Melber Flinn

IR35: The updated test


I visited the HMRC website just before Christmas, running the IR35 test for a potential placement when I noticed there has been some changes. Distracted from the reason I was there, I started to play about with the test and follow different paths of questions, and I realised the changes were quite significant. I also knew that something else was imminent, my first IR35 blog since 2017. I needed to revisit the topic which gave me some mild LinkedIn fame a couple of years ago. I’ve since blogged about other topics of course, but its bit a like Rick Astley preparing for concert, I’ve got other songs to sing, but most people are there to hear “never going to give you up”.


Apparently 39 changes have been made to the test, and there is no doubt the potential paths of questions and the time it takes to complete the test are all longer. All of which suggests HMRC wants to ensure the test is more rigorous and comprehensive in determining the employment status of temporary workers. And before you start the disclaimer states that “HMRC will stand by the result you get from this tool”, which is a change from before when HMRC were exactly saying the opposite. Now with a more robust test, contractors, agencies and clients can be more sure that the results are accurate, but crucially they can have more confidence in a defence should HMRC wish to investigate the status of the engagement at a later date. The timing of the changes should also have been predictable, given the further roll out of the IR35 legislation change in 2017 from public sector to the private sector from April 2020. The legislation is about to capture the totality of the market, rather than just the approximate 40%* of the contracting market which works in the public sector, and HMRC can expect two things. Firstly the size of the prize increases, the potential extra tax receipts in income tax and NI vs PSC corporation tax are bigger in market size across the private sector, and HMRC needs to ensure IR35 is better understood and that the test is more accurate, if it is to increase compliance rates for private sector contractors and achieve those tax receipt increases. Secondly, the private sector as a whole will have more muscle power, legal competence and commercial incentive to challenge IR35 where appropriate and to ensure they see no interruption in service from their contractors. I think we are far less likely to see the “you’re all in” policies adopted by public sector organisations who were ill prepared for the legislation change in 2017. And if the private sector will put up more of a fight, HMRC needs to ensure that the right legal framework is in place before it takes on organisations and contests cases. A comprehensive and clearer test is a core part of that.


The Office Holder question is still the first main one, as contractors covering office holder positions must automatically be treated as employees. Substitution follows shortly afterwards and the first noticeable difference is that this is not a silver bullet question anymore. You can answer “No” to whether the client has the right to reject a substitute, previously answering No to this question delivered an automatic out of scope result, but not anymore. This reflects the fact that employment status is determined by a range of indicators, all with different weightings, and no one single factor can make an engagement out of scope. Clearly HMRC must feel that substitution, whilst important, deserves a lesser weighting, and must be considered amongst a range of other indicators.


We also have a new question: “Does this contract stop you from doing similar work for other clients?” A core feature of contracting is being engaged by more than one client concurrently, and many public sector contractors felt that such working practises made them more “out of scope” in terms of their operations, but this wasn’t being recognised by the previous test as there was no question to cover it. This has now been addressed and those contractors that do work for multiple clients have an opportunity to score points to support their out of scope status.


We also have new questions about creation and subsequent ownership of assets. I am not sure this will often apply to interim managers providing professional services. Rarely is an asset created in the delivery of the work, unless the contractor in undertaking the work designs a specific methodology (difficult to protect anyway) or a piece of bespoke software. In ten years of interim management, I have never had an instance of an interim wanting to sell back to a client an asset they created whilst undertaking the interim assignment. Indeed the example given by HMRC indicates that they expect this question to apply for other types of contractors, i.e. the content writer for children’s books who acknowledges their client owns the copyright for those books.


Additionally, the test asks questions around “Series of Contracts” and in so doing I think a loophole is being tightened for contractors who would undertake a range of different tasks, in separate contracts for one client, and assume that puts them out of scope. This broadly fits under the topic of Control. In their guidance notes HMRC state “Where a worker can only be moved to an alternative task under some new form of agreement, for further remuneration, HMRC would expect this to fall under the requirement for a new contract.” And of course when this happens, it indicates that the worker is not under the direct control of the hiring organisation, they are there to carry out a specific task and any request from the hirer to change that task would result in a new contract negotiation, just like the builder who will charge you more if you ask him to build a conservatory when he was originally asked to remodel your kitchen. This slightly contradicts the new questions around Series of Contracts – whilst HMRC states that new tasks require new contracts (IR35 friendly), it also states that “A more enduring relationship with the client can be a pointer to employment”. So where an contractor works continually for the same client, but on four separate contracts that run to a total of 2 years, it seems that HMRC would recognise the worker has control by having negotiated 4 separate contracts for the different types of work, but equally the more enduring relationship with one client points towards employment. Whether the two factors would in fact net each other off is unknown and would depend on the underlying weighting, but I think it is clear that contractors can’t automatically assume they are safe because they are renegotiating new contracts with the same client.


There are four new questions around the topic of “part and parcel” which relates to whether a worker is integrated into the employee base, and is being treated like any other employee, e.g. being given a parking space or attending fixed meetings. I seem to remember questions for this topic arising later in the test and depending on your combination of answers for earlier questions, they may not have arisen at all. But in the new test these questions have to be answered. The first, around whether the worker receives benefits or access to any kind of corporate memberships, can be easily avoided as they should never really feature in a contractor’s contract but the second relates to management responsibilities, and clearly HMRC feel that if the worker is managing teams of employees, and departmental budgets, then they are likely more integrated into the client, rather than coming and going as the work dictates. Management requires a more constant presence, and some implicit investment in the organisation’s people and their development, all indicators towards to employment. For HMRC this comprehensively covers the type of gap fill requirements which are so common in the NHS interim market. If an interim is covering an absent employee, to undertake a Head of Governance or Deputy Director of HR role, they would automatically have to take on management responsibilities in that position. The only alternative for a client looking to position that requirement out of scope would be to delegate the management responsibilities to another employee, and hire the interim to tackle a series of remaining tasks, such as reviewing and revising policies, or negotiating a contract with an external supplier. But more often that not, the core part of the remit of such posts IS the management element, and stripping that away from the remit might not leave enough remaining work to justify the appointment of an interim.




For many features of IR35, the contract used by the client and worker becomes crucial and would form the bones of any defence. Another new question in the test asks “‘Does this contract stop the worker from doing similar work for other organisations?’ or ‘Does this contract stop you from doing similar work for other clients?’”. Clearly a contract which ties the worker into a certain client, or restricts the worker from working for any of the client’s competitors or indeed any other organisation, is a pointer towards employment. But a simple clause in a contract to state that the worker can seek work from other clients, may work for other clients concurrently, and is not obligated to take work from the first client, all points nicely away from employment. Similarly an out of scope contract should also have clauses with directly address questions from test, and if provided at an early stage in a negotiation might provide the client with guidance on how to complete the test. For example, the Melber Flinn contract states that the worker has control over deciding the location from which to deliver the services. Candidates and agencies should be habitually reminding clients of these types of clauses and what they can and can’t do, when they are looking to engage an contractor on an out of scope basis.


Ultimately however the contract is not an iron door defence, HMRC says on the test webpages that it expects a contract to be in place, but also “HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service.” A client and candidate could collude to produce an out of scope result, supported by a well written contract with all the right clauses, but it is critical that the engagement then follows the contract in terms of working practices and how the candidate and client behave and exercise their rights. A theatre cannot put up posters for Swan Lake and then have stand up comics performing inside. Any investigation from HMRC into an engagement would evaluate the contract as a key tool, but they would look beyond it to verify whether the worker really did substitute, whether they can evidence their control over the location from which to deliver the services, or whether they actually worked for other clients concurrently. If you haven’t reviewed the test recently, I would advise doing so, the updates and new questions which have been introduced for the private sector roll out have certainly made it more robust, and contractors who might have become comfortable with the old test and assumed their general working practices land them out of scope, might find that running their typical engagement through the updated test delivers a different result.


Quick disclaimer: I am not a legally trained nor a tax adviser. I am just a recruiter with a rather sad interest in IR35. If you need advice on IR35 Id be happy to talk but you may wish to seek it from a qualified professional.


*The IIM track the split of contractors across private and public sectors every year and the average splits since 2011 has been 60:40.


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