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Legal analysis shows why HMRC is wrong about blanket assessments

HMRC comments which appear to permit the blanket assessment of contractors for IR35 status by hiring organisations under the Off-Payroll rules are legally flawed.

The comments, published in the minutes from the 21 November 2018 IR35 Forum meeting, argue that in instances where identical contractual conditions apply, an end client isn’t obligated to assess each contractor individually.

However, as director of The Law Place Martyn Valentine explains, HMRC’s guidance is in direct conflict with the Off-Payroll legislation, and, as such, risks encouraging non-compliance: “HMRC’s comments reflect, at best, a fundamental misunderstanding of IR35. At worst, they are a deliberate attempt to incite the incorrect assessment of employment status.”

What’s HMRC’s stance on blanket assessments?

Addressing the issue of blanket assessments within the IR35 Forum minutes, HMRC condemns its adoption in instances where ‘an engager decides that all roles and workers are inside the Off-Payroll rules’.

While reiterating its insistence that public authorities refrain from adopting this approach, HMRC acknowledges: ‘The determination of status is dependent on the contractual terms and conditions, and actual working practices of an engagement.’

Curiously, the taxman goes on to state: ‘The term is also being applied to circumstances where, having reviewed one contract, an engager may consider that identical facts and terms and conditions apply to other contracts, and it is then not necessary to review every individual engagement separately.’

Blanket approach circumvents Off-Payroll legislation

“The peculiar thing is that HMRC goes from reminding public authorities of their obligation to consider the ‘actual working practices’ of an engagement to completely disregarding this moments later when appearing to authorise the latter form of blanket assessment,” comments Valentine.

The obligation to consider the working arrangement as a whole is set out in section 61M(1)(d) of Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, which requires an examination of the ‘circumstances’ of an engagement. Section 61M(3) notes that the terms of the contracts simply form ‘part of the arrangement under which the services are provided’.

“The key factor is ‘reasonable care’,” adds Valentine. “If a public authority fails to take reasonable care in reaching its employment status decision, as required by section 61T(6)(c), it will become the ‘fee payer’ while assuming tax risk.”

Decoding ‘reasonable care’ in relation to Off-Payroll

According to the legislation, applying reasonable care means undertaking an assessment of employment status as required by section 61M, which Valentine interprets as:

“An assessment of the circumstances pertaining to the provision of services by an individual, and not an entire category or class of contractors irrespective of any similarities which may exist in actual working practices.”

Valentine adds: “There’s nothing in the legislation which states that reasonable care is discharged by applying a like-for-like approach to assessing contracts. Contractors must be assessed on a case-by-case basis. In reality, there can be many variations between each contract, meaning the working practices for two contractors perceived to be doing the same job can be very different.”

The significance of hiring organisations is that, by the letter of the law, adopting the non-compliant approach sanctioned by HMRC will leave them vulnerable to tax liability. It also creates great inconvenience for recruiters and contractors, who risk becoming victims of false-employment.

Tribunal history doesn’t favour HMRC

Chapter 10 isn’t the only place where role-based blanket assessments fall foul. Precedents set in numerous employment status tribunal cases have reinforced the necessity of examining the bigger picture.

In Hall v Lorimer (1993), one of the seminal employment status cases, Lord Justice Nolan set out the often-quoted blueprint for IR35 status assessments, stating:

“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture, viewing it from a distance and only then making an informed, considered, qualitative appreciation of the whole.”

More recently, in RS Dhillon & GP Dhillon Partnership v HMRC (2017), Judge Zachary Citron noted: “The courts have warned against a mechanistic approach to these tests. Each case must be decided on its own facts. The hirer-hiree relationship must be examined in detail in each case.

“The factual matrix may mean that some of the indicia mentioned are very important or even determinative of the nature of the relationship. In other cases, the same indicia will be of little help in determining whether the relationship is that of employment or self-employment”.

Blanket assessment claims defeated at Judicial Review

Recent legal action taken after HMRC appeared to incite the blanket assessment of locum workers within the NHS has also reinforced the unlawfulness of the approach. During an IR35 webinar delivered to NHS Trusts by HMRC and NHS Improvement (NHSI), HMRC stated that they expected all healthcare contractors, apart from GPs, to fall within the Off-Payroll rules, and taking a blanket role-based approach was acceptable.

Consequent NHSI guidance, stating that all locum and agency workers should be deemed ‘inside IR35’ and placed on a payroll, was subject to a Judicial Review (JR) lodged by the Independent Health Professionals Association (IHPA) on the grounds that it wasn’t legally accurate. At the pre-action stage, NHSI conceded and amended its guidance, stating:

‘An assessment of whether or not IR35 applies should be carried out in a fact-specific way; that is, it should be applied on a case-by-case basis, rather than by a broader classification of roles.’

Despite the conclusive outcome of the JR, IHPA head of legal, Stephen Mhiribidi, is unsurprised that the taxman has since continued to issue similar misleading guidance:

“Based on the experience within the NHS, we have no doubt that HMRC’s intention is to force as many contingent workers as possible onto a payroll, regardless of their true tax status. The webinar was designed to look like it was sharing impartial HMRC advice but, in reality, it was a directive to Trusts to blanket almost all healthcare contractors into IR35, backed up by threats of Treasury fines.”

Contracts v roles: the danger for hirers and contractors

Another point of contention for Valentine is HMRC’s insinuation that contractors fill ‘roles’. Though it may appear an innocuous misinterpretation, if hiring organisations follow the taxman’s lead, the implications for all involved could be of great significance.

“By definition, an individual undertaking a role cannot operate outside of IR35, or Off-payroll, and would be considered an employee in any case,” explains Valentine. “In this scenario, the engagement wouldn’t even be considered within the scope of IR35, which requires that the status of the client be that of a customer of the individual and not a temporary employer.

“This is confirmed in section 230(3)(b) of the Employment Rights Act 1996 and regulation 3(2)(b) of the Agency Worker Regulations 2010 and reinforced in every single judgment where a contractor has been found to be outside of the IR35 legislation.”

The difference between a contract and a role will be lost on most hirers. However, treating a contract like a role invites HMRC to infer that mutuality of obligation (MOO) and a significant degree of control are present, leaving the status assessment vulnerable to a challenge from the taxman.

“There is a case to be made that HMRC is encouraging non-compliance surreptitiously by setting up public authorities to fail through providing inaccurate advice regarding assessments,” concludes Valentine.

“Ultimately, taking the role-based approach advocated by HMRC instantly gives the taxman a leg to stand on when challenging an outside IR35 assessment. If HMRC wins on this basis, everybody else loses. The hirer has a sudden tax liability to contend with, while the contractor risks being unjustly forced ‘inside IR35’ as a result of their client’s lack of due diligence.”

Published: 11 February 2019

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