IR35 barrister and CTA - Helping all corporations safely retain independent contractors with strong legal advice
I continue to receive queries from contractors concerned that they are being placed within the scope of the off-payroll rules by clients.
It appears that clients are making blanket decisions in this direction (many doing so publicly). Even if not declaring blanket decision-making, it is clear that clients are assessing the off-payroll rules without reference to the worker.
This is not a risk-saving approach. It actually brings its own risks:
If you are engaging the same person now and placing them "inside IR35" and before that they were operating "outside IR35", what do you think HMRC's response will be?
Why wouldn't HMRC, so very keen on pushing IR35 on the gig economy, simply ask why you were not paying Secondary Class 1 NIC's (employer's contributions) all along? That's potentially a really big hit.
Even if not the same worker; if you have been engaging on similar projects and now they are all "inside IR35", why shouldn't HMRC smell a rat?
I am not able to quantify the risk as this is uncharted territory. But consider the ESM. Where HMRC, client and worker agree going forward that an individual will be treated as employed rather than self-employed, the manual tells HMRC to look for back-dated, unpaid PAYE and NIC's. This is not specifically written for IR35 but the method of thinking is very clear.
The client is exposed to retrospective enquiry. So is the worker. For the same reasons.
Why would a worker want to accept an assignment that requires them to place a big target on their back?
The case law is really, really clear: The employment test includes important elements particular to the worker (business on own account, other clients, intention and so on). Ignore those and you have failed to exercise reasonable care, which is required by the legislation.
The immediate consequence is that you, not the agency, bear the burden of deducting PAYE and NIC's at source. It goes further:
Inevitably, a client owes a common law duty of care to a worker.
If reasonable care is not exercised (see above) and the worker suffers (foreseeable) harm as a result, you could be liable for damages in tort. Say for example that a careless assessment (and a blanket assessment is unarguably careless, even on HMRC's guidance) and the worker went through a long, painful and expensive enquiry by HMRC? If the enquiry was in fact unfounded, they may well seek advice from the legal profession for damages against you.
The IR35 test is the same test as the common law test for employment.
That bears repeating: It is the same test. The legislation specifically lifts the common law test directly into the statute.
By unilaterally declaring that the engagement is "inside IR35" you will be unilaterally declaring that the common law employment test is met.
If an IR35 assessment is correct, the only correct assessment on employment status will follow suit.
Even worse, any lawyer with knowledge of contract law and employment rights cases will tell you that the law recognises that in the case of employment-type cases, the balance of power lies with the employer. The employer is able to say "take it or leave it".
By making the decision unilaterally, you are placing yourself squarely in that space which, to the employment tribunal, will look precisely like the imbalance of power seen in employment.
The Court of Appeal and Supreme Court have both recently demonstrated in high-profile cases, that the courts will utterly disregard the paper-form of the engagement. If the employment test is met, the existence of a PSC will not matter one jot. Holiday pay. Sickness absence. Pension contributions. All of these and more come into play.
IR35 is a difficult area of law. It is necessarily bound to the common law of contract and the common law relating to employment, as well as the various statutes and regulations that apply. Knowledge of tax legislation and policy is also important when assessing status and risk.
Who is making your IR35 assessments? Who is guiding your overall IR35 decision-making process? I hope the answer is someone with sufficient knowledge and expertise to be able to assess the global impact and most of all, get it right.
Alexander is always happy to help address concerns he is asked about frequently.
Aimed at the engaging businesses (clients). Feel free to copy and provide to your client's decision-makers if you think you are affected by a blanket decision.
Happy to advise and act for contractors and clients alike.
A barrister and chartered tax adviser, specialising in IR35 issues.