The IR35 Lottery

It would appear that my previous article made a good bed time read - although not as popular as Harry Potter, it is pleasing to know that I appear to have a fan base; something that I didn't achieve with the outside profession when I was previously in the employ of HM Revenue and Customs as a Status Inspector'

From experience, I prefer to tackle the subject of IR35 with the following points in mind in order to avoid the pitfalls and mitigate risk. I appreciate that others may not necessarily agree or indeed may prefer a different approach. What matters is getting it right for the client.

Prepare for the worst ' hope for the best.

The best defence is not to be attacked in the first place!

Lower the profile

Don't make your client an easy touch. IR35 was introduced as anti-avoidance legislation. HMRC will have an eye on monetary yield. HMRC target companies where the worker insists on paying a minimal salary and maximum dividends. If a more modest stance is taken, then the amounts at stake are reduced and so is the risk.

Establish the position at the outset.

It is essential to collect and collate all the relevant evidence. It is no good relying on a one-size-fits-all contract with an over reliance on a substitution clause. A holistic approach is required.

You need to apply what I call the 'smell test' to the contract. If it does not obviously reflect reality, then beware. The recent commissioner's cases show that it is the actual day to day working practices that take precedence ' the usual things, right of control, personal service, exposure to commercial losses, investment in equipment etc. I've seen numerous contracts that say the right thing, but fall apart under closer examination. I strongly urge you look closely at these areas, and if there are any doubts, you need to seek specialist advice. If the written terms of the contract do not reflect reality, then it may be unwise to depend on it being 'IR35 Proof' as I've heard all too often.

One way to get clarification (if you are able) is to put the question in the right terms to the right person at the end-client. It my not be sufficient just to talk to the immediate line-manager ' who may not care or even know what his employer would allow. On the other hand ' find out if local arrangements may have been put in place ' even if it goes against company policy. Does the line manager actually operate in a different manner' If so, this becomes a relevant part of the arrangements under which the services are provided; whether the end client likes it or not. It's the reality of the arrangements that count in the end when constructing the notional contract.

But if the workers know that they have been personally selected to work for a set period, to assist on a large project, as part of a team working in a managed operation, using end-client equipment-yet nevertheless decides to chance it, they are likely to have an issue. On more than one occasion it was admitted to me in my former role as a Status Inspector, ' I knew I was caught, but waited to see if you would challenge me.' Perhaps many advisors and PSC's think it is a risk worth taking.

Worker in business.

I recall one case where the end-client had assured me that all work was done on site using their computers, but the reality was he operated from home much of the time with his network of computers using a program costing £10K which he had purchased. The specific facts are important and the HR manager will probably not know all this. The worker looked much less like an employee because of his investment and his choice of working place.

Multiple clients

What if the contract HMRC want to hit for IR35 is merely one in a chain of contracts for different clients' If there are concurrent contracts, or a large number of clients, or a long history of working across the sector, then it is easier to argue that the contract in question is but one in a diverse portfolio of operations. If the company was set up purely to service a succession of contracts with one end-client, then HMRC will tend to smell a rat. Diversity of operations always helps to dispel the 'hidden employment' argument. See Example 1 below.

Revenue disclosure.

If the worst happens''

HMRC have unrivalled powers to obtain information from end-clients and they should be requested to share this at an early stage in the interests of all concerned. It is virtually impossible for workers to obtain the upper level contract, but IR35 may hinge on this document and how the end-client puts it into practice. All too often, it has only been well into an investigation that all the documents are declared by HMRC ' which is most unsatisfactory. They must be more transparent about the evidence they hold. If end-clients have agreed a generic statement of arrangements with HMRC, then this should be openly available to the agency and the workers at the outset.

Witness credibility.

If there is an investigation and the case is to be heard, HMRC should be reminded that in the Datagate and the First Word Software cases, the Commissioners considered that a distant HR manager was too remote from the actual workplace to know what was actually happening.

If calling witnesses from the end-client, advisers need to explain to them what is likely to be asked and what are the implications resulting from what they say.

The credibility of the worker's evidence should not be under-estimated. After all, the worker knows the context better than anyone - and how it worked from day to day.

Specialist help.

Get help immediately from people who specialise in status and IR35 all the time - especially if HMRC come knocking ' but better still ' share the facts with a good adviser from the beginning.

Some examples to think about.

As I said, I was a Status/IR35 Inspector in a former life. I had to give many opinions on hundreds of IR35 cases. These are typical of the sort of investigations undertaken. Names and details have been changed to avoid any possible identification.

Example 1

Mr P worked mainly for a government department via P Ltd. The work was under terms and conditions that made it seem certain that IR35 applied. It took a long time, and the use of Section 20, before the worker produced the lower level contracts. However, these revealed that the government job was only part-time and other work was done for other clients. At one time there were 3 concurrent contracts, and over a 10 month period work was done for 5 end-clients apart from the government department.

I decided that the diversity of contracts meant that a tribunal would probably decide that each contract would be viewed as only one in the overall trade of P Ltd, and therefore that IR35 would not be applied to any specific contract.

Another Inspector might well have taken another view. This boils down to 'know thy enemy.' IR35 legislation allows the Inspector to argue that each contract stands on its own. Could IR35 have been applied to the government contract ' even if the rest were not caught'

Defence: Not needed. This is a realistic outcome. However the agent acting did not realize the strength of the cards he was holding and he could have stalled the investigation much earlier by showing his hand. Did the client benefit from the delay'

Example 2

Mr P set up his company to develop software for a new computer game. He engaged staff and ran up a large overdraft with the bank. The bank became anxious about repayments as the development was likely to take over two years and they asked Mr P to consider raising some money to make repayments. He started to sell his own computer skills through his company to an end-client under arrangements that were obviously caught by IR35.

The argument I advanced on behalf of HMRC was that the PSC had two distinct trades, which had no connection. The income from the end-client was caught and the fact that the company had other activities was too remote for it to be said that the consultancy work and the software development were part of the same trade.

Mr P disagreed. He was incurring legitimate employment expenses and capital allowances, and his PSC was able to pay pension contributions. Was there was insufficient liability in it to be worth the fight' It's important to calculate how much PAYE/NI is at stake after CT relief and SA repayment.

Defence: This situation has not been tested at SpC's or High Court (yet). Will the Inspector be backed by the technical bods' Will HMRC be keen to take a case to tribunal to test this point, when the defence will be, 'Just one client, m'lord. Just one part of my trade.'

My advice now would be to challenge HMRC. Their interpretation is too narrow within the context of the overall aims of the company's activities.

I hope you have found the two articles of interest, or conversely that they helped you go to sleep. Anyone taking good advice will significantly increase their chances of winning the IR35 lottery.

Steve Gretton now heads up employment status and IR35 services for Inspired Employer Solutions Limited which specialises in providing planning, advisory and support services in PAYE, NI, employment benefits, expenses, status cases, IR35, investigations and the Construction Industry Scheme." He can be contacted on 01793 611173 or status@inspiredemployer.co.uk




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