Why the IR35 'blanketing' row misses the point

The master of word play, Lewis Carroll, would have enjoyed the semantic row that has broken out between HMRC and its critics over IR35 ‘blanketing,’ writes Roger Sinclair, legal consultant at egos Ltd.

“When I  use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”[1]

Today, almost 150 years since Carroll penned those words in Through the Looking-Glass, the master is the tax authority. Or at the very least, HMRC and Humpty Dumpty appear to have similar views.

But arguing the niceties of the meaning of ‘blanketing’ -- a word that before last year’s IR35 rules was not even uttered in the public sector but which is now as common in contractor parlance as ‘IR35’ itself, rather misses the point.

Past, proper, PAYE

After all, it is the Revenue which has been all too ready to tell us in the past that an IR35 (therefore a Chapter 10 of Part 2 of Income Tax Earnings and Pensions Act 2003) decision can only be properly made on a case-by-case basis, taking into account the working arrangements, and having regard to the contracts (i.e. all contracts) in the chain.

It therefore follows that, seemingly contrary to what the department told the May IR35 Forum, an IR35 status decision made other than on a case-by-case basis is not properly made.

And yes, there is a ‘reasonable care’ obligation in Chapter 10. But this obligation is only set one-way. In fact, when you look at the legislation, the only sanction is on an engager who fails to take  ‘reasonable care’ and issues an ‘outside’ IR35 decision (not an ‘inside’ one). In this case of an ‘outside’ IR5 decision arrived at without reasonable care, liability to operate PAYE shifts up to the engager.

'Serious injustice'

But note, there is no corresponding sanction (i.e. no obligation to repay PAYE wrongly operated) where there is failure to take ‘reasonable care’ and an ‘inside’ IR35 decision is improperly issued.

This is a serious injustice in the Chapter 10 legislation as it stands in relation to the public sector, and which may be extended in due course to the private sector.

Currently in the latter, where IR35 is engaged, the individual operating the PSC has the responsibility of making the inside/outside IR35 decision. If inside is their decision, they must pay up. Should HMRC disagree with that decision, the tribunals are there to resolve the issue.

But with Chapter 10, we have HMRC – not parliament – making the rules, and embedding their own interpretation of the law (interpretations that are increasingly challenged). They make this interpretation by choosing which questions CEST should pose and in their simplistic guidance notes on using the tool. Then, in that process, they seek to redefine the law as to what the relationships of employment actually means. One needs only look at the guidance notes in relation to Substitution, or vainly seek mention of the fundamental issue of Mutuality of Obligation to grasp this point.

And if, as undoubtedly happens, the engager, misled by HMRC’s CEST tool or the department’s May IR35 Forum ‘guidance’ on blanketing, incorrectly makes an ‘inside’ decision, the person bearing the ultimate burden of the tax has no remedy. That’s the case even if it can be demonstrated that ‘reasonable care’ was taken!

Unraveling HMRC's 'Reasonable Care' claim

As to the Revenue’s current stance on ‘reasonable care,’ HMRC told the May IR35 Forum:

“Treating people in the same factual position in the same way meets the statutory obligation to use reasonable care.”

Sorry, but that is precisely what it does not do.

Let’s turn it on its head. Let us suppose that an engager wrongly took an ‘outside’ decision and that HMRC then successfully challenged that decision, on the basis that ‘reasonable care’ had not been taken.

Let us also suppose that, meanwhile, the engager had ‘copied and pasted’ that decision for 100 other contractors. Could the engager reasonably expect to get away with saying the following to HMRC? ‘Well, we simply treated these 100 contractors in the same way, so at least we exercised reasonable care for them, even if not for the first.’

Somehow I don’t think so. And I suspect that HMRC would be the first to argue that each decision must be taken -- and taken correctly -- on its own merits, and without simply using blanket reliance on previous decisions made by the same engager.

You couldn't make it up

So as you can hopefully see, arguing the niceties of what blanketing means should probably be lower down the list of lobbyists' concerns about the Chapter 10 legislation. With the consultation which proposes its extension to the private sector still open, lobbyists still have time to point out that it appears inequitable for a framework to contain the threat of a penalty for engagers who fail to take reasonable care in determining an assignment to be free from the legislation, but contain no threat of penalty for engagers who err and wrongly determine an assignment to be caught by the legislation. ‘Unfair’ doesn’t really cover it. ‘Injustice’ comes much closer. Regardless, it all at least smacks of a rather strange, parallel world straight out of Charles L. Dodgson’s most famous novel.

[1] Lewis Carroll (Charles L. Dodgson), Through the Looking-Glass, And What Alice Found There, chapter 6, p. 205 (1934). First published in 1872.