The off-payroll legislation enacted in April 2021 introduced a requirement for medium and large private sector clients to use reasonable care in drafting status determination statements when engaging contractors. However, this apparently straightforward requirement has given rise to considerable confusion. The aim of this article is to provide clarification to cut through the bold claims made by accountants, insurers and the wider non-legal IR35 advice community.
In order to demonstrate that reasonable care has been taken, the status determination statement must explain the reasons why the terms and other circumstances support an inside or outside IR35 conclusion (sections 61M(1)(d)(i) and 61NA(1)(a) and (b) of the Income Tax (Earnings and Pensions) Act 2003). Unlike ordinary tax matters, the off-payroll legislation requires a client to draft a status determination statement that HMRC may later analyse to ascertain if reasonable care has actually been taken, so arguments concerning privilege are not applicable. Judgments concerning the simple act of relying on a tax specialist to discharge the duty to take reasonable care (who later proves to have provided negligent advice) are not entirely relevant in this context.
Therefore, a client engaging a contractor must have confidence in the skills and qualifications of the person tasked with drafting a status determination statement to properly explain the reasons why the engagement is inside or outside IR35. If reasonable care has not been taken, the purported status determination statement is void. Accordingly, a client will be liable for any underpayment of tax and National Insurance contributions, together with penalties of 30% or 70% (depending on whether the conduct was careless or deliberate) on the sum demanded by HMRC plus statutory interest.
As IR35 is a legal test, it is axiomatic that the person drafting a status determination statement can accurately interpret contractual terms and working practices in light of relevant legislation and the vast body of judgments, including Ready Mixed Concrete Limited, and so forth. Uniquely, lawyers are trained to advise on contracts professionally. After all, contracts are legal documents conferring rights and obligations on the parties. If a client wants to ensure that it has received credible and robust advice and, above all, taken reasonable care in relation to the off-payroll legislation, it must use a lawyer for each and every status determination statement.
Examples of failing to take reasonable care include (but are not limited to):
– Using a substitution-focused service that makes use of a home-brew questionnaire rather than competent legal advice;
– Outsourcing “IR35 compliance” to a managed service provider (that is, in reality, a recruiter and its employees lack IR35 legal expertise) that uses a questionnaire provided by an insurer to produce generic “status determination statements” that fail to reference the terms on which the services are provided;
– Taking advice from a person lacking legal qualifications and relevant knowledge and experience;
– Placing excessive emphasis on substitution – it’s not a silver bullet, merely a hallmark of a contract FOR services;
– Relying on a role-based status determination statement when judgments confirm that an obligation to undertake a role is inherently inside IR35;
– Relying on a status determination statement that refers to the whole contract as being outside IR35 instead of identifying individual clauses and the description of the services;
– Relying on the in-house legal department, which cannot give impartial and objective advice;
– Taking advice from a “legal expert” who is trying to sell insurance – advice must be objective and unclouded by a desire to sell ancillary services;
– Allowing a contractor to fill in a questionnaire, then having the results magically converted into a valid status determination statement by a person lacking legal qualifications and IR35 training clicking a button on a screen;
– Using the services of a “statement of work” solution provider who is a recruiter, not a lawyer (n.b., “statement of work” has no legal meaning);
– Using an online tool provided by an insurer or CEST that cannot refer to the terms on which the services are provided.
Following the Lineker judgment, HMRC’s disingenuous and misleading guidance on reasonable care in ESM10014 must be taken with an even heavier sack of salt. The size of an organisation is irrelevant as to whether reasonable care has been taken in producing a status determination statement. HMRC’s mistake is to conflate the standard of care expected of a taxpayer (e.g., Collis) with the statutory requirements of a valid status determination statement. However, the widely held belief that CEST is a trap is probably correct.
You would use a lawyer to represent you in court, so why would you ask an accountant or insurer to review a contract and place your business’s reputation and finances at risk?
At The Law Place, we have reviewed many status determination processes, including smart questionnaires that produce generic conclusions that, in the cold light of day, bear no relation to the terms and true working practices. We have heard everything, including deluded views that the standard of care needed to properly provide IR35 advice is somehow lower than in other areas. This is a view espoused by “wannabes”.
For example, using HMRC’s CEST tool would not constitute reasonable care, and a client would be liable for any underpayment of tax and National Insurance contributions plus penalties (see above) of the amount due and statutory interest. This is because CEST cannot reference the terms on which the services are provided, so it cannot give valid reasons for the conclusion. CEST can neither read the contract nor understand all the circumstances of the engagement. Can CEST distinguish between a role (inside IR35) or a project (potentially outside IR35)? No.
The use of CEST by a client will inevitably lead to expectation bias. For example, a client may be unduly fearful of engaging a contractor on an outside IR35 basis despite HMRC’s expectation that two-thirds of all engagements involving contractors are potentially outside IR35. Additionally, it is unlikely that an external IR35 specialist legal adviser would countenance using CEST. Of concern, HMRC has disassociated itself from CEST results in recent judgments. This is precisely the reason that IR35 advice must be given by an impartial and competent adviser and not an employee.
Contractors should be wary of starting an engagement based on a result from CEST or an insurer’s status determination tool designed to sell an insurance policy that may never pay out because contracts typically contain tax indemnity clauses to protect a client.
A further consideration is that clients must have reasonable preventative measures in place to protect against tax fraud. Arguably, a contractor who knowingly relies on an inaccurate status determination statement to receive payments net of tax and National Insurance contributions for services provided may be a party to tax fraud. Naturally, the use of a role-based status determination statement process is dangerous if used to produce an outside IR35 result. Hence, a contractor engaged in such circumstances to undertake a role within a client’s organisation is vulnerable to prosecution, and a client may be liable under the Criminal Finances Act 2017. Try explaining that to shareholders.
A common misconception is that obtaining legal advice for every status determination statement is disproportionally expensive for a client. This view is not factually correct, especially given The Law Place’s disruptively affordable fee model. Instructing a Magic Circle firm of solicitors is unnecessary when The Law Place’s director, Martyn Valentine LLB (Hons), has 18 years of focussed IR35 legal advice experience backed up with dedicated legal professional indemnity insurance. We are confident that our advice can enable you to safely engage the best contractors to deliver time-sensitive projects on budget without taking unnecessary risks by using umbrella companies, expensive agency workers or employing contractors directly.
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