Contractors’ Questions: How can contractors get a client to reverse an IR35 blanket decision?

Contractor’s Question: I’d like to know if contractors can aid the process of getting a client-company to reconsider their blanket approach to IR35 determinations. I know agencies play a role but ought us contractors get involved too?

I did see some research saying that blanket approaches are being reversed or overturned by recruiters a bit more than a year or so ago. But is there a correlation between client size and likelihood of blanketing? And where can umbrellas fit in here, if at all?

Expert’s Answer: Firstly, as to whether contractors can aid the process of a blanketing review, the answer depends mostly on the risk appetite of the client.

We’d say the contractor can be involved in the process of determining status, and has the right to formally challenge a Status Determination Statement once one has been issued.

Though where a role is clearly advertised as ‘inside IR35’, there is very little that the contractor will be able to do to persuade the client to change their opinion. The role has been advertised as such for a reason!

‘We’ve got it right already, thanks’

In our experience, it’s not always easy to get a client to change IR35 status or implement changes to a contract. A lot of recruiters/clients are convinced they have it right already, or have sought tax advice elsewhere and therefore do not appreciate any further input into the matter.

Defeating the (legislative) point

So it’s not really the case that contractors can usually do much when up against a blanketing end-client. The whole purpose of the April 6th 2017 and April 6 2021 frameworks is to increase compliance through shifting the responsibilities and liabilities upstream -- which means moving away from the contractor. Though contractors are likely to have more experience with IR35, it shouldn’t be left up to them to educate their clients.

Having said that, we encourage open and honest discussions about status and working practices. This could be a part of negotiating between the contractor and the client, though as mentioned previously, a lot of roles are advertised as either ‘inside’ or ‘outside’ at the outset, which leaves no room for movement. Unfortunately, the contractor rarely has the leverage they need to re-negotiate working practices and contractual terms.

Blanket reversals; why do they happen?

As to blanket approaches being reversed by recruiters, we’d say that there will be a number of factors which have driven the change.

We suspect that lack of talent is the main one increasing the willingness of organisations to re-think IR35. Whether IR35 exists or not, clients will need consultants, specialists and experienced workers to undertake short-term assignments and projects. If a blanket ‘inside’ IR35 policy is pushing away the workers they need, of course the end-user is going to have to reconsider their approach to stay competitive in an ever-increasingly variable market.

One thing to note is that blanket inside IR35 decisions are not examples of “reasonable care.” HMRC makes this point clear at ESM10014. Instead, IR35 must be considered on a case-by-case basis. That said, it’s impossible to imagine a scenario where HMRC query an ‘inside’ determination!

The larger they are, the more risk-averse and blankety they come…

In terms of the correlation you enquire about, logically, the bigger clients will have a much bigger liability on their hands should they be found to be non-compliant with the off-payroll rules. This could potentially encourage an organisation to issue blanket ‘inside’ determinations, or blanket PSC bans. 

A larger client is more likely to utilise a high volume of contractors. The sheer amount of admin and time necessary to review contracts and working practices (in order to issue a SDS) may also be to blame for the tendency to use a blanket approach.

The industry in which a client operates also is important. The reputational damage of being fined by HMRC for not complying with tax legislation would be a lot more disastrous in highly regulated industries.

Umbrella companies, blanketing and ‘square one’

Finally, you ask about umbrella companies.  Blanket inside decisions have led to the increased usage of umbrella companies. Umbrella companies do work well for a number of workers, however not all umbrellas operate the same, and compliance isn’t regulated across the industry. Also, contractors can find it more difficult to grasp the concept of how an umbrella company operates compared to the PSC set up.

Umbrellas will typically provide much lower income to the worker than contracting through a PSC whose contracts are treated as outside IR35, which will put off a great number of freelance specialists. While we have seen a lot of people have no other option but to take umbrella assignments, we’re seeing a significant proportion of the workforce outright refuse to go through umbrella companies. This again feeds back into the lack of talent or a saturated pool of individuals from which to choose, and leads back to ‘square one’ -- where the client requires the use of a limited company contractor  on an outside IR35 basis.

The expert was Nikola Nowak, a tax consultant at Markel.