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:
Length of Engagement
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.
Mutuality of Obligation(MOO)
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.
Basis of Payment
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.
Control
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.
Right of Substitution
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!
Financial Risk
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.
Integration
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.
Why doesn’t HMRC/Gov. just come clean about the whole sorry mess that is IR35 and admit that it wants to eradicate contractors and contracting?
One question I cannot get answered is this:
If I elect to go inside IR35 and be treated as a permanent employee (in HMRC speak), why should I then have to pay employers NI contributions through my company; as in effect I am then not being treated like an employee (in HMRC rules).
So I take the risk of sourcing work and downtime and HMRC gets more than its pound of flesh – no wonder this country struggles to innovate.
Surely a compromise would have been to alter IR35 such that contractors could pay PAYE but their limited companies would be exempt from employers NI if their company had less than say 3 employees. This would recognise the unique nature of such engagements without fully penalising the contractor.
HMRC have again managed to further confuse an already confusing situation by ignoring relevant points and placing importance on complete irrelevancies.
The nature of IT Contracts, and thus contractors, is the provision of in-depth skillsets that can be provided hitting the ground running for a short continuous period then pulling out leaving the Customer with the desired product, and no further liabilities or overhead. The fact that a Customer did not pay his bill or that funds have been spent on advertising, which is not used by IT Contractors because we use Jobserve, Monster etc., is completely irrelevant. If HMRC are unclear on the application of IR35 how can we be expected to be? Why should we be singled out for the risk of incarceration?
Shouldn’t it be as simple as this: anyone who has worked for a company as an employee and then contracts for the same company doing the same job (within a 12 month period) should be classed as inside IR35, everyone else is outside. This is why IR35 was created in the first place.
It would probably help if we had people in govenment / HMRC that actually knew and understood how to run a business or offer a service in a competitive environment.
Mike A – I agree, this would seem like a logical compromise; whoops I used the ‘L’ word again, that’ll put the dampeners on it.
I have to sadly admit that it’s effectively not about what is logical or morally correct, but about how the treasury can maximise their income without blatant abuse. It’s like fuel duty. Watch when the world changes and we are all on eco friendly cars – the duty payable will remain as the chaps in charge will always require their pound of flesh whatever the ‘excuse’ for taxation.
If the aim is to generate as much tax income as possible, then it would make sense to make the IR35 rules as confusing as possible to ensure that more contractors get rattled enough to change their tax status i.e treat themselves as permanent employees and pay more tax.
Does anybody know what the position is with a person such as myself? I am a Project Manager (Limited Company, sole employee), who is frequently contracted to fill a short/medium term gap in a resource pool’s capacity.
What this means is that within the scope of the contract I may be working on one specific project, or on occasions a number of smaller projects. I do not have specific contracts for each and when one finishes I will normally just roll onto the next.
[quote name=”JohnH”]Does anybody know what the position is with a person such as myself? I am a Project Manager (Limited Company, sole employee), who is frequently contracted to fill a short/medium term gap in a resource pool’s capacity.
What this means is that within the scope of the contract I may be working on one specific project, or on occasions a number of smaller projects. I do not have specific contracts for each and when one finishes I will normally just roll onto the next.[/quote]
I am in the same situation myself, I don’t have an answer I’m afraid. I am working on the basis that I am providing ‘specific expertise’ not found within the organisation and not so much a specific activity. Whether this stacks up or not I’m not sure. It’s just another example of how HMRC are incapable of understanding modern day working practices.
This beggars belief: “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.” USUALLY? I would argue that it is NEVER the case. I would like to see a single example of a genuine employee in the country who pays PL/EL/PI insurance – something that is mandatory for most of the contracts I have undertaken (in the finance industry).