch 1. Given the confusion and disruption that has followed this new policy, one might well wish the draftsman had cut a little deeper.

Public Sector Burden

Those who are sufficiently long in the tooth will recall that, when IR35 /the intermediaries legislation was first mooted, the original intention was for the ‘employer’ / engager to be made responsible, but this approach was written off as unworkable.

In spite of this, the new regime basically requires Public Sector engagers to consider whether or not the relationship with an individual is in effect one of employment, notwithstanding the individual’s being hired through his or her company. Where that relationship is found to fall within the scope of IR35, the Public Sector Body essentially becomes responsible for ensuring that PAYE is applied to any payments made from 2016/17 onwards.

“Public Sector Bodies” (PSBs) includes the obvious suspects, such as hospitals and universities. However, the legislation ties the definition of a “Public Sector Body” to that of a “public authority” as per the Freedom of Information Act 2000, so it also includes GP surgeries and dental practices that provide NHS care, so this issue is likely to affect a significant number of businesses and individuals (and their advisers) who might have thought themselves outside the scope of the new rules.

Not all Guidance is Useful

It seems even ‘real’ Public Sector Bodies – notably in the NHS – were struggling with the implications of the new rules, let alone high street medical practices. But help was at hand, in the form of a February missive from NHS Improvement’s Chief Executive, with the following pearl of wisdom:

“…HMRC will treat all public sector ‘self-employed’ contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017…”

Which would be great – or straight forward, at least – if it were not utter cobblers.

In fact, the relevant engager remains obliged to consider the engaged party’s IR35 status on a case-by-case basis; there is no universal approach, which NHS Improvements has now had to acknowledge in its May 2017 IR35 Update:

“The introduction of the rules has made clear that an assessment of whether or not IR35 applies should be carried out in a fact-specific way; that is, it should be applied on a case-by-case basis, rather than by a broader classification of roles. Therefore, NHS providers, and all others categorised as public authorities, will need to consider whether or not an individual in their particular situation is self-employed when they determine the application of the IR35 rules in that case. This consideration must be conducted fairly, accurately and take into account all relevant factors, including representations which may be provided by the individual. [My emphasis]

HMRC has provided a simple tool to help determine whether an individual should be considered employed for tax purposes. Providers and individuals may find this helpful for guidance. This tool does not negate the necessity for careful case-by-case scrutiny. The link to the tool is: www.gov.uk/guidance/check-employment-status-for-tax...”

Well, thanks for clearing that up. Except it doesn’t, because actually, HMRC’s tool is not fit for purpose. I didn’t say that it wasn’t useful; just not very good. First, there were complaints that it wasn’t ready. Then, when it was ready, it wasn’t right. And, now it has been updated, it’s even less right than when it was, er, ready.

Employment Status Indicator/Service/Tool

HMRC’s Employment Status Tool has been around for a few years now, in one form or another. It is a series of online questions and answers from the user, plotting a course to arrive at one of a range of pre-determined outcomes. I seem to recall that, in the Tool's infancy, a certain tax barrister recounted that he had used it himself, and it had told him he was an employee – hardly a promising start.

Aware of growing concern amongst the Public Sector Bodies, HMRC had promised that the EST would be overhauled to assist in determining status in relation to the updated legislation, in time for the start of the new tax year. I am not sure that concern had given way completely to panic by the time HMRC said it was ready in March 2017, but it must have been a close-run thing, given the sheer number of individuals potentially involved, and that the PSBs might have to ‘test’ before the next payment in the new tax year.

On the plus side, the Tool site says:

“HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate.”

Unfortunately, the Tool often cannot give a definitive answer, so users will be no better placed to determine status. According to Dave Chaplin of Contractor Calculator, when he ran the facts of the main IR35 judgments through the Tool:

“There are effectively 22 test cases, since the last case, JLJ Services Ltd v Revenue & Customs [2011] UKFTT 766 is a split case – being outside IR35 to start with, and then on later contracts being considered caught by IR35, so it was run twice on slightly different facts.

The HMRC ESS Tool:

• Agreed status in 13 of the test cases (3 inside IR35, 10 outside IR35)

• Disagreed in 1 case – HMRC actually passed a case as being outside IR35 that was deemed inside IR35 in court

• Was unable to determine status in 8 cases – 36%”

The strange thing is that when the original version of the Tool was tested in this way, it was unable to determine status in about a quarter of the test cases. Now that it has been updated, the proportion of “unable to determine” results has actually risen to 36%. Which would ordinarily be considered a step in the wrong direction.

The Answer’s Simply Stupid

The reason for the high level of “unable to determine” cases seems relatively simple: HMRC’s Tool gives up far too easily. Contractor Calculator has its own free online IR35 status tool, which uses 101 questions to determine the user’s status. But, according to Dave,

“HMRC’s tool asks only 16 questions, across four areas:

1. Personal service
2. Control
3. Financial risk
4. Part and parcel

And there are no questions on Mutuality of Obligations, leaving a rather large hole in their logic.

HMRC’s Tool appears to be based on a simple checklist approach. But the courts have clearly and repeatedly said that it is not possible to evaluate IR35 in this way: an engagement must be looked at “in the round”, as per Hall v Lorimer [1993] EWCA Civ 25.”

So, in summary, HMRC’s Status Tool appears to be asking too few of the wrong kind of questions, and many users seem likely to end up getting an “indeterminate” result. While HMRC may promise to ‘stand by’ the result given by the Tool, I don’t think that applies when the result is “we don’t know”. HMRC says it doesn’t record any information entered into the Tool, or any results given. Which basically boils down to “we don’t know when we don’t know”. Or something like that. Meanwhile, GP practices, hospitals, dentists and education bodies, etc., are wasting time trying to get an answer, when - and this is only a guess, I must admit - they have much more important things to do. 

A link to Contractor Calculator’s own free online IR35 status test may be found here.