What are contractor blanket decisions and why do companies use them?

From April 2021, reforms to the private sector will be set in motion to match the off-payroll working rules already being used in the public sector. This will mean that medium and large sized end clients engaging with contractors will be responsible for deciding the IR35 status of every engagement.

Currently, contractors are responsible for determining the status themselves until April 2021 (and indeed will continue to do so if engaged by a small company as defined by the Companies Act). 

What is a blanket decision?

Where IR35 is discussed, the terms ‘blanket decision’, ‘blanket ruling’ or ‘blanket assessment’ are often mentioned.

A blanket decision can mean two things. Firstly, an end client making the decision to stop using contractors who work through a limited company. The second meaning involves taking a blanket view, where for all contractors providing the same service, the end client treats their IR35 assessments in the same way, without personalising the status to each individual’s circumstances.

Are blanket decisions legally allowed?

HMRC have stated in their Employment status manual at ESM10014 that making a blanket ruling for every contractor providing their services through their company would not constitute taking reasonable care. Companies working with contractors have to prove they’ve taken reasonable care when making an IR35 assessment. That means taking a personalised approach and looking case by case at the working arrangements of contractors.

In certain circumstances, where a group of people have the same role or the same contractual terms, a collective IR35 status may be allowed by HMRC. For such a determination to be reasonable, contractors would need to be working under the same terms and conditions.

A blanket decision not to use contractors entirely is not covered by the legislation (as the legislation would not be in play).  While this may seem initially appealing to some end client businesses, the reality is that they may struggle to find the resources they need if they cut out the contractor market in this way.

Why are IR35 blanket decisions used? 

Taking a blanket approach can be an attractive option for end clients. If they stop engaging with Personal Service Company (PSC) contractors altogether, it removes the need to make a decision on IR35 status.

For larger companies who hire hundreds, or even thousands of contractors, individually assessing the IR35 status of each contractor is a large administrative burden and requires a strong understanding of the subject.

To do this, extra resources would be needed, either in house or through a third party, at a potentially large expense. If a firm engages with 5000 contractors, they might need to hire a new team of staff to solely work on carrying out individual IR35 assessments. From a business point of view, this might not seem like a feasible or cost-effective option.

In short, some end clients make blanket decisions because they think it’s the easiest, safest and financially the best option for their business.

The need to ensure a robust decision-making process as well as the need to handle any appeals against IR35 status decisions, contribute toward businesses deciding to side step the entire process by ending the use of IR35 contractors.

Issues with blanket decisions

 The main issue with IR35 blanket decisions is that the one size fits all approach only works if everyone is the same size which isn’t always the case with contractors.

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 review, but in reality, the client and the contractor may only have sight of the contract they are party to. 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 involved in will be the actual working practices.

As a consequence, this can mean that the person making the status decision may not have day to day responsibility for the contractor or even any personal understanding of how the contractor’s service is provided in reality. The issue here is that it isn’t always clear what the end client will base their decision on.

The consequences of blanket decisions for contractors

Blanket decisions, as mentioned above, can mean no longer engaging directly with PSC contractors and instead mean working with contractors using a Pay As You Earn (PAYE) model which is traditionally done through an umbrella company. Alternatively, some end clients could offer contractors permanent employee contracts or fixed-term contracts.

If a contractor can negotiate a PAYE role with an increase in rate per hour, to compensate for the financial loss of no longer working through their own limited company, as well as employee benefits, the consequence of a blanket decision could be positive.

Unfortunately however, in a lot of situations, blanket decisions can have a negative impact on those genuine contractors who are working outside of IR35. If they’re forced to work inside IR35, they’ll face a cut in their take home pay, without gaining any benefits.

Many contractors choose to contract for the flexibility and autonomy it provides, so going down a PAYE route might be an unappealing last resort.

The consequences of blanket decisions for end clients

For end clients, a key benefit of making blanket status decisions is the reduction in the cost it would take to carry out individual reviews.

Not just for the contractors, but for the end clients themselves, blanket decisions can have a negative impact. If contractors are not happy with the alternative ways of working they’re offered, they’re likely to look for contracts elsewhere which could mean a big loss in talent and specialised skills that are difficult for clients to replace.

As we have noted above, HMRC expect reasonable care to be taken in the IR35 status decision and have specifically warned of the penalty for taking blanket decisions in ESM10014:

“If the client has not taken reasonable care then responsibility for the deduction of tax, NICs and apprenticeship levy and paying these to HMRC is the client’s. This is the case even if another party has already made deductions in line with the original determination”.

Finally, 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 which could have legal implications for end clients.

Caunce O’Hara offer a range of IR35-based insurances and an IR35 Contract Review service. Through our partners at Markel Tax we can also offer you expert advice regarding IR35 taxation.

For further information please call 0333 321 1403.

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Sources:

Markel Tax, Senior Tax Consultant, David Geldard

https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10014

https://www.gov.uk/income-tax/how-you-pay-income-tax

https://www.gov.uk/government/publications/off-payroll-working-rules-communication-resources/know-the-facts-for-contractors-off-payroll-working-rules-ir35#clients-cannot-apply-a-blanket-rule-across-all-contractors

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Find out more in our IR35 Hub

Contractors’ Guide to IR35 – downloadable resource