We have an IR35 storm in a contractor's teacup
I really really have tried, but I just don’t see what all the IR35 fuss is about, writes a former director of IR35 specialists Accountax, David Harmer, of chartered tax consultancy Francis Clark.
Did anyone really expect the taxman to wave a magic wand and provide contractors with certainty on IR35? When have HM Revenue & Customs ever done this – provided absolute clarity - in any area of taxation for this customer group? And whether IR35 Forum member ‘A’ said “this,” or whether member B objected to “that” is, in reality, of little use to contractors today. We are where we are, but it is a more than a little naïve to have ever thought we could have had a change in law.
Employment status - the same since 2000
So to reiterate, the IR35 legislation has not been changed. The new, non-enshrined business tests are simply an HMRC administrative aid as to their opinion, nothing more and nothing less.
That means, despite the new IR35 guidance, it remains to be the courts, not HMRC, who ultimately decide whether a contractor is or is not caught by IR35. And the courts’ thinking is clear:
What the courts say
- The fundamentals of status are Personal Service, Control and Mutuality of Obligations. So-called ‘in-business’ factors may help to decide a case one way or the other, but these are not conclusive in their own right.
- The test for Personal service is whether an individual is obliged to provide his services personally. Where an individual has a genuine, not unreasonably fettered, right of substitution this is evidence that he is not obliged to provide his services personally. It is the right to utilise a substitute which is of significant importance, and not the actual sending of someone in your place.
- Where an individual is not subject to control as to the manner in which he/she provides the services he/she cannot be an employee. It is whether an individual is controlled as to how he provides the services (not the what, when and where) which is fundamental.
- Where there is a clear lack of obligation on the work provider to provide work and the work doer to accept work the individual cannot be an employee.
- The ‘in business on your own account test’ encompasses secondary factors, of which no exhaustive list can be produced, to be considered after the fundamentals of status (above) have been considered.
When you sit the IR35 business test
As such when a contractor utilises HMRC’s business tests (PDF) he or she is merely comparing where he/she thinks they fit on HMRC’s subjective grading on their opinion of what being in-business’ for IR35 purposes means. HMRC’s opinion, contrary to what they may have you believe, is not law. It is the Tax tribunals who will ultimately decide whether a contractor is or is not caught by IR35.
A contractor who scores “low risk” has no certainty the courts will deem him outside of IR35; likewise a contractor who scores “high risk” could quite easily be found by the courts to be outside of IR35. Actually these tests are nothing new as a concept; HMRC produced a similar questionnaire for self-employed status to aid CIS contractors determine the status of workforce, which was equally as helpful!
‘Business test says no’
The danger of these business tests is that it may add yet another barrier between contractor and HMRC, while it definitely is yet an additional “policy” which HMRC can utilise in a broad-brush fashion to browbeat the average contractor. Unfortunately, I can envisage many cases where contractors are caught up in an initial ‘trial by Revenue’ to prove they are not caught by IR35, with HMRC simply responding “business test says no.” This type of response will mean time spent arguing over the relevance and interpretation of the business test before any substantive arguments as to the facts of the case can begin.
More harm than good
To my mind, anything which detracts from applying the specific facts of a case to case law principles (which this has the potential to do) does more harm than good and is extremely detrimental to contractors when looking at IR35.
Beyond the test, perhaps some congratulations can go to HMRC for finally providing guidance which contains IR35 scenarios taxpayers can apply in the real world (as opposed to their more traditional examples which are poles apart from your average contractor). However the scenarios aside, the remainder of the taxpayer-focused document will, I’m sure, prove largely irrelevant to them.