Following the publication of the Business Entity tests and six IR35 scenarios last week, HMRC has come under fire for not delivering the certainty to contractors that it had promised and that everyone had hoped for. Some of that criticism is justified especially in respect of the example scenarios.
The scenarios, which can be found on the HMRC Legislation Guide (PDF) , have been developed to illustrate when and why IR35 will apply to an engagement and when and why it will not. There are six in total, two outside of IR35, one within IR35, one borderline, one in and outside of IR35 and one where the main contract is within IR35. Unfortunately there is nothing new contained within these scenarios that contractors will not have already seen or known about.
The criteria that is used for deciding whether or not each of the fictional contractors is outside or inside of IR35 are the usual suspects that HMRC have relied upon over recent years, namely, control, personal service/substitution and financial risk. Ignoring the obvious and taking the six scenarios as a whole we can deduce the following:
At best this is a neutral factor. The scenarios illustrate contract periods ranging from 18 months – 8 years but attach no real importance to their length.
MOO is given very little mention or inference. HMRC still appear to want to brush this important status factor under the carpet as they always have done. Although its relevance has moved down the pecking order, recent Tribunal cases have attached some importance to this criteria, with the notable exception of Judge Nowlan in the JLJ Services Ltd case.
Stage payments and premium rates for working unsociable hours appear to be acceptable although HMRC set these within the context of a fixed price contract knowing full well that the majority of contractors are remunerated by way of an hourly, daily or weekly fee.
Being told what to do by an end client is not unusual, although this will be dependent on the nature of the services.
Periodical progress meetings is a reasonable expectation of an end client.
The fact that a contractor is highly skilled and cannot be told how to perform the services is still to be ignored by HMRC as demonstrating a level of control being exercised by the freelancer.
A genuine right of substitution still remains the golden bullet in arguing employment status.
HMRC consider it unlikely that a specialist contractor will be able to find a substitute with the right skills. How presumptuous and back to Judge Nowlan again!
An end client providing specialist equipment to enable the services to be carried out is a weak pointer towards IR35.
Professional indemnity insurance and paying for training are weak pointers towards self-employment but HMRC do now accept that employees do not usually have to carry insurance or pay for their own training.
Although HMRC accept that a contractor mentoring end client employees is a usual way for those employees to learn it does, however, also point to the freelancer being part and parcel of the organisation and is a weak pointer towards IR35.
The scenarios do at least enable contractors to delve into the psyche of HMRC and understand where they are coming from although not always agreeing with their rationale.