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The Flawed Logic in HMRC’s IR35 Status Tool
11/07/2017, by Dave Chaplin, Tax Articles - Business Tax
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Despite HMRC’s efforts, their IR35 assessment tool is fundamentally flawed, produces inaccurate results, and unless they go back to the drawing board it will never be fit for purpose, warns Dave Chaplin of Contractor Calculator.

Introduction

At ContractorCalculator we have knowledge of what HMRC tried to achieve, because we’ve already spent the last 7 years tackling this task, and released our enhanced version of our IR35 Testing tool in Feb 2017 – it asks 101 questions and delivers a verdict based on a 19-point scale – because, as most employment status experts know – status lies on a spectrum. We’ve read and analysed all 415 pages of the court case judgements for all 21 court cases, and we have a working tool that gives the same result for all those cases.

So, when HMRC claimed they were going to build something similar in a matter of months we were rather surprised at their confidence.

In the end, they took on the impossible task of building a status assessment tool in an impossible timeframe that would give a binary result for IR35 status, ran out of time, released something not fit-for-purpose, and tried to bolster its credibility by offering a guarantee which has caveats making it worthless.

How Does the HMRC Status Tool Work?

HMRC publishes the underlying code for their tool, and all the logic online in a publicly accessible repository, so we decided to take a look and see how it works.

Some facts about their tool by reading the programming code:

  • Once it has established the person is using a limited company and not an office holder, it asks just 16 questions
  • It considers four areas sequentially:

1.      personal service,

2.      control,

3.      financial risk,

4.      part and parcel

  • If certain criteria are established in each of (1), or (2), or (3) the user is immediately told that “IR35 Does not Apply” and asked no further questions.
  • If after all four areas no pass is identified, a look up table is used based on each sections answers and the user is either told “IR35 Applies” or “Unable to Determine Status”

What’s Wrong With This Method?

Canny status lawyers will be aware that once personal service is established there are two irreducible minima that must be present for the relationship to be considered one of employment: control and mutuality of obligation (MOO). Did you spot the section on MOO? Nope, we didn’t either.

Notwithstanding the fact that there are no questions on MOO, HMRC’s basic algorithm is not founded on how case law judgements are made, as laid down by Justice Nolan in the case Hall v Lorimer [1993] EWCA Civ 25. This stated that all factors should be taken into account and a "stand back approach" taken to examine the picture as a whole. What HMRC are doing is taking pieces of jigsaw out of a box, and if they see certain ones they conclude “IR35 Does not apply” without looking at the whole picture. Are there any employment status experts that would work this way for their clients? We don’t think so.

Golden Ticket

This “golden ticket pass” approach means that for many contractors who have a substitution clause in their contract and claim, possibly using wishful thinking, that their client would agree to it, they are told after just two answers that IR35 does not apply to them. In the past, judges have overruled substitution clauses, considering them to be window dressing. Did HMRC not read this in the IR35 case law?

HMRC’s “Guarantee”

HMRC’s approach to hand out ‘golden pass tickets’ without examining the whole picture means that in many instances some key factors that impact IR35 status will be completely overlooked and bypassed by the tool. But, despite the crude approach it offers a guarantee to stand by the result – which is tantamount to an attempt to rewrite case law.

So What is this Guarantee?

HMRC state that they will stand by the result of their tool provided that they agree that the answers you gave were correct, and also provided that they do not think the relationship has been contrived just to pass the tool. 

Does that give anyone a warm fuzzy feeling if they get a pass result? Would an underwriter insure based on this? No, and No.

So, What Happens Next?

Many experts, including us at ContractorCalculator, believe that HMRC are using the public sector IR35 reforms as a test before rolling them out to the private sector. Having a two-tiered system puts the public sector at a disadvantage, because contractors are turning their noses up at public sector contracts unless they are paid significantly more to make up the tax loss. Hence why many of us think it will happen sooner rather than later, perhaps as early as April 2018.

But the silver lining is that the chaos that ensued in the public sector when these reforms were released, combined with the awful implementation of their IR35 tool and the subsequent inability to provide certainty for the market, may mean that the roll-out could be delayed. We hope so. The UK needs the flexible workforce to help with Brexit, and now is not the time to put the brakes on it further.

As for its tool, HMRC needs to go back to the drawing board, and listen to what the experts and other stakeholders have been telling them and stop denying that its tool is unreliable and inaccurate.  It must acknowledge its failings and agree that it is a weak and wobbly tool rather than the strong and stable one we were all hoping for.  Now, where have we heard those words before?!

About The Author

Dave Chaplin is a former IT contractor in the City of London, and is founder and CEO of ContractorCalculator, and author of The Contractors' Handbook and Beat IR35: The Ultimate Guide to IR35 for Contractors, Agencies and Clients.

Started in 1999, Contractor Calculator is a comprehensive online resource for freelancers and contractors that has become the expert guide to contracting. It is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.

(W) www.contractorcalculator.co.uk

(E) info@ContractorCalculator.co.uk

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