HMRC’s prototype assessment model for IR35
Over Christmas a candidate kindly sent me a copy of HMRC’s prototype assessment model, intended to be used by public sector organisations from April 2017 to assess the IR35 status of off payroll workers. We’re 10 weeks away from implementation and worryingly there is no sign of a release date for the final version yet, I emailed HMRC on 4th January asking for confirmation of the planned publication date of the test but have had no response. A candidate cynically suggested to me yesterday that there was no incentive for HMRC to release the model any time in advance of April 6th, as they probably know full well it will give the entire contractor market more time to play about with their model and try and find the perfect permutation of responses to generate an “out of scope” result. That said it may be that the model is still under development, the excellent ContractorCalculator has suggested that the topic of IR35 is by no means binary, with complex case law, and the design of a model which would fairly give an in / out result without considering the specifics of each contractor’s case is nigh on impossible. Either way, the delayed publication helps no one to plan, and I haven’t spoken to a single client yet in January who has had formal correspondence from HMRC outlining their new obligations to assess off payroll workers from April 2017. For many, my raising of the topic is the first they have heard of it, and in the absence of good, and early advice from HMRC makes it all the more likely they will adopt the low risk, blanket all-in-scope decision that I suggested in my last blog.
If they consider the HMRC prototype model they might feel all the more inclined to adopt that position. With 55 questions, it is comprehensive and onerous, and a far cry from the relatively simple HMRC employment status indicator tool. Crucially the prototype model I have reviewed is screenshots of slides, so the underlying weightings attached to each of the questions are not visible and the user cannot enter different responses to questions and check the result. But it feels like HMRC intend to leave no wiggle room for the average public sector contractor, which is consistent with a snippet I read from a recruiter who attended a HMRC IR35 workshop in November, and was told by a HMRC representative that they believe 80-90% of public sector contractors are wrongly declaring themselves out of scope.
The first 12 questions relate to PSC company structure, and ask repeatedly whether the worker and their family own or control more than 5% of the company, and whether they can take more than 5% of any dividends, or assets if the company was wound up. The answers to all these questions for PSC operators is going to be yes, as most contractors own 100% of their business, or at least a controlling half if it is split with family members. Many interims I had spoken to over the autumn had thought the prevailing solution would be the formation of small 3-6 partner consultancy businesses, but it appears HMRC have seen that one coming and have headed us off at the pass. Again keep in mind the underlying weightings on question responses are not visible but these company structure questions represent a fifth of the total number of questions, and will get any contractor off to a bad start.
Question 15 asks whether the worker holds office for the end client, and of all the 55 questions, I suspect this one has the greatest weighting, in that a “yes” answer would generate an automatic in scope result. This would be consistent with the latest Off payroll guidance (https://improvement.nhs.uk/uploads/documents/Off-payroll_guidance_-_ed_V2.0_final_3_1.pdf) published by NHSI on 20th December, which states that, after consulting with HMT, no off payroll office holder appointments will be allowed in the NHS, unless in circumstances where the incumbent is absent but still holds office, ie sickness absence. This guidance goes further than the previous NHSI position which was to state off payroll office holder appointments were allowable for 6 months, but only in exceptional circumstances.
There are a number of questions about substitution and sub contracting, which has always been one of the mainstays of IR35 determination, and should be properly covered off by most PSCs by having the correct wording in their contracts.
But the test also majors on supervision, direction and control, asking questions such as: “Does the worker get to decide which tasks they do each day for this contract?” “Can the client tell this person how to do the work for the contract?” “When does the worker have to do the work for this contract?” “Can the worker choose where to work during this contract?”
Interestingly, in amongst these questions HMRC provide an example of a painter and decorator who is commissioned to paint the third floor of a public sector organisation’s office block. The narrative around this example is intended to help the user understand how to answer the question, but I think it is revealing. Although HMRC doesn’t explicitly say so, I think the painter and decorator is a second example (the first being Jasmine the website designer, featured in the 6th December HMRC technical guidance) of what HMRC feel is a legitimate out of scope worker. The painter and decorator can do the work when they wish, they can sub contract or use helpers, they can do other jobs at the same time, they provide their own equipment, they can decide how their do the work (doors first or walls? brushes or rollers?) all that matters to the client is that the floor is re decorated by a certain deadline.
My concern is that the average NHS interim cannot easily transpose the characteristics of Jasmine’s or the painter and decorator’s contract onto their own activities. For most if not all interims, there is a need to work within the fabric of the organisation to deliver, which requires them to attend meetings, adhere to client policies, form part of or manage a team, take an organisation email address etc. The HMRC interpretation of supervision, direction and control looks to be a pretty stiff test.
There are a further series of questions relating to payment based on client satisfaction. Under Agency rules, the agency has to pay the worker if they have performed the days, and the client has provided a timesheet. Most interims would not accept a contractual clause stating that the client (or agent) has the right to withhold payment if the end client is dissatisfied with the work, the pushback is the timesheet, which should be authorised by the client if they were unhappy with the work. In the world of management consulting, disputes of payment dependent on quality of work performed are more common. But interims may have to accept the added risk of having such a contractual clause, in order to provide the satisfactory answers on these questions.
The final questions are more straightforward, this is where most interims will be providing the right answers, or they can make the tweaks and changes to their PSC to provide the right answers, i.e. “Is their business registered for VAT?” “Do they have a business bank account?” “Do they pay for training?” “Do they have a website?”
But even though the final straight of the test might be slightly downhill, the user won’t know what impact positive answers to these final questions will have on their overall result until we see the final model and have a sense of the underlying weightings.
And this all assumes interims get fairly assessed in the first place. I speculated in my last blog that most HR departments in public sector organisations won’t understand IR35, are receiving no guidance from HMRC and will apply a blanket “all in” policy for its off payroll workers. If you knew that HMRC feel 80-90% of public sector contractors are wrongly declaring themselves out of scope, you’d play the numbers, declare your 20 PSCs in scope and expect 2-4 to contest the decision and expect to be assessed. There is an arduous marathon ahead for which we are under unprepared, but I fear many won’t even get to toe the start line.