IR35 – time to reflect and prepare

The start of a new year is often a time of reflection and with the impending reform of IR35 (off-payroll working) rules in April 2020, this is a good time to reflect on recent IR35 tribunal cases to highlight the importance of the client/contractor coming to its own decision on whether IR35 applies to a particular contract; rather than merely adopting HMRC’s view in accordance with HMRC’s guidance.

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.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *