IR35 changes – blanket statements uncovered
The term ‘blanket statement’ has become synonymous with a specific approach to the impending IR35 changes due on the 6th April 2021, but what constitutes a blanket approach and what are the consequences of getting it wrong?
Perceptions are that some organisations, in the automotive industry, for example, have adopted a blanket approach. However, this is neither proven nor has it been tested in a case of law.
What is clear is that a great deal of ambiguity remains amongst engagers and contractors alike!
IR35 – what does reasonable care mean? Let’s recap
In our previous article, IR35 – deferred, not defunct! Workr Group outlined the changes in responsibilities for engagers along with recommendations on how to achieve reasonable care.
The IR35 changes state that, as the engager, you must take reasonable care in how you go about making an IR35 status determination.
By reasonable care, HMRC means that you must conduct a thorough and detailed assessment of the work to be carried out by the contractor (worker).
HMRC recommends that you:
- Formalise and record a consistent process.
- Seek professional advice and assistance.
- Involve relevant parties or individuals.
- Use a determination test tool.
- Regularly review determinations.
- Define and communicate a transparent process for challenges.
How does this impact engagers?
Clearly, for companies that engage contractors who provide their services through an intermediary (personal service company or PSC), the IR35 changes will increase in the time and administration required.
As a result, it would appear that some engagers have opted to conduct mass determinations to try to reduce the administrative burden. Making mass determinations for all or large groups of contractors has commonly become known as making a blanket statement.
Previously in the rail sector and more recently in the automotive industry, concerns have been raised about engagers adopting the blanket statement method.
What are the risks of making blanket statements concerning IR35?
Where the engager is deemed not to have taken reasonable care in determining the IR35 status of a contractor, HMRC can transfer any debt for unpaid taxes to the engager.
According to HMRC’s Employment Status Manual (esm10014), examples of behaviours which do not constitute reasonable care include, but are not limited to:
- Determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.
- Determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker.
If therefore, making blanket statements does not constitute reasonable care, then the implications and risk for engagers are significantly increased.
In the UK automotive sector, for example, some companies engage hundreds, if not thousands of contractors meaning failure to take reasonable care could represent a substantial financial risk.
Additionally, the time saved by making blanket statements is likely to be expended many times over as a result of the high volume of challenges made by contractors in response.
IR35 – does outsourcing the determination process constitute reasonable care?
In the guidelines outlined above, HMRC encourages the involvement of professional advisors in the determination process.
Engagers who utilise such support will be demonstrating a commitment to making fair and reasonable determinations and will likely be looked upon favourably by HMRC and contractors alike.
However, this approach comes with a caveat!
Simply outsourcing the determination process to another party does not relieve the engager of responsibility or liability and may not be deemed as taking reasonable care.
In recent case law; Udlaw Limited v Revenue and Customs (27/01/2020), the tribunal referred to the HMRC Compliance Handbook – CH84540 concerning reasonable care.
The manual states;
A person cannot simply appoint an agent and deny responsibility for their tax affairs. The person still has a duty to take reasonable care, within their ability and competence, to make sure that what they are signing for is correct. The person has to show that they took reasonable care, within their ability and competence, to avoid default by their agent. This will include:
- Making sure that they give the agent all relevant information with which to work. No agent, for example, can produce correct accounts and returns from grossly deficient records, or give accurate advice if they do not have all the facts.
- Implementing the professional advice received and not neglecting some vital step.
- Checking the agent’s work to the extent that the person is able to do so. For example, an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.
IR35 — what should engagers do now?
We encourage anyone with a responsibility for IR35 compliance to ensure that your determination process is fit for purpose and meets HMRC’s reasonable care requirements.
Whilst it may seem time-consuming and burdensome initially, the mitigation of risk and time saved by taking a robust, right-first-time approach will give peace of mind and confidence to all stakeholders in the process.
With the IR35 changes now less than six months away, now is the time to review your determination process!If you have found this useful, then you can find further information on IR35 here.