HM Revenue and Customs (HMRC) has launched a new online employment status tool to help organisations determine whether individuals are employed or self-employed for tax purposes.
The tool can be used for current or future engagements in the private or public sector. HMRC has said that it will stand by the result given unless a compliance check finds the information provided isn't accurate.
The intermediaries legislation (often referred to as IR35), was introduced to prevent workers avoiding employee income tax and national insurance contributions by supplying their services through an intermediary and paying themselves in dividends.
However, the Government has long had concerns about widespread non-compliance with IR35, meaning that, over time, further layers of legislation have been added to the IR35 regime. The latest change is due to come into force in April, in relation to public sector employers that contract with personal service companies (PSCs).
From 6 April 2017, public sector employers that contract with PSCs for the supply of workers will have to consider the nature of the engagement and, where applicable, deduct employee tax and national insurance contributions (NICs) from the payments they make to the PSC. The public sector body will also be responsible for employer NICs in place of the PSC. Previously, responsibility for paying the right level of tax and NICs has always sat with the individual themselves.
It is against this background that HMRC has released the online tool as a way to help organisations decide whether public-sector workers fall under IR35 legislation.
Significantly, the online tool expressly states that it can be used for current or future engagements in both the public and private sector, suggesting that it may not be too long before the Government extends the reach of their latest amendments to the IR35 regime to private sector employers as well as public sector employers.
How does the new tool work?
The online service tool will allow HMRC to determine whether:
- IR35 applies to an engagement.
- a worker should pay tax through Pay-As-You-Earn (PAYE) for an engagement.
Contractors (i.e. a worker providing a service) or those who engage them (i.e. a person or organisation hiring a worker, or an agency that is placing a worker) can use the service tool to answer a pre-programmed series of questions, which change depending on the user’s responses. There are approximately 54 questions in total, but most users will not need to answer anywhere near that many questions to receive a result.
To use the service tool, whoever is completing it will need to know:
- the worker’s responsibilities;
- who decides what work needs doing;
- who decides when, where and how the work is done;
- how the worker will be paid; and
- if the engagement includes any benefits or reimbursement for expenses.
HMRC has said that it will stand by the result given unless a compliance check finds the information provided isn’t accurate, although advises that users should reassess the status of the role if there are changes to the engagement or the way the work is done.
Is the new tool fit for purpose?
There have been claims from some contractor service companies that the results provided by the tool may not be reliable or will still leave contractors unsure of their status. One company claimed to have trialled the tool by inputting 21 historical court cases around employment status, resulting in more than a quarter of cases receiving an “unknown” result, while only one-tenth “passed” the online test (meaning they would fall outside of IR35), despite a judge having decided otherwise. Other comments include:
- Contractors who are “significantly controlled” and move about frequently tended to pass the online test, despite case law indicating that this would not be the case.
- The test appears to be largely reliant on substitution, so that if a contractor doesn't have the right to send a replacement, there is little prospect of the tool deeming them outside IR35, even if they have control over how the work is done.
- Many of the questions failed to offer much direction in “mutuality of obligation”, despite this being one of the key factors in determining employment status.
As many commentators have observed, the difficulty with the service tool is that the current law on employment status is nuanced and heavily fact-dependent. As a result, it’s difficult to see how a one-size-fits-all approach can be completely reliable. In response, HMRC has said the tool is working correctly and has been extensively tested, although they have said that they would welcome any feedback from users.
Currently, employment law recognises three main statuses under employment law (employee, self-employed and worker) whereas tax law only recognises two (employee and self-employed). As a result, it is possible for HMRC and an Employment Tribunal to come to different conclusions in the same case.
Whilst Tribunals will take into account HMRC’s view when deciding whether an individual is an employee or worker, there are many reported cases in which a Tribunal has found an individual to be an employee or worker where HMRC had concluded that the same individual was self-employed. Consequently, whilst the new online service tool will be a welcome additional method of seeking to establish employment status, it should not be relied upon too heavily.
The issue of employment status is firmly in the spotlight at the moment. Several Tribunal decisions about the employment status of workers in the 'gig' economy have hit the headlines in recent months, including Aslam v Uber, Dewhirst v CitySprint and Pimlico Plumbers v Smith.
Separately, the Department of Business, Employment, Innovation and Skills' Select Committee recently concluded an inquiry into the Future World of Work and Rights of Workers (the results of which are still awaited), the Government published their Employment Status review last month and the Taylor Review on Modern Employment Practices is ongoing.
A recurring question that keeps popping up in relation to both the case law and the consultations is whether the definitions of employment status should be harmonised for the purposes of tax and employment law. This new online tool could be just the start of further developments in this area. As such, it looks like the spotlight on the issue of employment status is set to continue in 2017.