Don’t offload IR35 status determinations to contractors, warns lawyer

Could IR35 be a force for good in a flexible labour market? Is there an opportunity now to reassess the benefits that a robust IR35 strategy can deliver for more flexible and agile ways of working?

These are questions raised by Personnel Today in an article published last week. They flag the challenges that last year’s new IR35 regime has brought to the private sector, citing research suggesting the main one is flexibility. 77% of respondents to a survey of medium-to-large businesses are currently finding it difficult to hire and access the flexible workforce they need to deliver on their projects.

They also point to a ‘candidate-driven’ market with the same research showing that 87% of respondents have been forced to increase contractor pay rates since April 2021. The suggestion is that many companies are increasing pay rates to compensate for employment taxes paid by contractors who now find themselves inside IR35.

The conclusion is to make sure you have a robust IR35 strategy in place. They say that will ‘help ensure that all roles which should be outside of IR35 have the appropriate structure and contracts in place, helping organisations to recruit talented contractors needed to deliver post-pandemic growth’.

The ‘Lessons to learn’ section of the article deals with two issues we think need flagging. The first if around who make the IR35 status determinations. Referring to the research they say: ‘although 88% of respondents were confident that they understood requirements for reasonable care in making status determinations, 35% of companies asked contractors to make their own IR35 status assessments. We will come back to that in a moment. The second issue is around recruitment and, specifically, the wording of job adverts. On that, they say: for businesses that have less visibility of their supply chain, HR teams could assist with this by ensuring that the IR35 status of new roles are determined prior to recruitment and included in job adverts. They say: ‘agencies and recruiters should also continue to liaise with their clients to give their guidance on the IR35 status of roles and encourage them to be clear in job adverts as to whether contracts sit inside or outside.’  Well that’s the suggestion, but is it actually a good idea?

So, let’s get a view on both those points. Penny Simmons is a tax lawyer with Pinsent Masons. I asked Penny what she thought of that figure of 35% of firms asking contractors to make their own status determination:

Penny Simmons: “I would strongly advise against getting contractors to make their own IR35 status determinations. The reason for that, and you just said it yourself, and the Revenue advise against that, is the rules are very clear in this regard, and the Revenue has been very clear in this regard, that the legal responsibility from April 2021, for making status determinations, sits with businesses and that means a business has to work out do the IR35 rules apply when they engage with individuals through PSCs? You can't just pass that over to the individual contractors who, even if you ignore the legal risk implications, the contractors are going to have a complete conflict here because they're going to want to be deemed to the outside of IR35. The risk sits with business, and the legal responsibilities sit with business, and it's important that businesses are making those status determinations.”

Joe Glavina: “The article talks about how IR35 can help to give a greater level of visibility in the supply chain. They say: ‘HR teams could assist with this by ensuring that the IR35 status of new roles are determined prior to recruitment and included in job adverts. They say: ‘Agencies and recruiters should also continue to liaise with their clients to give their guidance on the IR35 status of roles and encourage them to be clear in job adverts as to whether contracts sit inside or outside.’ What do you make of that?”

Penny Simmons: “I'm not sure I think that's the best way to go, if I'm honest. I think that the Revenue has advised against making group determinations. I think that it's important to look at all the facts and circumstances of the case when making a status determination as to whether IR35 applies. So, to be able to do that before you've engaged in an individual, before you've found the individual and discussed with them the terms on which they'll be working, I think it could be problematic, not necessarily so, but it could be problematic. I also think, and I know we’ve talked about this in a previous programme but given the recent tribunal ruling in the Adrian Chiles case where the tribunal has said you really need to step back and look at all the facts and circumstances of the case. This is another reason why just kind of advertising roles as being inside or outside of IR35 may not work because you need to do just that, take a step back and look at all the facts and circumstances of the case and, ultimately, you're going to get a more accurate picture when you've identified the individual that you want to fill that role.”

Last week Penny talked to this programme about two other aspects of IR35. One was to do with the implications of the tax tribunal’s decision in the Adrian Chiles case and how these IR35 status determination are notoriously difficult. The other is around a potential role for HR in helping to minimise various tax risks when engaging overseas contractors. Both of those programmes are available for viewing now from the Outlaw website.