HMRC shifts IR35 decision, delays digital tool

The taxman has rubbed out the ‘end of February’ as the launch date for the IR35 digital tool and put “early March” instead.

By updating the timings of the tool in its online guidance set (this sheet specifically), HM Revenue & Customs can say the resource is not behind schedule when it unveils it very soon.

But the Revenue initially promised that the tool -- the Employment Status Service -- would be released as a beta in late autumn 2016, before building it had begun.

The delays (the beta did not emerge until 2017) owe to technical, development and conceptual issues, such as the ESS giving more weight to Substitution than Control.

No longer the 'main way'

In fact, the current version of the tool stops testing and returns an 'outside IR35' result if users input that a suitably-skilled substitute can be sent, without it considering Control or other factors like Mutuality.

Status experts point out that such a determination is incorrect, because a contract with a good substitution clause but where control and MOO exist would almost certainly be inside IR35.

It is such issues that IR35 experts hope the Revenue puts right in the extra time it has afforded itself, but the department now seems to be attaching less importance to the tool.

In May 2016, the IR35 tool was described by the tax authority as the “main way” for public sector agencies and bodies to apply the April 6th off-payroll rules with certainty.

Yet in its latest update, quietly made on Wednesday night, HMRC says the tool can merely “help” decide IR35 status, and says it is “optional”.  

'Person paying the intermediary'

Even more significantly, the tool sits behind a new instruction from the Revenue which appears to shift the decision of whether IR35 applies from the end-user to the fee-payer.

“The person paying the intermediary must look at the arrangements under which the worker provides their services to the client,” HMRC says, in a new paragraph (31) in its guidance.

“If applying the employment status tests to that engagement shows they would have been an employee of the client but for the existence of the intermediary, then the engagement is caught by the new rules.

“This is the same kind of employment status test based on case law that public bodies and agencies have to consider when they hire staff directly.”

'Clear and concise'

This repositioning of which party must decide IR35 status (since December it was understood to be the decision of end-users), and how, will disappoint the tool’s supporters.

“The IR35 tool is clear and concise,” said one person who’s tested the ESS but, noting the Revenue’s request not to circulate the beta, declined to be named.

“Yes, some of the questions are still being asked in a way that only a tax expert would understand the meaning of, but as more people use it, they will become aware of the terminology.”

Another beta tester added: “The IR35 tool is a smarter version of the ESI tool, which gave the right result anyway.

“Now anyone will be able to test whether PSCs fall inside or outside IR35 and also the employment status of sole traders. So this tool is going to be good not just for agency workers and the public sector, it is for everyone. Why it took so long to develop is my only question.”

'Should have been available months ago'

The Association of Independent Professionals and the Self-Employed believes the question is worth asking. “The Employment Status Service digital tool should have been available months ago”, it said yesterday.

“[This would have allowed] proper time for clients, agencies and contractors to get used to it and assess their status. In its absence, many engagers are taking the default position that all engagements are ‘inside IR35’.”

Three government bodies have confirmed that the absence of the tool is having an adverse impact, so much so that they have told HMRC to delay the April 6th rules until at least October, to allow all parties to get better prepared.

'Work will be ongoing'

But even when the ESS is imminently launched to the general public, “work will be ongoing to continue to refine and develop the test[s],” expects one recruitment agency, which was among the dozens who expected the tool to be released yesterday.

What was put out by HMRC on Wednesday night (in the update to its off-payroll rule guidance), was a clarification of the scope of the reform, including where MSCs and contracted out services are caught by the April rules. 

The Freelancer and Contractor Services Association also pointed out that HMRC’s update includes worked examples for tax advisers and accountants, as well as support for public authority teams who may be affected.


“It looks like it just brings together all the other details [of the rules we know about]”, a former tax official said of the update. “But paragraph 31 looks confusing -- everyone is checking everyone.”

A status advisory reflected on the implications, practically, if fee-payers -- typically recruiters -- must gauge the IR35 status of PSCs.

“It looks to me like a lot of agencies will [now] not take the risk, regardless of what the PS body says [or decides],” the advisory said. “As for the public sector bodies, they will need to have a plan in place to show to HM Treasury.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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