HMRC’s updated IR35 tool still not fit for purpose

New research suggests that HMRC's updated IR35 tool us still not suitable enough for UK contractors to use.

Despite recent updates to its Employment Status Tool HMRC needs to go back to the drawing board. This is according to Dave Chaplin, CEO of ContractorCalculator, an online portal that has become the UK’s expert guide to contracting, who has re-run the 21 historic IR35 test cases through the newly adapted tool to ascertain any changes to the initial results.

ContractorCalculator discovers

HMRC’s first public beta version could not determine status for 27 per cent of the 21 court cases. With the new adaptations this number has increased to 38 per cent.

There is still one case which HMRC claims that IR35 does not apply to which, in court, the judge decided IR35 certainly did apply.

The Larkstar case was fixed from giving a pass instead of a fail but now it gives ‘Unable to Determine Status’.

Examining the ten cases the tool correctly concluded that IR35 does not apply to, eight of those pass using the HMRC tool based on the flawed approach of only testing for substitution rather than assessing the whole picture.

For two out of the ten substitution-pass cases, if these had not been passed solely on substitution then HMRC’s result would have declared ‘Unable to Determine Status’.

Looking at a copy of the blue prints of HMRC’s tool obtained by ContractorCalculator, the inner workings reinforce why the HMRC tool is handing out spurious results.

Chaplin comments, ‘HMRC has developed an extremely basic algorithm which is not based on how case law judgements are made. The foundations of how to judge cases was laid down by Justice Nolan in the Hall versus Lorimer case 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.

‘Instead, 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 onto any further sections, no further questions are asked, and no big picture evaluation is made that can result in a pass status.

‘If no pass ticket is handed out then after the fourth section the user is either told that ‘IR35 applies’ or that they are ‘Unable to determine status’. It’s not how judgements are made, and for HMRC to suggest they will stand by the results of the tool is tantamount of an attempt to rewrite 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. 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.’

Further reading on IR35

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the Smallbusiness.co.uk and Growthbusiness.co.uk titles before moving on to be a Digital Technology reporter for the Express.co.uk.

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