It has been six months since the Off-Payroll legislation took effect in the private sector.
One unfortunate observation is seeing some companies seeking to cross-sell their wares by leveraging the naivety of medium and large firms who have been tasked with the challenge of getting to grips with IR35 compliance.
The reality is that in the complex world of IR35, someone who knows a little can come across as credible to someone who knows absolutely nothing – and this is where the cross-sellers have sought to enter the play to cross-sell their main game – be it insurance, a payroll service, or consultancy based billable hours.
Typical gambits based on a false premise or false equivalence tend to be the following:
- Reasonable care means you have to use experts all the time (buy our billable hours!).
- HMRC guidelines say X, so you must do X, and we can help you do X (buy out billable hours!).
- HMRC’s Check Employment Status for Tax tool is a bit rubbish – therefore all tools are rubbish. Computers cannot replace humans (only use our humans!).
- Your staff are incapable – (please buy our billable hours again!).
Let’s look at some of these areas.
The new Off-payroll legislation (Chapter 10 of ITEPA 2003) in section 61T(6)(c) states that you have to take reasonable care in coming to the conclusion in a status determination statement (SDS), that’s all. It says nothing about what happens after that.
Furthermore, the effect of not adhering to reasonable care, in a 61T sense, means the client becomes the fee-payer and liable for any potential tax, not the recruitment agency. That’s all. Not meeting reasonable care does not mean the tax is automatically due either, it just means the SDS is not valid, so the client becomes the fee-payer. It’s possible to meet reasonable care (i.e. not be careless) and still owe the tax. And it’s also possible to not meet reasonable care, and still not owe the tax.
Bear in mind that in the last 20 years, in every single IR35 case won by HMRC at tribunal, they’ve never won a carelessness argument. And, given the complex and subjective nature of IR35, it’s highly unlikely they will, unless someone runs their business with their eyes shut. In our experience, firms have staff that are smart and capable and are able to take sufficient steps to ensure they do not fall into the carelessness pit.
The reference to “carelessness” here is in the sense defined in the Taxes Management Act 1970, Section 118(5) (“TMA”), which states:
For the purposes of this Act a loss of tax or a situation is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss or situation.
This is a different area of tax law, but they are related because not taking reasonable care means you have been careless. And there is an abundance of case law on what carelessness means, and it’s this case law which any arguments in the Chapter 10 sense would be based.
Under the TMA, the enquiry window for HMRC in discovery assessments is four years, which can be extended to six years if the taxpayer is careless. And if they are careless, then penalties (not “fines”) can be added to the tax amount due, which is a percentage of the tax amount.
As mentioned, there is a considerable amount of case law as to what constitutes carelessness on the part of the taxpayer, so what about these HMRC guidelines on reasonable care (ESM10014)?
HMRC guidelines are not law – they are not statute. HMRC cannot simply write guidance on what it thinks is “reasonable care” and if you don’t do what they say then you have gone wrong and can be fined. They are not dictators. We live in a democracy. HMRC administers the laws made by MPs in Parliament.
Courts may sometimes refer to written Government materials, Hansard and/or guidelines, where there is ambiguity in the statute and one party is seeking to rely on them on a legitimate basis – another area of case law itself. For Off-payroll, we aren’t in that zone. The statute is clear, and the case law on reasonable care is well-trodden ground.
You don’t need to pay another firm thousands of pounds every month to make sure you are adhering to reasonable care.
Computers v Humans
It’s difficult to take the argument seriously when people claim that computers are incapable of dealing with the complex area of status determinations – particularly as we are witnessing a revolution where cars can drive themselves down the road.
Most legal advisors have little or no experience writing computer programming code or designing expert systems and may struggle to shift the unconscious bias that surfaces when their livelihood is unfortunately under threat of disruption via automation.
Similar arguments occurred in the accountancy profession around 15 years ago when firms such as Xero and FreeAgent came on the scene. Lawbots are a movement, and it’s happening. In a 2016 report, Deloitte estimated that over 100,000 law jobs in just the United Kingdom alone could disappear within the next twenty years due to automation.
The car maker Henry Ford, who delivered the Model T to the world over 100 years ago said: “If I had asked people what they wanted, they would have said faster horses.”
Are your staff capable?
Some firms may choose to fully outsource the compliance work. Others prefer to take control – which is wise, given the amount of money at stake if things go wrong.
Implementing Off-Payroll is not difficult. The hard part is the status determinations, and everything else is admin.
Many large firms have in-house expertise, have conducted considerable research and have a very good understanding of IR35 matters. They then choose an automated tool to supplement their own expertise and streamline their processes, having conducted considerable due-diligence.
You can implement a process for Off-payroll working yourselves, meet reasonable care, and whilst some consultancy help at the start may be useful, you don’t need to pay ongoing consultancy fees once you’ve got your process in place.
Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained. With over 20 years’ experience of IR35 under his belt, he regularly assists with IR35 tax tribunals, has consulted on many occasions for HMRC, advises politicians and Government bodies on freelance tax matters, and is prolifically quoted in the trade and national press.