What is an IR35 Status Assessment Actually For?
Contractors. Please try to contain yourselves when I share that this blog is the first in a mini-series I will be publishing about IR35 status assessments. You may have read my views in Put Away Your Umbrellas about the wisdom of you executing robust assessments for your engagements from April 2023. You will of course only need the assessment and its outcome if you ARE going to operate outside IR35. If you operate inside, you may have conducted an assessment to conclude you need to, but you won’t need any fancy reports or to refer to it, because Off Payroll Working Rules won’t apply. So let’s focus our thoughts purely on the aspiration to operate outside IR35. In that context, what’s the true role of an IR35 assessment? It’s possibly widely misunderstood.
Let’s start by ensuring you understand, in a dispute with HMRC, what an IR35 tribunal aims to do. It aims to establish what the contractual relationship would be with worker and client if there were no limited company or other intermediaries and simply a contract between worker and client; would it be a contract of service akin to a contract of employment, or a contract for services akin to a supplier, customer relationship, and outside IR35? To do this, it scrutinises the various contracts in place for a given engagement between all involved parties in a chain, and combines this with the pertinent facts it can establish about actual working practices and the true relationship. It relates this to the known differentiators of the two types of contract and of course calls upon and references precedent in case law, in order to draw its conclusions. It does not run the facts through an IR35 status assessment tool.
Why is all of this important? Well, an IR35 assessment is not a contract. Nor are its responses guaranteed to be reflected in reality once work gets under way, either because responses were knowingly fabricated, or simply because the best intentions turned out not to be true in reality. So, an IR35 assessment actually contributes little or nothing in a dispute with HMRC, beyond a demonstration of intent at the outset. Many gasped with consternation at the alleged HMRC get-out clause when ‘HMRC will stand by all determinations given by the tool, as long as the information you give remains accurate’, was added at the top of HMRC’s Check Employment Status for Tax, or CEST tool. They of course HAVE to include the condition that responses reflect reality. It isn’t quite sufficient to intend to obey the law if you then… err… don’t. What this means is that CEST carries no more weight than any other assessment process out there, and arguably carries substantially less. More on that later.
So, what’s the point of an IR35 assessment in advance of an engagement, you may ask with an enormous shrug? Well, different experts may have differing opinions on this. Here’s mine. Firstly, it’s an incredibly important joint statement of intent between you and your client. You should share the content and outcome with your client in my view. From April 2023, they aren’t obliged to sign it, but if they don’t object to any content, it’s an indication of alignment and something you can refer to if you’re asked to deliver some work that you believe is contrary to it, for example, formal line management. This means it’s important that your status determination statement is detailed, transparent and referenceable. You don’t get anything like that from HMRC’s CEST, by the way. You don’t even get a report. You don’t get a transparent explanation of the outcome and you don’t get to know why each question was asked or what difference they make, at least for the majority of questions. So that’s my ‘firstly’. Set out your intent and use it to help parties stick to that intent throughout the engagement.
Secondly, it’s important that said intent IS actually aligned with your contract. Perhaps stating the obvious here, but stating the intent isn’t quite sufficient if you can’t be extremely confident that were that intent to be reflected in reality, you would not be defeated by HMRC in a dispute. In other words, you NEED the robust logic that concludes with the level of precision reasonably possible, your IR35 status outcome. Unfortunately, CEST again falls woefully short. It asks some questions that have little or no relevance to the distinction between a contract of service and a contract for services. It also asks insufficiently targeted questions to robustly establish the intent around key status drivers, including financial risk and being in business on your own account, and mutuality of obligation. So, secondly, you NEED to utilise the robust logic in an assessment tool to legitimise and validate your intent.
Thirdly, it is actually a great checklist for ensuring there are no contract clauses that contradict it and that the requisite contract clauses are in place to reflect it. For example, if you stated in your assessment that you have a right of substitution and that the client has no right to reject the process, you need that to be reflected in the contract. If you stated in your assessment that you will have no line management and employee appraisal responsibility, you should ensure the contract does not state or infer that you will. It won’t be enough on its own to ensure contracts are solid, and you can take a look at various gotchas in that regard that we’ve published in Outside IR35 Contracts Advice.
Fourth, whilst considering what purpose an IR35 assessment might serve, perhaps we should also consider what it does NOT and CANNOT do. The conclusion in any IR35 status assessment is never absolute even if responses are seemingly borne out in reality. It’s an assessment with an inherent degree of subjectivity, simply because every engagement is unique. There is one driver that is as close to absolute as it gets, and that’s the right of substitution. If HMRC can find no cracks in your right of substitution or capability and intent to execute it should the need arise, you are outside IR35 pretty much irrespective of any other factors. It’s why the 34square assessment is uniquely combined with some very special capabilities that can render a right of substitution essentially unbreakable. More about that in Even Stronger Than the 10 Out of 10 Cases HMRC Lost... and Watertight Substitution. You SHOULD ensure in the rest of your contract and other engagement attributes, that there aren’t any obvious indicators of an employment relationship. Such indicators would likely arm HMRC with a route to destroy your right of substitution in any case. In other words, you’d have cracked your potentially unbreakable right of substitution in an unfortunate own-goal.
In sharing my fourth reason to perform an assessment, I've described what it can't do. It can't fully protect you. It isn't absolute. BUT... if you’ve used a robust tool, and most of them ARE essentially sound, not including CEST, it should at least provide substantial reassurance and peace of mind for you. It's an insurance policy. It won't stop your house being burgled or burnt down, but it will limit the net damage and stop you having to worry about it. If you do nothing in terms of an assessment and simply embark upon an outside IR35 engagement, you have a risk of a HMRC dispute and defeat hanging over you, having done nothing material to mitigate the risks. Given the effort is minimal and the cost is negligible, especially with 34square, why would you not?
Finally number five and possibly most critical, if you are fallen upon by HMRC for initial scrutiny, they are more likely to be deterred at the outset by a robust assessment and firm evidence that you have endeavoured to be compliant, than they are by the total absence of an assessment. Clearly the sooner in the process that HMRC are deterred, the better. You reduce to a minimum the level of disruption and work required to respond, and remove the prospect of eventual defeat at the earliest possible juncture. HMRC takes a risk-based approach in targeting disputes, which means they only pursue the ones they believe they have some chance of winning. Make sure they know they won't, right away.
In my next installment, I’ll talk about what you should look for in an IR35 status assessment process to maximise that reassurance. I may unapologetically mention how our assessment tool delivers that reassurance with gusto.