April 25, 2023

Off-payroll working – the imaginary world of “hypothetical contracts”

Navigating HMRC’s employment status rules can be a trip into the unknown.

It sounds simple. Determining whether the off-payroll working rules apply to a contractual arrangement needs just one question to be answered. What is the deemed employment status of the freelance worker with the end client?

Unfortunately, the approach taken by HMRC to answer this question is anything but simple. Bewildering would be a more accurate description. That’s because HMRC transports you to an imaginary world where the true and legal contractual relationship is ignored. Instead, deemed employment is assessed based on what it calls a “hypothetical contract”.

This assumes the freelance worker is engaged directly with the business. It disregards the freelance worker’s personal service company (PSC) and any agencies or third-part intermediaries that may be involved. In HMRC’s world, whether the engagement is considered employment or self-employment comes down purely to the relationship between the freelance worker and the end client.

If employment status wasn’t already a complex and contentious area, the introduction of a hypothetical contract has taken it to a new level.

Building a case

It’s therefore not surprising there is considerable case law precedence for employment status disputes. Determining whether a contractual relationship is self-employment (a contract for service) or employment (a contract of service) requires all parties, including HMRC, to have detailed knowledge of the rules and previous legal disputes.

But even with that know-how, the process can be very difficult and where disagreement persists, the only way to resolve disputes is through a legal tribunal process. That can be a tortuous process. It’s not uncommon for disputed cases to drag on for over three years; a costly exercise in terms of time and money, particularly if the case is ultimately lost and a settlement has to be paid to HMRC.

So, how can that be avoided? It’s vital to understand the process HMRC goes through when looking at employment status; the hypothetical contract and the deemed employment relationship under IR35.

There are three distinct areas of focus for HMRC. We refer to these as the three planks approach with which HMRC must build a bridge. If HMRC is to succeed in making its case, all three planks have to be in place. If one or more planks is missing, the bridge - HMRC’s case - cannot be made and the contractual arrangement will fall outside of employment status and IR35.

  • Plank One – “personal service”
  • Plank Two – “right of sufficient control”
  • Plank Three – “any other factors consistent with employment”

We’ll explain more about the three planks in a later article. The objective is to ensure HMRC is unable to construct its bridge in the first place. Alternatively, you can dismantle a bridge HMRC believes it has constructed. That depends on the strength of the case you present and the quality of the audit trail you provide when HMRC investigates.

That’s what IR35 App (www.ir35app.co.uk) can do for you.

Defence mechanism

IR35 App helps ensure you have the right documentation and audit trail in place that will proactively discourage HMRC from pursuing its investigation because it is unable to lay down the three planks it needs to launch its attack.

No off-payroll working cases have yet been taken to tribunal. That’s largely because the rules have only been introduced into the private sector relatively recently.

The only IR35 cases that have so far proceeded to tribunal have involved PSCs, which have legal responsibility to consider whether a deemed employment exists and, if so, deduct PAYE and National Insurance contributions. But these cases were still based on the ‘three planks’ criteria.

Cases have included high profile celebrities Adrian Chiles, Eammon Andrews and Lorraine Kelly. Most recently, HMRC lost a £4.9m IR35 case against Gary Lineker their first attempt at challenging a partnership under IR35 . Here the tribunal rejected HMRC’s claim on a technical point regarding the partnership contractual relationship with the BBC and BT Sport.

Whether chasing celebrities or everyday businesses, the off-payroll working rules will continue to give HMRC license to seek potentially large sums of money to boost the Exchequer’s coffers.

Help at hand

Inspired Employer Solutions Ltd (IESL) has developed IR35 App (www.ir35app.co.uk), a first-to-market solution to help businesses navigate the complexities of IR35 and off-payroll working regulation. The web-based app delivers bespoke and comprehensive support to put in place the best possible defence for your business and make HMRC think twice before challenging your contractual arrangements.

IR35 App is designed and supported by IESL’s specialist team. Geoff Heron and Adrian Williams, IESL’s directors, are former HMRC investigators and senior managers with a Big Four accountancy firm. They are joined by Steve Gretton, a former employment status inspector who formerly spearheaded IR35 investigations at HMRC. We are confident that no Big Four firm or other accountancy practice can provide the same expertise and knowledge as the team at IESL.

IR35 App is not available as an off-the-shelf package, as we believe it’s imperative that decision-makers get the opportunity to see and understand the benefits and value it offers before pressing ahead.

In a face-to-face meeting, Adrian and Geoff will demonstrate the app, explain the support and extras that come with it, and answer any questions.

To find out more, contact Adrian or Geoff via the link at www.ir35app.co.uk.