When advice to avoid IR35 is no longer sacrosanct

The Supreme Court has handed down a judgement that has major implications for limited company contractors seeking advice and representation in relation to IR35, writes Martyn Valentine, founder of employment status advisory The Law Place.

The judgement, in the case of Prudential plc V Special Commissioner of Income Tax, provides HM Revenue & Customs with additional weaponry to target such taxpayers, because it rejects the argument that Legal Professional Privilege should attach to legal advice given by non-lawyers.

When LPP applies

Legal Professional Privilege (LPP) is an ancient common law right protecting clients of lawyers, not accountants giving tax advice, from disclosure of correspondence to the court and applies where the dominant purpose of the advice is in connection with litigation or in anticipation of litigation.

Although the judgment doesn't change LPP, it provides clarification for professional contractors facing the prospect of an HM Revenue & Customs enquiry, particularly for those contractors who are concerned about the ‘IR35 risk’ of a new engagement.

HMRC can now see what your insurer/accountant advised you regarding IR35

As the law stands, HMRC can only be refused access to documents under Schedule 36 of the Finance Act 2008 (which superseded Section 20 Taxes Management Act 1970) where such documents set out legal advice given by a legal professional to a client, i.e. LPP.  So in theory, HM Revenue & Customs may be entitled to receive copies of written legal advice given by an accountant or insurer to a taxpayer client, as LPP doesn't apply.

LPP covers CIS contract reviews for IR35

In the context of IR35 and the Construction Industry Scheme, a contract review is within the scope of LPP as the advice given is in anticipation of litigation, i.e. the risk of HMRC deciding that an engagement is caught by the IR35 legislation and the client liable to pay more tax.

Know the risks of using a non-legal advisor for IR35 guidance

But the protection afforded by LPP only applies, of course, where the adviser is legally qualified. Conversely, where the adviser is not a lawyer, HMRC can demand disclosure of all advice notes, contract reviews and attendance notes. Therefore the main concern from a contractor's point of view is lack of confidentiality in the event of an IR35 enquiry if an accountant or insurer is providing them with representation.

This could result in potentially incriminating evidence being disclosed to HMRC which may adversely affect the outcome of an IR35 enquiry and give rise to yet more expense. This means that limited company contractors may need to exercise restraint in seeking IR35 and employment status advice from accountants and insurers, where their advice would be outside the scope of LPP. It will be interesting to see how accountants and insurance providers offering IR35 advice propose to deal with this.

As IR35 and employment status are exclusively matters of law, I strongly recommend that limited company contractors with concerns over their status seek legal advice. Moreover, while the question of whether clients of accountants should receive the protection of LPP is a matter for Parliament to decide in the future, any change seems unlikely bearing in mind the volume of former lawyers in Parliament.

Meanwhile, a further issue is the practice - even continued by IR35 ‘experts’ in LinkedIn discussions – of claiming that a contract is outside IR35 or certified outside IR35 by a trade body. As case law demonstrates, a carefully drafted contract is useless unless it precisely mirrors the working practices. This practice seems to be a cause of complacency among some contractors with potentially expensive consequences.

Editor's Note: Right to reply: Why status experts are still the best bet for IR35 advice