Taxman finally unveils IR35 digital tool

The IR35 digital tool -- a long-awaited widget to help assess the IR35 status of personal service companies -- has finally been launched by HM Revenue & Customs.

In an update to its website late yesterday afternoon, HMRC said “people” can now check if the Intermediaries legislation applies to an engagement,” in the department’s view.  

The word “people” is important, as although the tool was initially meant just for end-clients, the first question asks the user to select whether they are a worker, end-client or agency.

What follows is a pre-programmed series of questions which fluctuates what's asked based on the user's responses.

However, the questions stop once the tool believes it has collected enough information (based on the user's responses) to reach a decision on IR35 status.

‘Employed for tax purposes’

For example, selecting "yes" to question five "Is the worker…an office-holder of the end-client?" (IR35 was updated in 2013 to cover office-holders), returns an ‘inside’ IR35 decision.

Or, as the tool -- being described by HMRC as a "service" but not named yesterday as the Employment Status Service (ESS) which it was leaked to ContractorUK as, specifies: “This engagement should be classed as employed for tax purposes,” so the “intermediaries legislation will apply”.

But the tool is not always decisive. Insert answers that point to IR35 in reply to some questions, and those that point to being in business of one’s own account in reply to others, and the tool won’t guess either way.  

“Unable to determine the tax status of this engagement,” it concludes with such inputs, before directing the user to HMRC for further help but assuring that the results (all are printable) will not be stored on HMRC servers.

Contractors are likely to welcome this non-retention promise because many have historically been concerned that HMRC’s IR35 services, like Contract Review, can be used against them.

‘Reliant on substitution’

But contractors who don’t have a substitute will feel glum more than reassured if they use the IR35 tool. “From a first examination, this test is largely reliant on substitution,” status advisory Qdos told ContractorUK.

“If, as a contractor, you don’t have the right to send a replacement, there is little prospect of the tool deeming you outside IR35, even if you have control over how the work is done.

"This goes against case law established in Ready Mixed Concrete, where an absence of control by the engager was a pivotal and determining factor.”

‘Won’t be interviewed by the end-client’

The advisory’s concerns, expressed in relation to the tool’s question five, extend to the notes provided under the substitution question which state that, to be acceptable, the substitute must not be interviewed by the end-client.

“While ‘interview’ is a term which could suggest an employment relationship, the engager would be within their rights to meet a proposed substitute prior to them being used; this would not mean the right was overly fettered,” Qdos said.

“It also infers substitution is only valid if the original worker is ‘unwilling but not unable to do the work’. This is in contradiction to the ruling in Express & Echo Publications Ltd”.

Under the ruling, where it occurs that the contractor is unable “or” unwilling to perform the services personally, they shall arrange at their own expense (entirely) for another suitable person to carry out the service.

‘Not unable’

However, the new IR35 tool only permits a positive answer to the substitute question (which would suggest the more desirable, outside IR35 result) if the person is only unwilling, “not unable” to do the work.

“A worker could fall ill -- and therefore be unable to work -- and send a replacement; this would still constitute a genuine substitution,” said Qdos’ chief executive Seb Maley, sounding disappointed. “We will be testing and conducting further analysis on the tool”.

Speaking just before the tool’s release, another adviser to contractors said their wish for next week's Budget 2017 was for clarity on penalties for IR35 non-compliance. Accountant Carolyn Walsh, formerly of HMRC, will therefore be pleased.

Under the tool it states: “There can be significant consequences if you, your intermediary, or client ignore IR35 legislation.

‘Severe’

“Interest and penalties can be charged on any extra tax and National Insurance contributions that are owed. Penalties can be more severe if it can be proved that IR35 rules or legislation have been deliberately ignored.”

Then, brandishing the ‘carrot’ -- instead of just the ‘stick,’ the Revenue says that making a voluntary disclosure about IR35 status to its officials “may” reduce any penalties that are due.

Elsewhere in notes underneath the tool, the tax authority provides guidance on ‘working out the client and worker relationship,’ ‘using an agency or MSC to provide a service’, and being a PSC (or a client) overseas.

The IR35 tool and these notes covering potential users and circumstances follow a technical note that HMRC published within its existing IR35 guidance set on Wednesday night.

‘Up in arms’

The department has also handed fresh guidance on the off-payroll rules to public authorities, employment agencies and ‘other third parties who supply labour’ -- typically outsourcers and consultancies.

Both these types of business were last night “up in arms” about the guidance implying that they are caught, a status specialist says, as are -- presumably -- Managed Service Companies, because the MSC legislation will be superseded by the new rules from April 6th.

Editor's Note: Related --

What's still wrong with the IR35 digital tool

IR35 digital tool is unlawful, taxman told

Budget 2017: how contractors are affected

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