HMRC has already started contacting various businesses to check they have the correct processes and procedures in place to comply with the new IR35 rules which affect public sector businesses and [medium and large businesses]* in the private sector.

Even as a ‘small’ business in the private sector, the new IR35 rules require you to respond to any correspondence from a worker asking for confirmation of your size in respect of the criteria below*, which you must respond to within 45 days. The worker may request this information in order to confirm if their limited company remains responsible for the determination of IR35.

A report published earlier this month, reviewing the long term effects of the 2017 IR35 off-payroll reform into the public sector, revealed that between 15-27% of those public sector businesses who took part in the review had not heard of the 2021 off-payroll reform and were therefore unaware of the additional requirements placed on them since 6 April 2021.

You would therefore not be alone if you are currently unsure as to any new responsibilities you may have since 6 April 2021.

The best way to mitigate your business’s risk of exposure to tax and employment related challenges, interest and penalties, is to know your contractual chain and what impact this has on your tax compliance.

Even if you are fully aware of your new responsibilities within the IR35 legislation, as we are almost a year into the new regime, would now be a good time for a review of your processes and procedures by an IR35 specialist to ensure you are prepared for a potential HMRC IR35 compliance check?

* a business is medium to large for the purpose of the IR35 legislation if two of the following three apply:

• Turnover >£10.2m
• Assets >£5.1m
• Employees >50

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In more recent years, and particularly since the announcement of IR35 reform in the public sector which came into effect in 2017, HMRC has pursued more high-profile cases with clients including the likes of ITV and the BBC, presumably with a view to justifying the need for reform.

However, what the recent IR35 cases reiterate to me, are the risks of contractors and clients relying on HMRC tools such as CEST and its guidance.

Current criticisms of CEST highlight that the tool does not address one of the fundamental principles that can determine IR35, mutuality of obligations; nor does it allow the user to consider when a contractor is ‘in business on its own account’.

Furthermore, as it should go without saying, CEST and other HMRC guidance is based on HMRC’s interpretation of case law. In this case HMRC’s approach to determining IR35.

The recent cases, involving publicly known personalities, highlight fundamental issues with HMRC’s approach to IR35.

Quite apart from having the effect HMRC were seeking (to deter what HMRC believe to be rife non-compliance of IR35), they reveal a picture of HMRC not approaching IR35 in the way ‘clearly’ set out by case law.

In the cases involving Lorraine Kelly and Kaye Adams, best know for her work on Loose Women, as the ‘worker’, HMRC sought to rely on the written contractual arrangements with little regard to the working practices.

Wrong focus…
The two most recent high-profile cases to reach the tribunal have several things in common, in addition to being in relation to well-known personalities.

Firstly, the appeals involved, either in whole or in part, contracts for broadcasts including the individuals’ name. In respect of Lorraine Kelly, it was the contract relating to ‘Lorraine’ on ITV and in respect of Kaye Adams, the contract for ‘The Kaye Adams Program’ for BBC Radio Scotland.

Secondly, HMRC’s case in respect of both was based heavily, if not soley, on the written contractual arrangements.

Thirdly, the ladies had been freelancing through their companies well before the original IR35 legislation came into effect, entering into contracts with many clients.

Fourthly, HMRC did not call any witnesses to supports its case.

Contractual arrangements
It is unclear why HMRC took the approach it did in these cases, with heavy reliance on the written contractual arrangements to the exclusion of working practices.

One could presume they became too focused on the high profile a win such cases could bring, the figures involved, or the perceived personal service element of the contract; or maybe the perceived control of industry guidelines following its success in the Christa Ackroyd case (which as I write this article is having its appeal heard at the Upper Tier Tribunal).

Whatever the reason, these cases, far from being the persuasive tool HMRC might seek to prove its suggestion that contractors are not correctly applying IR35, have demonstrated that HMRC frequently interpret the legislation incorrectly.

How then can contractors and clients place reliance on a tool designed by HMRC to draw the correct conclusion for IR35 in respect of its contracts?

Incidentally, the fact the contracts were in respect of contracts including the personalities name, did not automatically mean personal service was required. In making its conclusions in respect of this fundamental factor, the tribunal looked at the written terms and the working practices as it would with any other contract.

More importantly however, is the criticism of HMRC’s approach in which it seemingly ignores the working practices in favour of the written terms.

This is neither the approach the legislation requires us to adopt to create the hypothetical contract that would exist if the relationship were directly between the client and the worker, which clearly states we should looks at all relevant terms, including but not isolated to written terms. Nor, as the judge’s put it in the case involving Kaye Adams, the approach case law tells us to adopt:

“It is quite clear from the Supreme Court…that the correct approach to adopt in all cases is to identify the actual legal obligations of the parties” and that in doing so the court must examine all relevant evidence.”

Stating further, that where working practices are so persuasive the tribunal can infer this accurately reflects the terms of the actual (hypothetical) agreement, even where contrary to the written agreement.

Taxpayer’s success
In both cases the tribunal found that IR35 did not apply to the contracts.

In the case of Lorraine Kelly, predominately due to a lack of control, which the judge went so far as to say the:

“level of control falls far substantially below the degree required to demonstrate a contract of service”.

This conclusion, while taking into account the industry guidelines and written terms, was made based on the working practices, leading the tribunal to conclude that Kelly had the discretion to decide the manner, means and method by which she performed the services.

Kaye Adams contracts involved a more collaborative approach between her and the client, which HMRC sought to liken to the Christa Ackroyd’s case; and where none of the fundamental factors determining IR35 were found to be conclusive.

The judge, however, highlighted the many differences between this case and that involving Christa Ackroyd, concluding Adams contract was not within the IR35 legislation as looking at ‘all the evidence’ she was in business on her own account.

An important factor in both cases was despite an implication to the contrary in the written terms, neither ITV or the BBC respectively, had first call on the workers services and they were not required to obtain the client consent before taking on other work.

Highlighting just one area where HMRC’s approach to rely on the written terms alone was incorrect.

What we can take from these cases
Generally, in my experience, HMRC often neglects to take a commercial approach when determining cases. Yet, a more fundamental failing occurred here…not taking into account all the evidence.

Such failings, despite the ‘clear approach’ the courts have set out, demonstrate the importance of seeking specialist advice being key to determining an accurate IR35 decision; and for clients required to make the determination, attracting quality and expertise in its contractors.

There is no specific appeal process for contractors who believe a client has incorrectly determined IR35, nor is there expected to be one for the off-payroll reform for the private sector.

Contractors and clients who decide to base IR35 decisions solely on HMRC guidance can only be at a disadvantage.

With no formal appeal process for contractors who believe a client has incorrectly determined IR35 and the current consultation for reform in the private sector suggesting clients must have a procedure for hearing the contractors’ views of IR35, it is vital you use this opportunity to get your point across.

In addition, the implications of clients engaging contractors by other means, could, without the proper due diligence, cause more potential risk to clients and contractors than it would first appear.

Such alternatives including third parties can be extremely well marketed. However, contractors and clients alike should always seek independent advice in respect of such prospects in order to assess potential risks to its businesses.

How do I decide if IR35 should be applied to a contract?
My advice, simply put, is by not solely relying on HMRC’s CEST.

The recent tribunal cases alone demonstrate the faults in HMRC’s approach; an approach followed to produce its guidance, including CEST.

It is common knowledge that CEST does not address the fundamental factor of mutuality of obligation and in addition, does not enable the user to draw a conclusion on IR35 based on the secondary test of whether a contractor is in business on its own account.

Whether you are a contractor or a client responsible for the determination of IR35, it is important that you seek specialist advise and keep a record of how you came to your conclusion on IR35 for each contract.

This will ensure you can defend your case should HMRC open an IR35 enquiry; and for clients, enable you to continue to attract the quality and expertise required to fulfil projects to a high standard.

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The principles within this article are as applicable to those working in the public sector as the private sector.

According to the Budget, we are not expecting any detail regarding the reform of IR35 until the summer. This should include HMRC’s guidance. To sit back and wait for such guidance would, in my view, be a mistake and result in time pressures being put on the clients’/you to make a decision in respect of your IR35 status.

For this reason, I would strongly suggest that you start to consider, and evidence for your clients’ as necessary, your IR35 status.

The reform is expected to reflect that of the public sector changes in April 2017, namely that the decision as to whether IR35 applies shifts from you to the client, if certain criteria is met; including the size of the client you are working for. However, the uncertainty as to the exact criteria remains and with Brexit looking to be postponed, whether the decision ultimately remains with you or your client, undertaking a review yourself could assist you and the client later without adding time and administrative pressures to your clients.

Remember, how IR35 is determined, assuming the reform in the private sector is, as suggested, to bring the rules for the private sector in line with those of the public sector, does not change.

That is why I wanted to take this opportunity to highlight the fact that HMRC’s recent record in the tax tribunals by no means reflects a position in which HMRC’s view is reflective of the law. In fact, almost the opposite. It would therefore, in my opinion, be unwise to merely rely on HMRC’s guidance to determine your IR35 position.

As with any decision you make in life, it is important to be aware of all the facts, not just one entity’s view.

It is interesting to note that of the last four IR35 cases heard at the tax tribunal (between 2016 and 2018) the taxpayer has successful defended its outside IR35 status in three of the four cases. The case that was found in favour of HMRC has been appealed and is expected to be heard in July this year.

Prior to this, the previous string of IR35 cases to be heard at the tax tribunal were between 2010 and 2011, in which HMRC saw its longest consecutive run of IR35 defeats. The tax tribunals finding in favour of the taxpayer in four and a half, out of five cases.

Turning back then to the more recent IR35 tax tribunal cases:

Historic and binding case law tells us that for there to be an employment relationship, or deemed employment in the case of IR35, there must be: a requirement for personal service, mutuality of obligations and a sufficient degree of control by the client over the worker. If any one of these is missing the relationship cannot be one of employment.

Where a conclusion cannot be determined by looking at these fundamental principles, and only once these fundamental principles have been assessed, does one look at all the facts relevant to determining an individual’s status. This principle has also been established by case law.

One of the fundamental issues potentially affecting HMRC’s current lack of success at the tax tribunals could be due to the fact that HMRC’s interpretation of mutuality of obligations is in no way reflective of that of the case law.

HMRC’s current interpretation detailed in its guidance is:

“The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).

The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

1. that the engager must be obliged to pay a wage or other remuneration, and
2. that the worker must be obliged to provide his or her own work or skill.

These basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract.”

This interpretation is completely at odds with historic and binding case law, which clearly states that mutuality of obligations means more than an obligation to pay for work provided.

The opening line of the guidance confuses mutuality of obligations with basic contract law, so it is no surprise that HMRC’s pursuit of this interpretation of mutuality of obligations in Jensal Software Limited v HMRC was dismissed by the judge.

For there to be a contract of any kind, contract law requires an offer, acceptance and consideration. Once it is determined that these are present, it is then that one can determine the type of contract that exists, be it employment or not; and from here that one looks at the fundamental principles mentioned above, including mutuality of obligations.

Despite this, HMRC has, in my experience, continued with arguments based on the same interpretation of mutuality, choosing to dismiss binding case law precedent in this area, when entering IR35 enquiries with taxpayers.

I cannot therefore have any confidence that a tool designed by HMRC, or guidance produced, would reflect the case law in this area sufficient to provide a client or contractor with an accurate conclusion is respect of this fundamental factor in terms of IR35.

Particularly given criticism of the current tool produced to supposedly assist clients determining IR35 status of contractors in the public sector, as mentioned in my article last quarter.

This underlines just one reason why you and your clients should not base your IR35 status decision on HMRC’s guidance.

Ensure you are aware of all the facts relevant to making your IR35 status decision by basing your decision on leading case law in this area, not mere interpretation.

Should you have any question relating to this article or if would like more advice, please do not hesitate to contact me.

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There had been suggestions that the legislation to bring the private sector in line with the public sector could be introduced in April 2019. So, while the delay may come as relief, now is not the time to sit back and take a breath. Now is the time to act.

What we know, but more importantly what we don’t!

What we know from the Budget, and the related documents, is that the responsibility for determining whether the off-payroll/IR35 rules apply to a relationship will move from you, the contractor, to the client with effect from April 2020 in respect of all engagements, subject to the exemption mentioned below; and that the entity paying you, whether it be the client, agency or other third party, will be responsible for the deduction of tax and NIC if the client deems the relationship inside IR35.

The reform is intended to bring the private sector rules in line with the public sector rules. This, in itself, causes concerns given the problems that have been reported since the reform in the public sector last year, including but not limited to, clients making blanket decisions that contractors are ‘inside IR35’, and the fact there is no process for you to appeal a decision of ‘inside IR35’ if you disagree.

HMRC has acknowledged these concerns in the recent consultation response, however, with no guarantee April 2020 will see a change to the legislation currently operating in the public sector, we cannot assume the same issues will not arise when the legislation is introduced for the private sector.

Furthermore, it would, in my opinion, be a mistake to wait until we have any certainty.

According to the consultation response issued on Budget day, the Finance Bill will not be published until Summer 2019. Until this time, there will be no certainty of what changes, if any, will be made to the current form legislation. Leaving only a few months before the new rules take effect.

Not only does this give limited time for clients to review its relationships with contractors and get to grips with the legislation, assuming there is no contractor right of appeal of an ‘inside IR35’ determination, it provides little time for you to discuss your views of the relationship with the client.

For these and the other reasons highlighted below, I would strongly suggest you open dialogue with your clients and prospective clients now in respect of your IR35 status.

There are further fundamental issues raised by the announcement, deeming it necessary to open the lines of communication with your clients now and continue with your own due diligence in terms of IR35, such as ensuring you get your written contracts reviewed. Or indeed, get written contracts in place if there are none.

Exemption for small organisations

The government has announced that small organisations will be exempt from the changes proposed for April 2020. Meaning that contractors engaged in contracts with ‘small businesses’ will remain responsible for determining IR35 and not the client.

The criteria determining a ‘small businesses’ for the purposes off-payroll in the private sector is expected to be similar to the definition in the Companies Act 2006. At present the criteria is:

• Turnover not more than £10.2 million;
• Balance sheet not more than £5.1 million; and
• No more than 50 employees

There are various issues arising from this, including potential changes to Companies Act 2006 definition following Brexit.

On a practical level, it requires you to know, or find out, whether a client or potential client is a ‘small business’ in advance of April 2020 and then going forward in advance of every contract for you to 1) determine who is responsible for making the determination in respect of IR35 and 2) to make a decision whether or not you wish to take on a particular contract if the IR35 decision is taken out of your hands.

Furthermore, this is only likely to be a temporary exemption while everyone gets used to the shift in responsibility.

Much like the inevitability of off-payroll reform in the private sector following April 2017, it too seems inevitable that the exemption will be lifted at some point in the future.

CEST

There have been significant concerns raised about HMRC’s Check Employment Status for Tax (CEST) tool, which is intended to provide guidance to clients in determining employment status for the off-payroll rules.

One of the most fundamental issues stems from HMRC’s interpretation of mutuality of obligations (MOO), which is that it exists in every contract. This is reflected in its guidance, the arguments put forward in recent IR35 tribunal cases and, in my experience, the way they are approaching IR35 enquiries generally.

This view is contrary to the binding case law precedent, which determines that MOO, together with a requirement for personal service and sufficient control, are fundamental factors determining employment status.

HMRC’s interpretation of MOO is not only at odds with case law, unless there is a policy change by HMRC’s in respect of its interpretation of MOO, it is difficult to see how CEST can be effective in assisting anyone determine employment status for the off-payroll rules.

For this, and the other reasons mentioned, it is therefore important that you open a dialogue with your clients now.

While medium to large business are likely to have their own advisers/legal teams you should bear in mind that many private sector clients will, to date, have had little reason to know how the individual providing services to them is ultimately engaged or necessarily have any real exposure to IR35. Ordinarily the client is merely looking for a qualified resource and as such this change will be a significant undertaking for the client. Do not allow the blanket decisions we have seen in the public sector affect you.

Act now

Do not leave it to HMRC to provide guidance to your clients, particularly when it is clear HMRC’s current guidance does not reflect binding case law.

Discuss, and where possible assist and support your clients with determining your IR35 position so that everyone is prepared for April 2020, by providing your view of the relationship and if necessary putting the clients in touch with your accountant and/or specialist advisers.

Once the rules are brought in, and assuming they mirror those for the public sector, you may have little chance to appeal an ‘inside IR35’ decision. The commercial and financial impact on your business could be substantial.

Nicola Smith, Fairford Tax Consulting

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