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IR35 in the public sector: are all NHS locums caught by mutuality of obligation?

NHS locums can’t be presumed to be subject to mutuality of obligation (MOO), and by assessing IR35 using HMRC’s tool the NHS leaves itself vulnerable to costly challenges by way of judicial review.

There have been numerous recent reports that NHS Trusts are assessing locum staff en masse using Check Employment Status for Tax (CEST), and a judicial review has already been opened on this basis. The NHS’s poor practice is in spite of the recent admission from HMRC that its tool fails to consider MOO – a key test of employment.

Assessing IR35 via CEST is invalid and can be challenged in the courts on multiple fronts,” explains Martyn Valentine, director of The Law Place. “Having this means of testing overturned certainly doesn’t guarantee outside IR35 status to locum staff, but the NHS has certainly left itself exposed by adopting a blanket approach to IR35.”

Assessing mutuality of obligation in the NHS

“Regardless of the sector, there’s generally always a residual degree of MOO,” says Valentine, who has worked with multiple contractor clients in the NHS. “If a locum doctor is engaged for a fixed period of time and being paid by the hour, it stands to reason that they are under some degree of MOO.”

However, that isn’t to say that all NHS locums are subject to a sufficient enough degree of MOO to fail this test, as HMRC’s tool implies. Valentine provides two examples where a locum’s arrangement may be outside the scope of MOO.

The first is where a locum is on a zero-hours contract, where no party has any obligation to the other. The second is where the contract doesn’t contain a notice period and the NHS has the right to terminate the arrangement immediately, should it wish.

“Either way, the NHS – and any other public body for that matter – creates grounds for a judicial review by deciding its contractors are caught by IR35 without considering whether MOO is present.”

Challenging the NHS on the basis of ‘Wednesbury unreasonableness’

According to Valentine, a claimant could bring a strong case against the NHS on the basis of ‘Wednesbury unreasonableness’. This is the standard of unreasonableness of public body decisions that would make them liable to be quashed in judicial review. The precedent was set in the case of Associated Provincial Picture Houses Ltd. v Wednesbury Corporation (1948).

It states that, to have the right to intervene in a public body decision, the court would have to conclude either:

  1. That the public body took into account factors that shouldn’t have been taken into account when making the decision
  2. That the public body failed to take into account factors that should have been taken into account
  3. That the decision was so unreasonable that no reasonable authority would ever consider imposing it

“There’s a strong argument that any public body operating a blanket approach to IR35 which overlooks MOO is acting unlawfully or irrationally,” says Valentine. “In this instance the high court could certainly intervene on the basis of ‘b’ and possibly ‘c’.”

Is the NHS ‘fettering its discretion’ with blanket IR35 assessments?

There may even be scope for claimants to challenge the NHS and HMRC on the basis that these bodies are fettering their discretion. Valentine explains the concept:

“Where legislation grants a public body authority to make decisions, it is required to consider each decision on its own merits. If the public body adopts a one-size-fits-all approach to a decision rather than making decisions on a case-by-case basis, it can be argued that the public body has fettered its discretion.”

If a public body is found to have fettered its discretion, a court may find it to be unlawful, unreasonable or unfair. Valentine points out that, in either instance, both the NHS and HMRC could be vulnerable to a claim:

“Both parties could be jointly and severally liable. The NHS for placing undue reliance on a tool which isn’t based on law or logic, and HMRC for encouraging use of its flawed tool.”

Using CEST to assess IR35 - the risk of judicial review to NHS Trusts

“However, as the predominant decision making body it is more likely that the NHS would be first in the firing line in the event of a judicial review,” Valentine continues. “It isn’t required by law to use the tool, so whatever HMRC says, the NHS will be deemed to be acting irrationally by refusing to consider necessary legal arguments.”

In the event that the decision of the NHS were to be successfully overturned in a judicial review, Valentine explains that it would be directed by the court to reconsider the decision on the basis of all the legal facts. This would mean reassessing the status of each contractor involved on a case-by-case basis.

This may be the scenario that many NHS Trusts short on resources will currently be looking to avoid by using CEST. However, as Valentine points out, Trusts are better off changing their IR35 assessment habits sooner rather than later:

“Judicial reviews are civil cases, so Trusts won’t incur fines or penalties. However, they will be liable for costs under the civil procedure rules. There is a clear case against the use of CEST, so judicial reviews challenging this arrangement could become commonplace and increasingly costly for the NHS.”

Published: 02 November 2017

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