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IR35 reforms: HMRC denies claims that online tax status assessment tool returns unreliable results

HM Revenue & Customs hits back at research that suggests its IR35 online assessment tool is hindering public sector organisations in determining the tax status of off-payroll staff

HM Revenue & Customs (HMRC) has denied claims that its online IR35 assessment tool is continuing to return unreliable and inaccurate results three months after its launch.

The HMRC Employment Status tool made its debut in March 2017 as part of the organisation’s bid to help public sector bodies determine the tax status of their off-payroll workers, before the reworked IR35 regulations come into force.

Under the terms of the new-look IR35 regulations, which came into effect on 6 April, public sector contractors can no longer self-declare whether they should be taxed in the same way as off-payroll workers (outside IR35) or salaried staff (inside IR35).

Instead, it is now up to their contracting organisations to declare whether their engagements should be classified as inside or outside IR35, and they have the option to use the HMRC Employment Status tool to inform their judgements.

Meanwhile, research carried out by online tax advisory service ContractorCalculator has detected a marked rise in recent weeks in the number of cases where the HMRC Employment Status tool returns an “unknown” result.

To reach this conclusion, ContractorCalculator claims to have fed details of 21 high-profile IR35-related court cases into the tool, which returned an “unknown” result 38% of the time.

The organisation ran the same data through the tool back in March, which saw the tool fail to reach a definitive conclusion about the IR35 status in just 27% of these cases, prompting the organisation to call into question its overall effectiveness.

ContractorCalculator CEO Dave Chaplin said the results suggest HMRC needs to go back to the drawing board with the Employment Status tool, given how out of step its results are with IR35-related case law.

“We have repeatedly warned HMRC that a robust online test could not be developed within such a short timeframe and now we are seeing the whole thing unravelling,” said Chaplin. 

“We invested seven years into the development of our IR35 test which, for the record, accurately predicts the correct result of all 21 court cases. Sorry HMRC, but despite these amendments, it’s back to the drawing board.”

Read more about IR35

Part of the issue, said Chaplin, is that the tool attempts to take a tick-box approach to deciding how contractors should be taxed, which fails to take into account the nuances of each individual contractor engagement.

“The foundations of how to judge cases was laid down by Justice Nolan in the Hall versus Lorimer case in 1993, which stated that all factors should be taken into account and a stand-back approach used by examining the picture as a whole.  But when we looked under the bonnet of the tool, this isn’t how it works at all,” he said.

“It asks a limited number of questions across four consecutive sections, and the user gets the chance to be handed an ‘IR35 pass ticket’ in each section. If they get one, they do not move on to any further sections, no further questions are asked, and no big-picture evaluation is made that can result in a pass status.

“It’s not how judgements are made, and for HMRC to suggest it will stand by the results of the tool is tantamount to an attempt to rewrite case law.”

In statement to Computer Weekly, HMRC rejected ContractorCalculator’s claims and said the Employment Status tool does deliver reliable and accurate results when used correctly. 

“We do not oblige anyone to use the tool, but we stand by its results where correct information has been input in line with the guidance,” said an HMRC spokesperson in a statement to Computer Weekly.

“If incorrect information is input, the results will be skewed, but that has nothing to do with the reliability of the tool.”

Called time on contracts

Computer Weekly has reported on numerous cases over the past few months where IT contractors have called time on public sector contracts at the Home OfficeHMRC and the UK Hydrographic Office, to name a few, after having their outside IR35 engagements reclassified as inside.

Although HMRC said public sector organisations are not obligated to use the tool, Computer Weekly understands some public sector bodies have clamped down on the use of alternative third-party IR35 contract assessment services.

Meanwhile, the NHS Improvement watchdog published a revision to its guidance on how the health service should determine the IR35 status of contractors on 30 May, in which it advised against solely relying on the HMRC tool to determine whether locum doctors and agency nurses should be taxed.

The guidance urges trusts and care providers to stop taking a blanket approach to IR35 determinations, and instead assess the status of contractors on a case-by-case basis, and use the tool to help inform their decisions. 

“HMRC has provided a simple tool to help determine whether an individual should be considered employed for tax purposes,” the document states. “Providers and individuals may find this helpful for guidance. This tool does not negate the necessity for careful case-by-case scrutiny.”

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