IR35 – a scourge for all but the risk averse

As time passes, more evidence emerges from the fallout of the new ir35 rules. With stories of penalty notices being issued to public authorities (we wonder if HMRC has yet issued any to itself), it seems only a matter of time before private sector hirers feel the bite of HMRC’s whip. So what can hirers do where they have engaged a contractor since 6th April 2021, or wish to do so now?

Contractors subject to the new IR35 rules are individuals who provide services through companies, partnerships or very occasionally other individuals (all referred to in the legislation as ‘intermediaries’). Hirers who are small (i.e. t/o of less than £10.2m, fewer than 50 employees etc.) are out of scope, but all other hirers of contractors are required to comply with the rules.

Such was the sea change in approach introduced on 6th April 2021 that private sector hirers fell into three camps; (a) those who decided it was all too much and decided to reject the hire of any affected contractors (perhaps insisting on engagement through umbrella companies or agency PAYE); (b) those who recognised the issue required an entirely new approach to contractor engagement and who adjusted accordingly by limiting engagements to essential contract work on projects only; and (c) those who decided that giving up the use of contractors was too much and, relying on assurances from operators in the market, wanted to continue much as before. No surprises there, as these were the options adopted by public authority hirers when HMRC first forayed into this territory in 2017, with in some cases, the penalty consequences mentioned.

The Risk Averse – approach (a)

Hirers in this category are safe from the HMRC IR35 spotlight but likely find themselves hampered by their blanket approach – what to do if they cannot find anyone other than an intermediary contractor with the required expert skills to undertake the work? Given the individual’s objective will be to earn a net income similar to the pre- April 2021 rules, the cost of hire will inevitably increase (assuming that this highly risk averse hirer will want to remain risk averse). This is because the course of least risk involves meeting the cost of payment of the employers NICs and factoring in compliance with the rule requiring the intermediary to be paid net of employment taxes.

Options for the hirer here are either (i) to still engage the individual without involving an intermediary, or (ii) allow engagement through an intermediary and determine the arrangements to be caught under the IR35 rules. In either case this would ensure that payment to the individual or intermediary is treated as employment income and the risks under IR35 are wholly avoided.

The Realistic – approach (b)

It is only if the hirer refuses to meet higher cost of approach (a) that a problem arises and that approach would have to be cast aside. This means adopting approaches (b) or (c) and assessing whether the work is caught under the IR35 rules. Is this worth it?

One view may be that the benefit of saving 13.8% employer NICs and allowing the individual a greater tax free income whilst getting the job done by the right person outweighs the risk of being subject to an HMRC investigation. This should really be included under approach (c) as a gamblers viewpoint; statistically it is probably correct as HMRC is understaffed, but liability will last for at least 6 years and may interfere with balance sheet values. Note that the recently reported public authority notices from HMRC relate to failings since 2017. The better view would be to take proper advice to get the IR35 assessment right, and here is where things get difficult. Where and how can you get that advice, and what can you rely upon?

As someone whose business has provided IR35 advice since 2000 I can say that reaching a clear conclusion in many cases is difficult and is always subject to the accuracy of information provided by the hirer, rather than the contractor. For example contractors are always keen to say that they can provide a substitute (so influencing a decision to be outside IR35), but hirers usually want the work done by the specific individual, leaving substitution dead in the water as a reliable means of avoiding IR35 taxes. It is invariably only the hirer that knows what the work conditions will be, both when formulating the job requirement and during the continuation of the work. Only if the work is genuinely controlled by the individual throughout with little or no interference from the hirer, whether with or without reporting requirements, can it be said that IR35 will definitely not apply. Even then HMRC may investigate, but the risk of liability should be zero assuming that the contracts used correctly capture the conditions.

So those adopting approach (b) need not seek advice as such; although some assurance may be sought from professional advisers in the first instance once the approach is understood and correct contracts are formulated further assurance should not be needed. All should avoid trying to shoehorn the facts into an outside IR35 scenario. For more on this see our article ‘IR35 made easy – a must read for hirers and agencies’ published earlier this year.

The Gamblers – approach (c)

Approach (c) adopters, those who want to continue as before, are the most likely to be at risk. These are hirers who are swayed by the desire to continue hiring contractors regardless and who are persuaded that a system of advice and insurance will protect them from risk. Here are some issues with this kind of system advice:

  • it will probably involve a checklist approach without in depth enquiry into the actual working arrangements, especially if charges for the services are low and fixed
  • a conclusion that an arrangement is outside IR35 is never unconditional, it will always be dependent on full and correct information having been provided and likely expressed in this way
  • Some outcomes are based upon an overreliance or misunderstanding of substitution.
  • IR35 insurance cover linked to an outside IR35 outcome will also be similarly dependent, so allowing insurers to avoid a claim if any important detail is omitted
  • a claim for negligence against the adviser is unlikely to succeed for the reasons above
  • advisers will need to balance the risks for both insurers and the hirer where insurance is sought, if both are relying on advice from the same potentially conflicted source
  • a system advice approach encourages lack of attention to detail
  • the review will be at a snapshot in time and could be negated by a later change in details

Factor in that the outcome can never be relied upon fully because of the above and is thus uncertain and the entire exercise becomes pointless. Add to that the following:

  • an uncertain outside IR35 position is the most likely scenario to be investigated by HMRC
  • reviews and insurance incurs fees and premium cost, and whilst that cost may appear attractive at first glance it pales into insignificance against the potential liability to HMRC
  • the hassle of an investigation should not be underestimated, even if no penalty arises time will be wasted and relationships with involved parties possibly negatively affected
  • HMRC has 6 years to investigate even though guidance may indicate otherwise

Online assessment tools

It appears from recent reports that some public authority hirers relied upon HMRC’s own online tool CEST to conclude that arrangements were not caught by IR35, yet now they face penalties. Whether or not that is correct, can online IR35 tools be relied upon?

Regardless of the efficiency of any online tool, any outcome it produces will be dependent on the accuracy of the information that is input. For the reason already expressed in this article why information from the contractor is relevant remains a mystery since the hirer is always the party with all the information, yet it is common for information from the contractor to be taken into account. Regardless, there is a tendency to input information either before or immediately after work has started on the belief that the arrangements at the time will continue throughout the assignment. As such there are two scenarios which could land the hirer in hot water. One is that the person inputting information into the tool was not in possession of all the facts. The other is that there is a later change in the arrangements that would have affected the outcome. In either case the online tool may not necessarily have been at fault, yet its use cannot be relied upon. These ‘snapshot in time’ factors are relevant to all reviews whether online or otherwise.

There is one further factor. An online assessment tool will hopefully have been programmed in line with current case law. However all cases are dependent on their individual facts and case law is ever evolving. This means that a correct determination made today in line with current case law may be incorrect in the future if the law changes. This in turn means that all outcomes based on similar facts will also be incorrect until the tool is reprogrammed. This principle will also apply in the case of human assessments until the assessors are up to speed on the change in the law. Whilst some sympathy could be hoped for from HMRC in these circumstances, don’t bank on it; there will be no defence to liability.

For all the above reasons a simple conclusion is that it is far better to take a risk averse or realistic approach to IR35 than adopt a bulk system advice or online tool approach on its own. The risk averse or realistic approach matched with supportive contracts in each and every case will keep HMRC’s cat’o’nine tails at bay.

The author of this article Adrian Marlowe is managing director of Lawspeed and chairman of the Association of Recruitment Consultancies. Lawspeed group corporate clients benefit from immediate up to date advice on any recruitment sector or employment matter, contract review/negotiation, terms of business and IR35 contract templates, trade membership, government representation, accreditation services and an advanced digital contract platform.

 

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