Osbourne Budget – IR35 Targeted Again!

I thought you may be interested in this story I found on MSN regarding IR35: Budget to close tax loophole which disguises employees as freelancers:  http://bit.ly/1RZho2f

Unfortunately, I was unable to contact Sam Lister ahead of posting this blog.  I will continue to try and get in touch with Sam at the Press Association so that I can update this blog as necessary, but my initial comments follow:

“Sources” can be saucy, especially pre-budget!

1. 90% of earners do not comply?  Is there real evidence of this?  On what basis?  As a former Inspector of Taxes and now a Chartered Accountant, I can truly say in my opinion HMRC do not (for perhaps understandable reasons) empathise with small business.

2. Depending upon the wording of this new legislation, it seems likely that state-backed organisations will be naturally risk averse and so deduct tax at source.  Sounds good?  Except then the individual earner will be having to pay taxes out of post-tax income.  How will this affect the economics related to (say) an independent worker who is expected to travel from job to job (at their own expense) whilst not being paid in the interval between jobs?

3. Will the “deemed employee” automatically get the same rights to employment protection/pension etc?  if not, how is this fairer?  If they do, will it cost more?  If not, how is the new arrangement “fairer”?

4.  The distinction between “Employed” and “Self-Employed” is complex.  It is not a clear line.  It never has been simple as case law has shown over many years.  The Chancellor may try to define it on one sheet of paper – but I fear he will fail, and/or create a mindless tick box bureaucracy which restricts business innovation.  Does a Government really wish to discriminate against independent small business?  They are not all “rich BBC Fat cats”!

5.  Why should there be different rules for “state” organisations vis a vis the private sector?  Should there not be a single law for all?

6.  Paying the “right” amount of tax under the law is surely correct.  The rules and rates though are a matter of policy and should be subject of thought and debate.

Example; An independent computer programmer with a project to help develop systems for a large corporation earning say £60,000 a year will face a marginal tax rate of 42% (income tax plus NIC).  The large corporation on the other hand would face a tax rate of 20% whether it earned £60,000, £60m or £600m.  The tax rate for the large corporation is down from 30% less than 10 years ago.  Fairness and where best to invest scarce HMRC resources are questions which may be coloured in the eye of the beholder.

The proposed rules seem to be designed to hinder certain small businesses from operating as limited companies.  Is it good policy to hamper independent commercial choice?

7.  If the independent earners did operate as a limited company, the earners would still have to pay extra tax to extract any money for their own use.  If they are genuinely independent, what is the “abuse”?

8.  If there is a genuine lack of compliance with existing rules, would it not be more efficient to employ more HMRC staff to police them, rather than adding another set of bureaucratic and complex rules?

A properly informed debate would be useful.  Anyone wishing to contribute to this debate, please leave a comment below.

Refreshing look at Employment Status – Slush Puppie Ltd (TC2042)

Mr Sandford was a service engineer for Slush Puppie Limited (SPL).  From 2001 to March 2007 the individual had always considered himself to be self-employed and paid tax on that basis.

However; when his engagement ceased, the individual’s tax agents reviewed the situation and concluded that they believed he had been an employee of the company.

As a result they informed HMRC and sought a refund of self-assessment tax paid, suggesting SPL should be liable.

After a review of the facts HMRC accepted this view. They subsequently issued SPL with a notice that ruled Mr Sandford was an ‘employed earner’ and as result SPL were liable for income tax and Class 1 NICs.

SPL appealed.

The tribunal looked at several of the key indicators and found on balance Mr Sandford was self-employed.

Below are some of the key points which the tribunal felt indicated self-employment:

  • He was free to take on business from elsewhere and was able, having accepted a job, to find someone else to do it.
  • SPL’s supervision and control of his work was restricted to ensuring he complied with legal obligations
  • The use of a daily rate of pay was ‘a strong indicator’ that matters were based on a daily contract.  The fact that monthly invoices were raised for convenience did not alter this fact.
  • The lack of redundancy rights or other employment protection meant Mr Sandford shouldered financial risk.
  • The fact ‘that no substantial risks materialised in the course of five years is no indication that they did not exist potentially’.

The case does, however, highlight the importance of taking advice in this area as the company could have been liable for the tax due through PAYE should the tribunal have found that he was employed.

Employment Status – Umbrella Contracts and Illegal Performance – Quashie v Stringfellows Restaurants Ltd

Contracts

Contracts (Photo credit: NoMouse)

A recent Employment Appeal Tribunal case was of interest for tax purposes as it considered whether an individual was employed or self-employed in fairly unusual circumstances, as well as a related legal point on whether illegality in reporting the income from the engagement could prevent a claim being made in relation to the contract.

 The case concerned Ms Quashie, who had worked as a dancer at Stringfellows from June 2007.  An interesting element of the case concerns the fact that the dancers were not paid by the the club, but actually paid the club to be able to work there.

 The tribunal considered whether the elements of control and mutual obligation still created an overarching “umbrella” contract of employment despite this.

 The key factors appeared to be the requirement for dancers to turn up if they were rostered to appear, and a requirement to attend team meetings every Thursday morning.  Fines were levied for failures to attend in these circumstances.

 Based on these factors, the tribunal found that there was an employment contract which covered the full period of her engagement.

 A further interesting aspect of the case related to illegality.  Ms Quashie had completed tax returns on the basis that she was self-employed and had claimed a number of expenses which the tribunal believed had been misrepresented.  These included £20 per week for the use of her home, motor expenses and “depreciation and loss of profit”.

 The judge pointed out that false returns to HMRC can make the performance of a contract illegal and therefore prevent a claim being made by the taxpayer for a breach of the contract.

 The case was referred to a full employment tribunal to consider Ms Quashie’s claim for breach of contract on the basis that she was employed but direction was given for the tribunal to consider the illegal performance aspect further.

IR35 – New Tests for Personal Service Companies

IR35 TestsFollowing a review of the effectiveness of the IR35 rules, there is to be new guidance from HMRC including what is described as 12 business entity tests.

Points are allocated to each test and if a contractor scores less than 10 points there is a high chance of them being caught by IR35; if they score more than 20 points there is low risk.

 The headings for the tests are set out below:-

  • Business Premises Test
  • PII Test
  • Efficiency Test
  • Assistance Test
  • Advertising Test
  • Previous PAYE Test
  • Business Plan Test
  • Repair at Own Expense Test
  • Client Risk Test
  • Billing Test
  • Right of substitution test
  • Actual substitution Test

 For further advice regarding IR35 contact Eaves & Co on 0113 2443502

HMRC Argue for Self-Employment – T Coffey T/A Coffey Builders and Dr M Selvarajan (TC1888)

A recent First-tier Tribunal case was unusual in that HMRC were arguing for self-employment, whereas they would normally take cases to Tribunal arguing against self-employment, due to the extra National Insurance costs and less relief for expenses.

Yellow hard hat. Studio photography.

(Photo credit: Wikipedia)

Mr Coffey had been in partnership with his wife as a builder, but had retired through poor health. He claimed that he had been employed by Dr Selvarajan to supervise the refurbishment of the Doctor’s clinic.

Mr Coffey was paid a set weekly amount, regardless of hours worked. There was no written contract, no invoices were raised and there was no right of substitution.

The tribunal found that Mr Coffey had control over the building project. In the absence of a written contract, two documents were considered. The first was a document which Mr Coffey had signed which referred to him as, “principal contractor” and “planning supervisor”. The second was a note in his diary setting out the payments to contractors, which was held as evidence that Mr Coffey was in charge of these payments. Dr Selvarajan was still responsible for actually making these payments.

The tribunal also noted that there was a lack of financial risk, but that this was not “necessarily determinative”.

The Tribunal determined that Mr Coffey was self-employed, with one key indicator apparently being the fact that Mr Coffey had previously been a builder for a number of years and that he had not checked with his accountant how his new engagement would be taxable.

Whilst the outcome of this case, and the approach taken by HMRC, might be surprising, there may be some elements that could be used to build a case in favour of self-employment.

No PAYE or NIC’s: Talentcore Ltd v R & C Commrs

 HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.

The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.

Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.

The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:

 (a) Providing, or under an obligation to provide personal services; or

 (b) Subject to (or to the right of) supervision, direction or control.

The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.

 The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.

The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.

There is no Substitute…

The importance of substitution in determining employment status was again confirmed in the recent Supreme court case, Autoclenz v Belcher.  The case arose from an employment law perspective rather than taxation, however the principles will apply across the board.

Autoclenz provide car cleaning services and the case involved a number of valeters who had been engaged as self-employed workers, although it was Autoclenz that drew up the contracts.

The contracts explicitly stated that the valeters were self-employed and provided a right of substitution.  The court found that if a genuine right of substitution exists this “negates an obligation to perform work personally and is inconsistent with employee status”.  A genuine right of substitution would therefore mean the valeters had to be self-employed.

The court found however, that it is possible for the written contract to be seen
through, in cases where the way in which the parties practice is so persuasive that they show the true obligations of the parties.

In this case, the court found that there was no right of substitution in practice;
the valeters had to do the work personally and were not in fact in business on
their own account.  They were therefore found to be employees regardless of the contract.

 At Eaves and Co, Specialist Tax Advisors, we have always advised that it is best practice to ensure that the written contracts are consistent with the actual
facts and practices.  It is now more important than ever to ensure that this advice is followed.

IR35: Contractor Wins

HMRC assessed Elaine Richardson who worked via ECR Consulting Ltd for £50,000 under IR35.

The case went to tribunal where three tests were applied; mutuality of obligation, substitution and control to determine the nature of her working relationship.

In deliberating, the tribunal made the following observations about ECR:

  • It operated from a dedicated business area at her home
  • It has company a domain and website
  • It advertises its services and is a member of the Professional Contractors Group
  • There are retained reserves and invested in business development
  • Over the years ECR has taken on fixed price work for a variety of clients.

The tribunal judges concluded, “it is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation”.

From this case it is clear that IR35 is still being pursued by HMRC, and freelance arrangements must have a clear commercial trading rationale behind them.

If you have any queries about how IR35 applies to you or are thinking about going freelance, please get in touch on Leeds (0113 2443502).

Self Employed or Employed

 When deciding on whether an individual is employed or self-employed the Courts look at several ’employment indicators’.

These are used to gain an indication of an individual’s employment status.  They include the right to substitution, level of control, use of own equipment and several more.  

In a recent tribunal case it was contested as to whether a Doctor was self-employed or employed when undertaking practice work.  The tribunal found that applying these indicators proved to be inconclusive.

Both parties involved believed that the arrangement was one of self-employment and a contract was drawn up as such. The tribunal stated as the case was ‘borderline’ this should be taken into account. The taxpayers appeal was upheld and he was deemed to be self-employed.  

An individuals employment status is a complex area. If you would like advice with regard to your employment status  why not get in touch.