HMRC has not been shy in coming forward when it doesn’t approve of IR35 status determinations made by public sector organisations. There have been persistent rumours that HMRC has been busy challenging ‘outside’ IR35 status decisions – this is where a public sector hirer has assessed an engagement and determined that IR35 does not apply.
Those rumours have now been confirmed via several stories in the contractor press, most of which stem from information published by public sector bodies in their annual reports. Of course, it is absolutely right that HMRC enforces the legislation – that is exactly what it is supposed to do. But can it be trusted when it comes to getting IR35 status decisions right?
Earlier this week it was reported that NHS Digital (NHSD) had been hit with £4.3m IR35 tax bill. It seems that HMRC disagreed with some of their status decisions and felt that employment taxes should have been deducted and paid over to the Revenue on a significant number of engagements which had been deemed ‘outside’.
NHSD is considering appealing the tax bill, and I very much hope they do because HMRC’s judgement on when IR35 does and doesn’t apply is highly questionable. In short, there is a good chance HMRC is wrong.
HMRC has issued the tax bill to NHSD against a backdrop of several defeats at the tax tribunal. There has been two such cases this week – one involving an IT contractor and the other, television presenter, Helen Fospero. In both cases the tribunal delivered firm verdicts that IR35 did not apply and key to those decisions was an absence of ‘mutuality of obligation’.
‘Mutuality’ is one aspect of IR35 which is particularly to difficult to understand and even harder to explain. But one fairly simply way of thinking about it goes as follows: is the client obliged to provide work and payment to the contractor, and is the contractor obliged to accept it?
If the computer system, which is critical to the contractors work, goes down at midday, is the contractor obliged to remain at the client premises, busying themselves by generally helping the client, or does the contractor leave the premises and only get paid for half a day? If it’s the latter, it indicates there is no mutuality of obligation and would very strongly suggest that IR35 does not apply.
At least that is one interpretation of mutuality. HMRC does not agree. Its view is that mutuality is always present in every contract as the parties are always obliged to do something for each other, even if it’s just ‘you do the work and I pay you’.
By taking this position on mutuality – an extreme position in my view – HMRC has effectively removed it as a consideration when determining IR35 status. And conveniently, has closed down one of the main routes to an ‘outside’ determination.
But time and again HMRC’s interpretation has been rubbished at tribunal, including in the two judgements this week. And this is critical because if HMRC is wrong about mutuality, and there is mounting evidence which suggests it is, then it completely undermines its opinion on IR35 status, including those which it has shared with NHSD. Incidentally, it also fatally undermines the CEST tool, as there are no questions in CEST regarding mutuality.
So, what does this mean for private sector businesses that will soon have to make notoriously difficult IR35 status determinations on each of their contractor engagements?
For twenty years private sector hiring organisations have been blissfully unaware of the Kafkaesque complexity of IR35. From April 2020, that’s going to change (although there is still hope that the legislation may be further delayed).
Assuming that the changes do come into the private sector in April 2020, UK businesses will have to make IR35 status determinations, as public sector organisations have had to do since 2017. Many are likely to find themselves facing the same dilemma as NHSD.
And these businesses can take as much care as possible, and even use the flawed CEST tool, as NHSD did, but still HMRC could come along, disagree with their determinations and hit them with a big bill. Businesses will then be left with an unenviable choice: either defy the all-powerful Revenue or stick to their guns and defend their status decisions.
My advice, for what it’s worth, would be don’t go down without a fight. The growing list of tribunal loses should make any business question the veracity of HMRC’s opinion. Just because HMRC says IR35 applies, don’t make it so. NHS Digital has an opportunity to blaze a trail and stand up to HMRC. The private sector will be watching with great interest.