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The blanket approach to IR35

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Written by Georgina Hiles
Last updated November 12, 2020

The delay in the introduction of the IR35 legislation allowed contractors and their clients extra time to prepare. It also provided the luxury of looking at decisions made by end-clients in the run up to April 2020 and use that as a guide to how the run up to April 2021 might unfold.

Engagements which were truly outside of IR35 before the change will still be outside of IR35 after the change. Or will they?

Blanket status decisions

One development we saw during the preparations for the April 2020 deadline was the use of blanket status decisions.

These were of two types: firstly, a decision to stop using IR35 contractors altogether, which is effectively a decision to remove the need to make a decision on status.

The second was a blanket view that everyone providing the same service to an end-client must be treated in the same way for IR35 purposes.

This is an attractive view to end-clients as it dramatically reduces the administrative overhead in carrying out status tests and, to be fair, in some cases it is an accurate view. However, one size fits all approaches only work if everyone is the same size!  This isn’t automatically the case with IR35 status.

There is also tension between an end-client wanting an easy status solution and a contractor wanting a personalised answer. A further issue is that it isn’t always clear what the end-client will base a decision upon.

In most cases the end-client and the contractor are separated by an agency sitting within the supply chain. This means that there are two contracts in place, one between the client and the agency (the upper contract) and one between the agency and the contractor (the lower contract).

In an ideal world both contracts would be considered in a status revie, but in reality the client and the contractor may only have sight of the contract they are party too. The detail the end-client needs is mainly within the lower contract as this details the contractor’s rights and obligations under the arrangements.

The only other information the client is party to will be the actual working practices.

In reality, the person making the status decision may not have day-to-day responsibility for the contractor or even any personal understanding of how the service is provided.

The situation becomes even more unclear where there are several contractors provided via different agencies. The key facts will differ from contractor to contractor and so, potentially, will the status.

Faced with this sort of uncertainty, and the need to ensure a robust decision making process, and the need to handle any appeals against status decisions it is unsurprising that many businesses took the decision to simply side step the entire process by ending the use of IR35 contractors.

Blanket IR35 status decision

Can blanket decision making work?

The simple answer is yes, it can. Although that simple answer isn’t much help by itself.

What end-client’s really need to know, is under what circumstances can it work and what information do they need to have access to?

Markel Tax’s view is that blanket decisions will only have any value where the contracting population can be easily segmented into groups with identical contracts and working practices.

That would probably only be the case where they are working on the same deliverables and have the same liaison point within the client project team and are contracting through the same agency.

The same liaison is a way to show that the working practices are likely to be the same across that group of contractors. If that cannot be achieved then blanket decisions are not a recommended route to follow.

The pros and cons of blanket decisions

The pros are that it will dramatically reduce the cost of reviewing subcontractor’s status after the private sector IR35 rules go live. This will be by virtue of the reduction in individual reviews carried out.

Set against this is the view taken by many that an even bigger reduction could be achieved by simply not using IR35 contractors at all. That latter option will be driven by the likelihood that existing contractors would agree to operate through other, personally less beneficial, engagement models such as umbrella company employment.

The downsides to blanket decisions are many.

Each contractor still has an individual right of appeal and may well appeal on the grounds that the decision is not personalised to their exact arrangements.

The profile of the contracting workforce may not allow the kind of segmentation that would support a blanket approach. If there are lots of individual projects each with different contracts, deliverables, skill profiles and project managers then creating groups to be reviewed as a single process is almost impossible.

Last but not least, is the fact that HMRC expect reasonable care to be taken in the status decision and have specifically warned against blanket decisions under threat of debt transfer and penalties.

Click here to read our article on IR35 Debt Transfers

Alternatives to blanket decisions

Perhaps the question shouldn’t be ‘can we use a blanket decision system?’, but ‘what are we trying to achieve by using them?’ That allows different strategies to be considered that may lead to the same benefits.

One option would be to outsource the review process. Nothing within the new legislation says that the end-client must personally carry out the review. This allows the option of using a third-party provider rather like outsourcing payroll functions.

However, the end-client is still responsible for the accuracy of the review and liable for any penalties arising due to errors. Having an expert and independent third party carry out testing minimises these risks and some may provide an insurance solution.

Under the current rules many contractors have their working arrangements reviewed for IR35 compliance and this option would be a variation on that service. It has the added benefit of having a number of existing providers with a good record in this area.

Another option might be to require the agency to do the review. They have sight of both the upper and lower contract and can check the working practices with both the contractor and the client.

To some extent they are in the perfect position within the supply chain to do this. Again, they could outsource the actual review and could seek to insure the decision. The agency as the fee payer would benefit but ultimately the end-client would have to sign off and take responsibility for the accuracy of the review process.

Having the contractor carry out a review may appear as an attractive third option but it flies in the face of the objectives of the legislation which is to separate the party making the check from the party who benefits from that decision.

We consider that HMRC would take a very close look at any such arrangements and would probably consider them as being in breach of the legislation, unless very stringent cross checks were put in place, which would defeat the original objective.

For further information, please email Georgina Hiles or contact Markel Tax on 0333 920 5708.

 


You can read up-to-date news about IR35 here


Avatar
Written by Georgina Hiles
Last updated November 12, 2020

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