Contractors caught in IR35 checks face an HMRC energised by Mutuality, Control and Substitution

New off-payroll working check letters by HMRC are less of a worry to outside IR35 IT contractors than the 6-page document’s context and background.

That’s the consensus of three experts, concerned at the significantly reduced wriggle room to shake off an ‘inside IR35’ Status Determination Statement.

Before the letters to end-clients lit up LinkedIn, HMRC “secured an opinion on MoO” which as good as removes MoO as a factor to help keep IR35 at bay.

'HMRC knocked holes in the issue of Control'

“And it’s not just Mutuality now firmly in the Revenue’s favour,” a former tax inspector, Carolyn Walsh, continued yesterday to ContractorUK.

“In the same PGMOL ruling, HMRC knocked holes in the issue of Control, finding control merely needs to be inferred, as a right.

“So if the way in which you carry out your duties can be reasonably expected to follow a procedure or set of rules, that’s ‘Control’ lost.”

'Substitution clauses don't weigh heavily in favour of outside IR35'

Yet Control and Mutuality aren’t the only IR35 status factors appearing more challenging to leverage for an outside IR35 defence.

Asked yesterday about HMRC’s OPW letters, a tax investigations specialist replied, in part, by indicating the real issue is Substitution.

“There remains a belief in the market that substitution clauses… weigh heavily in favour of an outside [IR35] determination.

“But case law continues to show that a much more balanced and nuanced view needs to be taken.

“And that view,” Tom Wallace, who heads investigations at WTT Group explained to ContractorUK, “is one which weighs up all factors.”

'More than just contract terms needed'

Stuart Marquis of Workwell, who does believe substitution can be optimised as an IR35 defence, says belt and braces is how to be outside of the OPW rules.

He told ContractorUK: “[To defend an outside IR35 role] …you’ll need more than just contract terms and a corresponding SDS”.

But amid the doubts over substitution (an agency also says none of its clients under an OPW check permitted RoS), and with Mutuality and Control going in HMRC’s favour, Walsh says the last bastion of outside IR35 may now be ‘in-business.’

'Unpalatable'

“[In light of HMRC’s wins] the IR35 status test has been whittled down to basically proving a contractor is in business on their own account,” the boss of Oblako Ltd says.

“It seems that only then will an outside IR35 determination be acceptable to HMRC, given MoO is gone as a factor and, also since 'PGMOL' at the Supreme Court, that that the level of Control needs to be evidenced in more detail.”

“However unpalatable all this is for contractors, aside from the OPW check letters, it's better for genuinely self-employed PSCs to know what they're up against than to believe anti-HMRC hype.”

'Significant number of PSCs with small company clients'

Also formerly of the Revenue, WTT’s Mr Wallace says a “significant number” of PSCs are supplying companies defined as 'small.'

There are therefore still a significant number of limited company workers who remain responsible for self-determining IR35 status.

“HMRC still considers that there is non-compliance in this [‘small company’] sector of the contingent labour force.

“This is likely to be a focus for the tax authority for some time to come,” warned WTT’s head of tax investigations.

“[But for mid-sized and large companies covered by OPW], it is imperative that robust processes behind any Status Determination Statement can be demonstrated.

“And it’s imperative that the working practices continue to reflect these for the duration of the engagement.”

'Multiple clients'

Wallace disagreed with some aspects of ‘in-business’ being worth basing an IR35 defence on, cautioning against “multiple clients” as a silver bullet.

Given that not even experts can agree on IR35 (Walsh backed IBOYOA, Wallace didn’t), one techie is hanging up his contractor spurs.

“Thankfully my last project status was determined by the client,” says the IT contractor, implying self-assessing status to be unappealing.

“After this, I'm done. I'd rather earn half my money working for myself selling beads on Etsy than hand my money to HMRC, which is probably using inside IR35 contractors [on the development of CEST] to ask me if I'm outside IR35.”

'Risk'

When contractors are paid regularly and consistently by their hirer, with little to no financial risk, Walsh says the HMRC “risk” indeed becomes worth getting out the way of.

She explained: “HMRC has long held the opinion that midwives and social workers are unlikely to be self-employed individuals, simply because they’re held to a set of principles which are laid down by their respective professional bodies.

“IT contractors aren’t caught quite in the same way, but how far from the client brief can a developer or engineer stray?

“Can a technical consultant code a Dynamics system in a way that Microsoft didn’t intend?

“How far from client expectations can a contractor afford to go, in practice? These are questions that IT contractors need to be asking themselves before HMRC does. And those questions just relate to Control.”

'Contractors caught up in OPW checks'

The Oblako boss warned that “obviously” contractors will get “caught up” in the new OPW audits, “and that could cause unexpected problems due to the recent wins for HMRC on Mutuality and Control.”

More ominously, Workwell’s Mr Marquis warned that now that it has its hooks into private sector organisations, “HMRC will be digging deeper.”

“It will want to see robust policy and process,” he said, “to validate both SDS outcomes and any off-the-shelf contractual clauses.”