Off-payroll Working: the voice of reason(able care)

One unfortunate consequence of the Off-payroll legislation, or “IR35 reform” is that we have seen some companies attempting 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 enter the play to try and sell whatever it is their main business is actually trying to sell – which could be insurance, a payroll service, or consultancy based billable hours.

The opportunistic companies in the IR35 world typically operate using the following types of gambits:

1. Reasonable care provisions mean you have to use experts all the time (buy our billable hours!). This is sometimes supplemented with a blend of the next point.
2. HMRC guidelines say X, so you must do X, and we can help you do X (buy our billable hours!).
3. HMRC’s Check Employment Status for Tax (CEST) tool is a bit rubbish – therefore all tools are rubbish. Often aligned with “computers cannot replace humans” (only use our humans!).
4. Your staff are incapable – (please buy our billable hours again!).

Let’s shine some facts on some of these areas.

Reasonable care– Off-payroll versus TMA

You can get all the detail in our technical guide on reasonable care for Off-payroll, but the fact is this: the new Off-payroll legislation (Chapter 10 of ITEPA 2003) in section 61NA(2) says you have to take reasonable care in coming to the conclusion in a status determination statement, that’s all. It says nothing about what happens after that.

Further, the effect of not adhering to reasonable care, in a 61NA sense, means the client becomes the fee-payer, not the agency. That’s all. Not meeting reasonable care does not mean the tax is automatically due either – it’s possible to meet reasonable care (i.e. not be careless) and still owe the tax.

In fact, this is the case for every single IR35 case won by HMRC in the last 20 years. 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, most firms hire capable people, and they are taking sufficient steps to 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.

These are different areas 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 where any arguments in the Chapter 10 sense are likely to be based.

Sticking with TMA, the typical enquiry window for HMRC in discovery assessments is four years. This 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 on reasonable care

HMRC guidelines are not the 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 broken the law and can be fined. They are not dictators. We live in a democracy. HMRC administers the law. They do not make it. Parliament does.

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 - an area which itself is covered by statutory interpretation - and there’s more case law on that too. For Off-payroll, we aren’t in that zone. The statute is clear, and the case law on reasonable care is well-trodden ground.

The HMRC guidelines are quite good, although some of the pointers have no basis in law, and in our view, they’ve accidentally conflated Chapter 10 reasonable care with TMA carelessness. Suffice to say, statute and case law are kings on this topic. Rest assured though, that provided you do sufficient research on IR35 and take a considered view of your processes, you should easily meet the requirement for reasonable care.

You don’t need to pay someone else thousands of pounds every month on an ongoing basis to do this.

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.

At IR35 Shield we appreciate that most legal advisors have little or no experience writing computer programming code, and it’s difficult to shift the unconscious bias that surfaces when one's livelihood is under threat of automation.

The same types of arguments occurred in the accountancy profession when firms like Xero, FreeAgent, and Crunch 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.

If you are worried about the benefits (or not) of computers taking over from humans, then consider this quote from carmaker Henry Ford, who delivered the Model T to the world over 100 years ago: “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 this status work. Others prefer to stay in control – which we think 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.

In our experience, particularly with the large firms, they have in-house expertise, have conducted considerable research, and have a very good understanding of IR35 matters. They then use IR35 Shield to help automate and streamline what they are doing, having conducted due diligence and reached the comfort zone where we deliver the same verdicts on status as them.

Our role is to then keep them posted with regular updates on what we see at the coal-face of tax tribunals so they and their legal advisors can anticipate changes in the emerging law and take a risk-averse approach.

Whilst we do offer niche consultancy for firms, we find that a small retainer for three months is all they need so they can quickly access the knowledge they need whilst they are building their processes.

What should you do?

You can implement a process for Off-payroll working yourselves and meet reasonable care. 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.