OUTSIDE IR35: IF IT’S SO SIMPLE, WHY HAS NO ONE ELSE THOUGHT OF IT?

Innovation starts with a need or problem. Even that need or problem might only occur to one person or a few. Following the need, there’s likely an amassing of already available information and knowledge. This can raise other questions and challenges. After that, the research and investigation. Gathering the other 90% plus of information and knowledge. Checking and challenging existing suspicions and assumptions; finding answers to questions; preparing to assess the feasibility of one or more solutions.

Now you're ready to process your information in the selection, design and build of your solution to the need or problem, which may have evolved or changed in the process, perhaps even spawned some additional sub-needs or problems.

The original need WE identified was to provide a robust substitution capability and process for ALL freelance contractors. Perhaps that didn’t occur to most because there was and still is a widespread perception that right of substitution is just lines in a contract that will never be used. That’s not our philosophy. We see the substitution capability as enabling a contractor’s limited company to deliver like a much larger organisation, providing a benefit to the client, an assurance that the contractual obligations delivery will continue even if the main resource availability is compromised for a period of time in which a resource being present is considered vital.

The fact that HMRC will attack and dismantle right of substitution lines in a contract that have no foundation in tangible reality, to defeat you in a tribunal, is simply an added justification and amplification of the need we had identified. You need a seatbelt to stop you going through the windscreen in a crash. It also stops you from being fined for not having one.

The IR35 reforms from April 06th 2021 also created a new context for this need and some other knock-on impacts and considerations. I’m referring to the switch to medium and large private sector clients (HMRC definition here: https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients#conditions) being responsible for determining the IR35 status of engagements of contractors.

Our inherent knowledge in identifying and assessing the need came from a collective more-than-four-decades delivering services as contractors. Our subsequent quest to know everything there was to know about our chosen specialist subject includes:

• To date, over a thousand hours of research, legal and expert advice, encompassing consultation with four separate legal firms and many other industry experts.
• Meticulous qualitative and quantitative analysis of 1100 pages of case history and legal precedent from 36 tribunal cases.
• Pouring over all of the content on HMRC’s Employment Status Manual pages.
• Scores of hours of testing in HMRC’s Check Employment Status for Tax (CEST) tool and in other commercially available tools.

This quest cemented the validity of our ideas and suspicions in a number of ways:

• It is spelled out in black and white numerous times in case law precedent in the public domain, that a right of substitution, even if never used, can be a sole determinant of a legitimate outside IR35 status.
• HMRC have designed CEST in 100% support of that precedent. If you tell CEST you have an unfettered right of substitution in place, that has, would or will be correctly executed, whatever your responses to any and all of the remaining questions, you will be told at the end of your assessment that off patrol working rules (IR35) do not apply, because the client has accepted or would accept a substitute. CEST has come under a lot of criticism, especially from commercial assessment tool providers, for not always providing a conclusion and for not dealing with mutuality of obligation. But if right of substitution is in place, those criticisms are neutralised.
• Not all assessment tools give right of substitution the weight that CEST does.

We also unearthed or included other needs and problems, some of them associated directly with the reforms:

• Even with a robust substitution capability, the absence of a legal right to use it would prevent a contractor from providing the aforementioned assurance of services continuity.
• The client is obliged to produce a status determination statement (SDS).
• Failure to take reasonable care in the status determination process can expose clients to back tax, National Insurance Contributions and penalties liabilities in the case of outside IR35 engagements.
• Many clients aren’t demonstrating any appetite for the perceived risks of engaging contractors outside IR35.
• Many clients just don’t want the hassle. They just want the problem taken away.
• Many clients are unaware that there are costs and risks with inside IR35, and with the abandonment of contractors or outside IR35 engagements, including but far from limited to talent drain and its impact upon critical business change and transformation.
• Different assessment tools and processes provide inconsistent results, throwing the element of chance into a critical process that has a substantial impact on costs and livelihoods.

In addressing the needs, we did not encumber ourselves with existing tools and concepts, such as assessment models, statements of work, or alternate intermediary arrangements, none of which were solving all of the problems we had identified. Many have set out to find a way to beat IR35. Many have targeted the pure, direct client regulatory need. We set out to work WITH IR35, to use it as intended, to support legitimate engagement of contractor limited companies outside IR35 and to battle its abuse. We wanted to find a way to ensure clients could and would still work with contractors and agents in the same way they all have been doing for 20 years. Probably over a quarter of a million of them, and yet less than one tribunal victory a year for HMRC. By the way, HMRC themselves have engaged hundreds of contractors outside IR35. We also wanted clients and agents incurring no additional costs and contractor incomes not materially impacted. Inside IR35 cannot achieve this. Here’s our solution to all of the needs and problems:

• A robust contractor substitution capability, complete with legal contracts.
• A Right of Substitution Declaration between worker and client, to protect the legal right in the event it is needed, and to remove any vulnerability in a tribunal.
• A configurable SDS generation service, that incorporates all the major drivers of an outside IR35 status. We’ve included the mandated SDS Disputes process that will almost certainly never be needed where we are involved.
• Clients’ reasonable care obligation is robustly met, with attention to detail paid to the pre-assessed status determination, backed by over a thousand hours of research; with agreements signed to cement the true nature of the right of substitution, and with workflow-driven, audit-trailed and securely stored SDS for all mandated parties, with even a periodic reminder to review and re-issue.
• We’ve eliminated material risk of back tax, NIC and penalties, given its 100% alignment with CEST and case law precedent.
• We’ve removed the hassle clients face in adhering to the legislation. SDS, SDS Disputes Service and Reasonable Care all taken care of.
• There are no additional costs for agents and clients. Instead there’s a nominal contractor subscription model.

So, the question I posed at the outset was, why HAS no one else thought of it? Fairer questions upon reflection might be, why have few people:

• Made it their mission, even obsession, to simplify a seemingly complex problem and devise a solution?
• Conducted over a thousand hours of research and consultations in pursuit of that mission?
• With that foundation of acquired knowledge, been prepared to publicly challenge widely accepted principles, expert opinions, established common thinking and powerfully fuelled misconceptions?
• Taken a substantial risk, heavily investing in a solution that will only provide financial return in the long term and can only deliver that if clients, agents and contractors see the light?

When you put it like that, the unique simplicity of our solution ought to be less surprising.