HMRC’s ‘Digital Tool’ Test Driven

Last week HMRC’s online employment status service went ‘live’. We had previously gone through the test version (results not good) so were interested to see whether any improvements had been made (substantial were required).

Incidentally, it should be noted that the current ‘live’ version is still headed; ‘BETA This is a new service – your feedback will help us improve it’. This suggests that further revision is likely. Of course, no test can be set in stone where it is based on case law and therefore has to remain flexible. However, when considered in the context of the numerous delays that have beset the ‘digital tool’, one could be forgiven for thinking that it is still very much a work in progress.

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Some Initial Information

Before assessing the accuracy of the digital tool, it is important to first understand its scope:

  • It is voluntary – there is no requirement for the end client, the PSC or any other party to complete the questionnaire.
  • It is anonymous – the party completing the questionnaire is not required to provide any information that could identify them and HMRC state that they will not keep a record of the information that is entered.
  • It is binding – HMRC state that they will stand by the result given by the tool. Whilst this sounds good (maybe even too good to be true) there is an important caveat: HMRC state that they will stand by the result unless a compliance check finds that the information provided isn’t accurate. This is a huge (but understandable) caveat and allows HMRC significant scope to backtrack from the ‘result’. Furthermore, it is a salutary reminder that HMRC will likely want to verify the facts inputted into the questionnaire and are likely to do so where they consider the result to be dubious.
  • It is (potentially) penal – The quid pro quo for the ‘binding’ result is that HMRC will not stand by ‘results achieved through contrived arrangements designed to get a particular outcome’ and that where this is the case the questionnaire will be treated as ‘deliberate non-compliance’ with ‘higher penalties’. This is understandable as HMRC guard against those that seek to manipulate the questionnaire.

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How it works

The questionnaire is broadly split into five main sections:

  1. Background questions – These questions provide HMRC with the nuts and bolts of the engagement. For example; who is completing the questionnaire and has the engagement started.
  2. Personal service – This section considers whether the worker is obliged to provide the services personally.
  3. Control – This section looks at control over the services in terms of how, what, where and when the work is done.
  4. Financial risk – Here the questionnaire probes whether the worker provides equipment and/or materials, how the worker is paid (for example hourly, daily or weekly rate) and whether and how the worker has to remedy any defective work.
  5. Part and parcel – In this section HMRC seeks to identify how integrated (if at all) the worker is in the end client’s organisation. They do this by querying matters like; what benefits the worker receives (for example; sick pay), whether the worker has any duties akin to an employee (for example; hiring and firing the end client’s staff), whether the worker interacts with the end client’s customers and how the worker would identify themselves to the end client’s customers.

So, these are the areas that HMRC has decided are key to determine employment status.

We will consider the technicalities of the above later but first a mildly positive point. On the plus side when completing the questionnaire it is not necessary to answer the entire bank of questions if the answers provided at a particular section indicate conclusively that the engagement is outside of IR35.  Of course, this is only a plus point if the tool is accurate (which we will come to shortly).

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Is it accurate?

So on to the detail.

Many remarked that because the digital tool was designed by HMRC it would be virtually impossible to get a finding that was outside of IR35. We can confirm that it is in fact possible to receive an ‘outside’ judgment from the tool.  Whilst this is initially encouraging the real issue is whether the judgments (whether inside or outside) are accurate.

There are in fact three potential outcomes of the questionnaire:

  • Inside the intermediaries legislation
  • Outside the intermediaries legislation
  • Unable to determine the tax status of this engagement

You will note that there is scope for the digital tool to not reach a decision and leave the user in limbo. This is of course frustrating given the headline from HMRC that they will be bound by the decision of the tool.  A ‘we don’t not know’ finding is not much use to contractors, agencies or end users.  Realistically though the idea that an online questionnaire can adequately determine the ‘borderline’ cases is dubious to say the least.

Many online ‘systems’ will be able to determine the extremes one way or the other but where you have borderline cases (the ones that are likely to be challenged by HMRC) expert legal advice from those that have experience of arguing IR35 is crucial.  These are nuanced issues that the digital tool will simply not be able to cope with.  What makes this situation disappointing is not the fact that HMRC’s system cannot determine the borderline cases (this is not surprising) but is instead the fact that HMRC have touted the digital tool as the thing that will assist tax payers in dealing with this ill-judged and ill-thought out legislation when in reality, for a number of cases (maybe even the majority), it will not.

  • Personal Service: Significance Right – Detail Wrong

HMRC’s digital tool rightly identifies that if the worker is not obliged to do the work personally (for example; they can send a substitute) then they are outside of IR35. However, what is alarming is HMRC’s view on what constitutes a lack of personal service.

HMRC’s main personal service question states the following:

Would the end client accept the worker’s business sending someone else to do this work instead?

What is interesting with regards to this question is that in order to be able to answer ‘yes’ you will need to agree with HMRC’s description of the substitute. One part of the description is that the substitute ‘won’t be interviewed by the end client before they start’.  So HMRC’s position is that in order for you to be able to validly send a substitute the end client cannot interview that substitute before they are sent.

First of all, this criterion imposed by HMRC is far too simplistic.  It, provides no detail with regards to what constitutes an ‘interview’ or scope for the user of the tool to have the facts of their particular case tested.  As we all know from the numerous cases on employment status the facts of each case are crucial and imposing broad terms like ‘interview’ on something as important as the right to send a substitute is far too simplistic.

Secondly, HMRC’s criterion is inconsistent with the case law.  The very recent case of Pimlico Plumbers v Smith [2017] EWCA Civ 51 provided a very helpful and erudite explanation of personal service (paragraph 84) which HMRC have chosen to ignore.  For our purposes the interesting statement by the Court of Appeal is:

“Fourthly, again by way of example, a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance.”

In Pimlico Plumbers the Court of Appeal accepted that the end client has the right to satisfy itself that the substitute is qualified to do the work and that there may be a particular procedure for this.  Who is to say that this procedure will not be an interview?  Remember, the Court of Appeal state that only in exceptional circumstances will a procedure to verify qualifications (for example; like an interview) serve to unreasonably fetter a substitution clause.  So not only is HMRC’s condition on personal service too simplistic but it also fails to account for case law that is only a month old.

  • Mutuality of Obligations (MOO) – Conspicuous by its Absence

In a previous article we raised concerns with how HMRC had approached MOO in the alpha version of the questionnaire.  These concerns have not been eased by the ‘live’ version.

Having gone through the questionnaire numerous times, it is apparent that the tool completely fails to address the issue of MOO.  This is concerning and disappointing in equal measure – but not surprising.  As we previously reported, the test versions of the tool assumed that MOO was present by the very fact that the questionnaire was being completed.  This (incorrect) assumption appears to be carried over to the live version.

HMRC’s intransigence with regards to MOO reflects their long-held desire to ignore (or misinterpret) it. This very fact was pointed out in a Judicial Review back in 2001 by Mr Justice Burton who criticised the fact that HMRC considered MOO to be irrelevant.

It is apparent from the ‘live’ version that HMRC have continued with this flawed view.  Such a significant flaw calls into question the veracity accuracy of the tool.

  • Control

The questionnaire rightly seeks to establish the position with regards to control.  We have in the past published an article on the importance of control with regards to IR35 which can be found here. In our previous article, we doubted whether HMRC’s tool would be able to cope with the nuances associated with control and unfortunately from what we have reviewed these doubts are well founded.

HMRC seeks to establish the position with regards to control by asking just four questions:

  • Can the end client move the worker to a different task or project than that they originally agreed to?
  • Once the worker starts the engagement, can the end client decide how the work is done?
  • Can the end client decide the schedule of hours?
  • Can the worker choose where they work?

Much of our past and current case work experience with HMRC has been confronting the fact that HMRC tend to focus their enquiries with regards to control on all the aspects of control other than who controls ‘how’ the work is done (which in our opinion is the most important aspect of control).

HMRC’s lack of emphasis on ‘how’ the work is done is evident in the tool as well. Even where the answers indicate that the worker decides how the work is done, the worker cannot be moved to a different task and it is the task itself (not the worker or the end client) which determines the location, the tool does not bring you outside of IR35 simply based on the control answers.

Unfortunately, the questionnaire’s programming betrays HMRC’s desire to limit the importance of ‘how’ with regards to control and instead focus on areas that in many cases are decided by the nature of the work rather than a particular party to the contract.

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A fair summary should begin by recognising that (as stated) any online questionnaire is going to struggle to determine the borderline cases. Given that case law on IR35 is finely balanced between HMRC wins and losses this is understandable.

What is not understandable however is HMRC’s failure to grasp the law, ignorance of major factors like MOO (which they have been scolded for by the judiciary in the past) and the fact that the tool betrays HMRC’s position on employment status which (as we have found on numerous occasions) is not consistent with the case law.

In short, if you put the facts of the engagement through the tool and you get a ‘outside’ IR35 result then keep the results, store them safely but do not assume that HMRC will not look beyond the results to verify the facts that you have input.  On the other hand, if you get an ‘inside’ IR35 result this will not necessarily mean that the engagement is inside of IR35 because the tool reflects HMRC’s view of employment status which is not in accordance with the case law. To come to this conclusion is disappointing (but not surprising) given that contractors, agencies and end clients were assured that the tool would provide valuable guidance to those grappling with the new legislation. Our advice to those grappling with the legislation is to speak to the experts.

Published: 03.28.17 - Posted In: Latest News