HMRC’s off-payroll tool goes live
After playing around with the format, HMRC last week launched its much anticipated Employment Status Service (ESS) tool.
The tool is primarily designed for those working in the public sector and can be used by contractors, public authorities and agencies alike. By answering a series of questions surrounding, what HMRC believe to be the key areas of employment status, the tool will provide a decision regarding the workers’ status, which can be relied upon provided the questions have been answered honestly.
How it works
After answering a couple of questions enquiring as to whether the engagement has started and how the worker provides their services, e.g through a PSC, the user is asked if the worker is an office holder. The accompanying explanation states that “an office is a permanent, substantive position that exists independently from the person who fills it. Holding office includes board membership or statutory board membership, or being appointed as a treasurer, trustee, company director, company secretary or other similar statutory roles.” All clear? Of course not, it’s as clear as mud because there is no statutory definition of an office holder, so we are left to rely upon its interpretation by the courts.
A ’yes’ answer here automatically brings the test to a halt and places the contract inside of IR35. Yet the tax rules for IR35 in respect of office holdings, that were changed in April 2013 to bring them into line with the NIC rules, only apply for tax where there is a requirement for the personal service of the worker. This question, therefore, should naturally follow the personal service question which immediately follows.
Personal service
This is the golden bullet and a positive answer here will swiftly give rise to the tool concluding that the engagement falls outside of IR35, provided the contractor remained responsible for paying the substitute.
The question asks, ‘Would the end client accept the worker’s business sending someone else to do this work instead?’ and explains that this is someone who:
- Is equally skilled, qualified, security cleared and able to perform the worker’s duties
- Won’t be interviewed by the end client before they start
- Isn’t regularly engaged by the end client
- Will do all of the worker’s tasks for that period of time
- Will be substituted because the worker is unwilling but not unable to do the work
It is clear that HMRC have designed this question in an attempt to stifle a positive response and take the user deeper into the tool. Many public sector organisations may well insist on meeting a prospective substitute to satisfy themselves of their suitability. Whilst that does not amount to an interview it could easily be confused as such by the public sector.
Fellow contractors working on the same project won’t be able to substitute for one another because of the third criteria.
Substitution will often only be contemplated and accepted when a contractor is unable to carry out the work, e.g because of illness or holiday. HMRC have however put this test in a straightjacket by imposing the requirement that the freelancer must be “unwilling” to do the work rather than incapable. Such an approach however flies in the face of the judgment in the employment case Express and Echo Publications Ltd v Ernest Tanton (1999), a case which is referred to in HMRC’s own Employment Status Manuals. Here, the employment tribunal found, as a fact, that a clause in an unsigned ‘agreement’ genuinely reflected the true agreement between the parties. That clause stated:
“In the event that the contractor is unable or unwilling to perform the services personally he shall arrange at his own expense entirely for another suitable person to perform the services.’
Mr Tanton therefore had an obligation to provide and pay for a suitable substitute should he be unable or unwilling to provide the services personally and led the judge to conclude this was wholly inconsistent with a contract of employment.
Note the requirement was for Mr Tanton to be either unable or unwilling not simply unwilling as HMRC have sought to redefine the substitution test.
Substitution is not the only feature that will disprove a requirement for personal service of the contractor. The ability to sub-contract some or all of the services or to engage assistance to help with the work will serve this purpose and there is a question regarding helpers.
Right of control and financial risk
All is not lost by answering ‘no’ to the personal service questions as this will then lead to a series of questions concerning the key elements of the control test. Reasonably positive answers here will then lead to the question, ‘What items does the worker have to buy for this engagement that they can’t claim as an expense from the end client or an agency?’ These are described as expenditure that is necessary for the completion of the services because they aren’t provided by the end client and don’t include expenses incurred by having to work away from home. This immediately excludes the cost of non-commuting travel, meals and accommodation, yet these expenses are mentioned in this section of the tool. This can only mean that such expenses would qualify where they are met by the PSC when the contractor is working at a secondary end client site, ie other than the main site, and only when the company isn’t entitled to reimbursement.
Dependent on how these are answered, then the user may be confronted with further questions in respect of:
- Basis of payment
- Correcting defective work
- Integration
- Employee type benefits
Mutuality of obligation (MOO), an integral feature of an employment contract, does not appear to feature at all. No surprise there however, as HMRC’s extremely narrow interpretation of this concept means that MOO is present in every single contract, regardless of its nature.
Results
Once the tool has gathered sufficient information it will produce a result which can then be printed off for the user’s reference. HMRC will not keep a record of this for security reasons so it is vital that a permanent record is retained.
There is then a warning that any attempt to manipulate a contrived result will be viewed as deliberate non-compliance which can result in penalties ranging from 20 -100% of the lost tax.
Finally, HMRC remind us that they can review a person’s taxes for up to 20 years but fail to point out that this time limit is only applicable in cases of, what is essentially, fraud or evasion. Normal time limits are four years, rising to six years where carelessness is the cause of lost tax revenue.
This is yet another example of HMRC not investing sufficient time to produce an effective solution.
The ESS tool seems like the modern day equivalent of a ducking stool ?
Precisely with the PSB or the agent doing the *ucking of the contractor.
They should of put the question in there -:
“If the day you work ends in a Y” then you fall within IR35.
Very helpfully the tool advised me that it’s “Unable to determine the tax status of this engagement”. Thanks HMRC.
> Very helpfully the tool advised me that it’s “Unable to
> determine the tax status of this engagement”.
No doubt you have to contact them to tell them so.
And trigger a subsequent IR35 fishing expedition once they have all your details.
Unless the contractor is ‘direct,’ the contractor ie you, will not be completing the tool so the number of ‘unable to determine…..’ by the tool will be rare.
The OP’s question shows how many contractors do NOT understand these changes to shift IR35 determination onto the ‘payer.’
Well “you” means the person running the tool.
Either way I’m sure the taxman will like to have further details on those the tool deems to be “outside” or “unable to determine” …
Ha,ha,ha:
“Bad CSRF token found in query String”
I bet their contractors have left already.
> “Bad CSRF token found in query String”
I too found that amusing.
Just clear all cookies for their site and it will work.
Oh what a surprise I’m caught by IR35. My client will never accept a substitute they won’t get within 500 metres of the front door. Even if I could find somebody with the correct clearance and my skill set. Guess I need to schedule a meeting to discuss my rate doubling; I wish I could record their reaction.
Interesting about the Substitution test, and specifically stating “Will be substituted because the worker is unwilling but not unable to do the work”.
Many contracts will not specifically mention the distinction between “unwilling but not unable”, they will simply say their is a caveated ability to substitute.
So in those cases; where you have the right to substitutue, but the contract does not mention the words “unwilling / unable” – how would you answer that question?
Once again, unless the contractor is direct, you dont answer, the ‘payer’ ie the PSB or agency does. Ergo the PSB or agent will say the contractor CANNOT substitute.
Im having an enjoyable time reading on another forum all these contractors using the tool and saying they are coming up with outside decisions.
Also, people are using their current contract terms as the basis for completing the tool. Do not be surprised if PSB and agencies start issuing contracts that do not have subbie clauses, MOO and tighten up who tells the contractor what to do and how therefore driving the tool to give more caught determinations.
Not unsuprisingly contractors are entering answers they believe reflect their current position. But, the reality is a PSB or agency will be the ones answering these questions. If you get someone else to input the answers, I suspect the number of ‘outside’ determinations will fall dramatically.
I would urge all contractors registered for VAT who are, or intend, to earn less that the VAT limit going forward (£83K) to deregister from VAT. Why be a tax collector for the government when you are losing out at every juncture?
I think this article is mis-interpreting the tool actually. The question regarding whether the worker is an “Office Holder” is about the worker being an “Office Holder” at the end customer where services are supplied, not an “Office Holder” in their own Company.
If I’m trying to contract into a company as their Managing Director or another statuatory role, but say I’m outside IR35 I think I’d be on a hiding to nothing – so I think I agree with HMRC on this one.
I see much is being made about rights of substitution, which seems fair also.
As a contractor, IR35 is a major consideration for me and I actually welcome the new tool.
I find that most analysis published here ignores the simple truth that a lot of contractors are actually deemed employees, smart enough to use the system, often at considerable risk if caught.
Rather than systematically try to find fault with HMRC, why not work towards a fair status of the Contractor, one that would be unambiguous, fair, and acceptable to both sides?
I think office holder is defined!
https://www.gov.uk/employment-status/office-holder
Note – someone is likely to be an office holder if most of these statements apply to them:
• there is no contract or service agreement relating to their appointment
• their duties are minimal, and are only those required under the relevant statute, constitution or trust deed
• they don’t get a salary or any other form of regular payment for their services
• the only payment they get is a voluntary payment (honorarium), regardless of the work they do – tax and National Insurance are deducted by the appointing body
• they’re effectively working as an independent office, and are not under the close supervision or control of the appointing body
Maybe the article is therefore based on a false premise ?
What a complete farce! Now the Public Sector has no confidence in the HMRC tool. Apparently, they have produced their own test consisting of 80 Questions. We were told, if we did not complete it, then they would assume you are working inside IR35; and backdated to April 16. We were told it would be released by close of play yesterday. We are still waiting. What a waste of money!
My public sector contract is due to end 1st April and I won’t be renewing.
Surprisingly I sat down my recruiting manager today to be told they have been asked by HR to use the online tool to check my IR35 status. Surprise Surprise I’m deemed to be in IR35.
They have also been given a list of answers to use. One of those questions relates to me providing a substitute. They would not allow an in vetted substitute to walk in. I don’t blame them, but this tool and the whole IR35 legislation is a joke.
Recruiters do not want contractors to act as an external supplier. They want to fill a skills gap within a team. The IR35 questions are a joke.
Followed by the great budget announcement yesterday I’m off to the private sector and I may end up looking for a permanent role some where because the benefits of contracting are becoming less and less. Well done Government.