Contractors' Questions: What if nobody uses the IR35 digital tool?

Contractor’s Question: The IR35 digital tool, or the Employment Status Service to use its expected title, is said to not be mandatory from April 6th 2017 or whenever it is released.

But isn’t the tool part of the IR35 changes that are mandatory? If the tool suffers from poor uptake though and is not widely used, couldn’t that spell the end for these changes?

Expert’s Answer: You are correct that use of the IR35 digital tool is not going to be mandatory although I think we can expect most public sector bodies to use it. However, I believe the ‘not mandatory’ provision has been attached by HMRC purely as an open door invitation to private sector bodies to start using the tool. In doing so, such companies and corporations would begin to participate in its development, making any private sector rollout more feasible and less open to challenge.  

We regard the digital tool as pivotal to the success of these IR35 reforms. Much more than just the showpiece of the reforms, it will probably be what determines their success or failure. Unfortunately for HMRC, and based on what I’ve seen of the tool, our expectation is that it will follow the path of the Business Entity Tests, and fail to win our trust. And if it fails, HMRC will be unable to roll these changes out, at least to the private sector. The service’s failure may result in HMRC losing the trust of public sector bodies.   

What’s notable is that throughout the consultation and in their ‘summary of responses’ to the consultation document, HMRC said the digital tool would be built on case law. Even if that happens (we suspect HMRC has changed its mind), and even if some of the questions reflect IR35 status rulings, we doubt that any tool can reliably operate to the letter of some 16 years of IR35 case law. We therefore doubt its ability to deliver ‘fair’ decisions. That ability is further undermined by the fact that there will be no appeals process. As if we need to be more unsettled, the Revenue has claimed that ‘public sector organisations are experienced in deciding IR35 because of the assurance processes.’ In our experience, that is simply untrue.

Lastly, you say “whenever it is released.” When we met HMRC’s digital team who are developing this digital tool for off-payroll workers after the Autumn Statement, they presented a development roadmap. This map has been circulated more widely since the meeting, but many of those circulations omit the final launch date of April 1^st. How fitting, some might say, that this flawed test has its debut on April Fools’ Day.

The expert was Graham Fisher, the chief executive of contractor accountants Orange Genie.

Editor’s Note: This is the sixth instalment of a seven-part Contractors’ Questions series based on questions posed in a recent webinar on Autumn Statement 2016 and its impact on contracting. Click to view the previous instalments -- part one, part two, part three, part four and part five.