Off-Payroll Tax Handbook 9781526512116, 9781526512147, 9781526512130

Citation preview

Off-Payroll Tax Handbook

Off-Payroll Tax Handbook

Kye Burchmore LLB Trinity Tax Ltd

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 41–43 Boltro Road, Haywards Heath, RH16 1BJ, UK BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2020 Copyright © BloomsburyProfessional 2020 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/opengovernment-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998-2020. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:

PB: ePDF: ePub:

978 1 52651 211 6 978 1 52651 213 0 978 1 52651 212 3

Typeset by Evolution Design and Digital Ltd (Kent) To find out more about our authors and books visit www.bloomsburyprofessional. com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

Preface Tax law is complicated and employment status is no exception. Individuals now work in a broad variety of ways, from PAYE, umbrella companies, on a self-employed basis, via their own limited companies or through agencies and it can be a difficult task to establish what is correct, who is responsible and for what. This book was written to provide the reader with clarity over the tax position of individuals who are engaged to work, but not on a company’s direct payroll. There are many misunderstandings about when an individual can be engaged on a self-employed basis (or outside IR35) and despite various government consultations and changes to legislation over the years, the law only seems to get more complicated as it evolves and adapts to the different types of working relationships. Case law plays a significant part in moulding the law on employment status and there is no substitute for reading full court judgments, but given the sheer volume of them, their length, and written form, this is an arduous task even for the most enthusiastic tax practitioner, let alone a business owner who has a company to try and run. The injustice of this grey area of law comes from the penalty regime that is attached to it. The liabilities very quickly add up and HMRC can backdate liabilities up to six years and then apply tax geared penalties and interest. This can lead to eye-watering amounts being due and what makes this really hurt is that it is a complex area of law and it is very easy to simply reach the wrong conclusion, even with the best will in the world. This handbook is structured by looking at the simple and standard self-employed engagement first, with a comprehensive review of the case law which forms the backbone of all status type challenges including IR35. It then moves on to working relationships that involve third parties such as agencies, umbrella companies and then outlines the Managed Service Company legislation along with the loopholes this closes and why. The remainder of the book focuses on the IR35 legislation, starting off with how and why the IR35 legislation was introduced before considering how it now applies to different sizes of organisations and in different sectors. The penultimate chapter takes the reader through the main IR35 cases that have reached the courts and highlights what can be taken from each case and why it was of importance. Finally, it concludes with a look at the practical issues of IR35 from handling enquiries and reviewing how individuals are engaged. When the content of this book was first devised the intention was that the public sector chapter under IR35 would be much greater, but once the draft legislation for the 2021 changes was introduced it was apparent that the public sector legislation and private sector changes would be aligned and so these chapters were consolidated to avoid considerable repetition. v

Preface To cover off a formality, whilst every effort has been made to ensure the accuracy of the contents of this book, neither the author nor the publisher can accept any responsibility for a loss arising to anyone relying on the information contained herein. Specific professional advice should always be sought where possible. Writing the first edition of a book has been rewarding but also very time consuming and with this in mind, I would like to thank my business partner, Sarah Carstens for encouraging me to commit to this book and enabling me to have the time necessary to write it. My wife Bethan, and my children: Kobi, Dylan and Maisie also deserve a special mention for listening to me when I have bored them with the details and for genuinely showing an interest in how I have been getting on, ‘how many words did you write today daddy’ – Not many, being the typical answer! A special thanks also goes to Claire McDermott and David Wright at Bloomsbury for asking me to write this book and for being absolutely fantastic throughout and a pleasure to work with, I am very grateful for their assistance to date. Last of all, I would like to dedicate this to the loving memory of Denise Burchmore, who truly did have a heart of gold and showed that when life gives you lemons, store them all in your cupboard so you can make lemonade one day. The law is stated as at April 2020. Kye Burchmore May 2020

vi

Contents Preface v Table of Statutes  xiii Table of Statutory Instruments  xv Table of Cases  xvii Chapter 1  Outline and Recent Developments  1 Background – Employment status  1 Mutuality of obligation  3 Personal service  4 Control 5 All other factors  7 The rise of personal service companies  7 Agencies paying people ‘off payroll’  8 Recent developments  9 IR35 public sector  9 IR35 private sector  10 IR35 case law  11 Employment status  12 Umbrella companies  13 Chapter 2  Employment Status  15 Legislation and case law  16 Background 17 The main employment status tests  17 Difficulties with employment status  20 Hierarchy of the courts  22 Ready Mixed Concrete 23 Control 25 The importance of control  25 Sufficient degree of control  29 Who controls the individuals?  31 The different aspects of control  31 Mutuality of obligation  36 Is mutuality of obligation important?  37 What is meant by mutuality of obligation?  40 Mutuality of obligation ‘within’ a contract  47 Mutuality of obligation in IR35 cases  50 Notice periods  52 Summary on mutuality of obligation  52 Personal service  53 The ‘right’ of substitution  55 Right to assign  55 Too fettered  56 Substitution clauses in contracts  58 Sham contract  59 vii

Contents Factors that are inconsistent and ‘in business’ test  61 The intention of the parties  63 Myths and misunderstandings  64 They have a UTR so must be self-employed!  65 They submit invoices  65 They work for other people  65 They provide their own equipment and/or materials  65 They work five days a week most of the year so must be employees  66 Once they have worked for three months (or two years) they have to be put on PAYE  66 They work alongside another employee so can’t be self-employed  66 The future  67 Legislation change?  68 How do other countries deal with status?  69 Moving forward  69 Chapter 3  Agency Workers  71 Background 72 Self-employment 72 IR35 73 PAYE 73 Self-employment 74 The old version of the agency legislation  74 The 2014 legislation  76 Personal service  77 When is a company an agency?  77 Control 78 What constitutes employment income?  84 Liability and fraudulent documentation  85 Excluded services  86 Anti-avoidance 86 Reporting 87 Expion Silverstone case  88 Personal service companies (PSC)  89 IR35 90 IR35 – Public sector agency work  91 IR35 – Private sector agency work  91 PAYE self-employed hybrid  92 Statement of works/contracting out  93 Chapter 4  Umbrella Companies  95 Background 95 How and why does an umbrella company work?  97 Where did it start to go wrong?  101 2016 – change to expenses for intermediaries  103 Expenses for PSCs  104 Transfer of liabilities  105 Fraudulent information  106 viii

Contents Chapter 5  Managed Service Companies  107 Background 108 How the MSC rules work  110 ITEPA 2003, s 61B(1)(a)  112 ITEPA 2003, s 61B(1)(b)  112 ITEPA 2003, s 61B(1)(c)  112 Managed service company provider  114 Carrying on a business of promoting or facilitating  114 Involved with the MSC  116 Exemptions 117 Accountancy and legal  117 Agencies 119 Transfer of debt  119 Practical issues  121 Facts of the Costelloe case  122 First and Upper-tier Tribunal for the Christianuyi case  123 The Christianuyi case in the Court of Appeal  125 HMRC activity  125 Chapter 6  IR35: Personal Service Companies  127 Background and scope  128 Public sector changes  131 2021 – changes in the private sector  132 The IR35 legislation  133 Collection of taxes  133 Case law overview  134 Chapter 7  IR35 for Work at Small, Private Organisations  138 Scope of the legislation  138 The main parts of the legislation  139 Is the organisation a public authority?  142 Is the organisation ‘small’?  142 Difference in National Insurance legislation  144 IR35 flow diagram post-April 2021  145 Calculation and accounting for the deemed payment  146 Construction Industry Scheme deductions and the deemed payment  148 Applying the calculation in practice  149 Chapter 8  Public Sector Work  150 Background 150 What is a public authority  151 The 2017 legislation  152 The fee payer  152 Calculating the deemed payment   153 Problems with processing PAYE for a company  155 Flow of information   156 Check Employment Status for Tax (CEST)  158 New provisions for public sector bodies from 2021  159 Reasonable care in assessments  159 ix

Contents Information flow  160 Client led right of appeal  161 Chapter 9  Private Sector Medium and Large Organisations  162 Background 162 Who is the client?  165 When is a company medium or large?  166 Outline of the new rules  167 Fee payer  168 Reasonable care in reaching decision  169 Information about decisions  169 Worker’s right of appeal  170 Summary of who will be liable and when?  170 Deemed payment  171 Transfer of debt provisions  172 Solutions and way forward  173 PAYE and umbrella  174 Sole trader  175 Contracting out  176 Agencies becoming consultancies/statement of works  176 IR35 status determination  177 Agency and fee payer  178 Chapter 10  IR35 Case Law  179 The heart of the legislation  179 Office holders  183 Terms 185 Why aren’t sole traders caught by IR35?  185 IR35 case law  185 Special Commissioner cases  185 The first IR35 case  186 The first taxpayer win  187 High Court win for HMRC  189 Challenge the right client  190 Clear as mud  191 Two more High Court cases in HMRC’s favour  192 Open and honest  194 A small but important win for the taxpayer  196 Dragonfly era  197 MKM Computing and Alternative Book Company 200 The taxpayer era  201 A win for both sides  203 Two clients – one caught, one not caught  204 HMRC’s media campaign  205 Chapter 11  IR35 Practical Issues  213 Handling IR35 enquiries  213 Check Employment Status for Tax tool (CEST)  216 Meetings 218 Fact finding  220 x

Contents Determinations and notices  222 Hearing at the Tax Tribunal  223 Witnesses 223 Your Charter  224 IR35 contract reviews  226 Review the contract in practice  227 Control 228 Personal service  229 Mutuality of obligation  229 Experts and advisors  230 Don’t be afraid of being outside IR35  230 Index 231

xi

Table of Statutes

Capital Allowances Act 2001 s 262...................................... 7.48; 8.16 Companies Act 2006.......1.40; 3.99; 7.22, 7.24; 9.18, 9.22 Finance Act 2004 s 61...........................................7.56 Finance Bill 2007.........................5.66 Freedom of Information Act 2002.................................. 7.16; 8.07 Freedom of Information (Scotland) Act 2002.............8.07 Income Tax (Earnings and Pensions) Act 2003..............4.31 Pt 2 Ch 7 (ss 44–47).................7.06 s 4.............................................2.01 44..............................1.29; 2.84; 3.04, 3.05, 3.22, 3.61; 4.35 (1)......................................3.18 (b)(ii).............................3.25 (2)(a)..................................3.31 (b)............................... 3.59, 3.60 (4)–(6)................................3.63 46A........................................3.68 47........................................ 3.22, 3.67 Pt 2 Ch 8 (ss 48–61)....1.25; 3.89; 5.01; 6.22; 7.04, 7.05, 7.09, 7.17, 7.38; 9.17; 10.01, 10.05, 10.06, 10.18, 10.26 s 48...........................................7.05 49............................. 7.07, 7.08; 10.01 (1)(a)..................................10.03 (b)............................. 7.10; 10.04 (c)............................. 7.11; 10.06 (ii).............................10.18 (4)......................................10.26 50............................... 7.13, 7.14, 7.15 (1)(b)..................................10.28 54...............................3.90; 6.23; 7.40 (2)......................................7.56 55............................... 6.23; 7.41, 7.43 60A............................ 7.25, 7.26; 9.21 60B, 60C.................... 7.26, 7.31; 9.21 60D–60G............................ 7.26; 9.21 Pt 2 Ch 9 (ss 61A–61J)......... 5.01; 7.06 s 61A........................................4.06

Income Tax (Earnings and Pensions) Act 2003 – contd s 61B........................................5.12 (1)(a)................... 5.12, 5.26, 5.69 (b).................. 5.12, 5.15, 5.26, 5.69 (c).................. 5.12, 5.17, 5.20, 5.26, 5.69 (d).................. 5.21, 5.26, 5.27, 5.61 (2)................................. 5.27, 5.62 (a)–(c).........................5.64 (d)............................ 5.64, 5.70 (e)...............................5.64 (3)........................ 5.30, 5.31, 5.58 (4)................................. 5.30, 5.36 (5)........................ 5.30, 5.36, 5.37 61E.........................................5.10 Pt 2 Ch 10 (ss 61K–61X)..... 1.25; 3.89, 3.95; 6.22; 7.05, 7.09, 7.17, 7.18, 7.27, 7.38; 8.06, 8.08; 9.17, 9.18, 9.28, 9.49; 10.01, 10.05, 10.06, 10.18, 10.26 s 61K–61L.................... 8.06, 8.08; 9.28 61M..........................8.06, 8.08; 9.28; 10.02 (1)(a)..............................10.03 (c)....................... 10.05, 10.26 (d)..............................10.26 (i)..........................8.09 61N........................... 8.06, 8.08, 8.10, 8.31, 8.41, 8.43; 9.28, 9.33, 9.38 61O, 61P.................... 8.06, 8.08; 9.28 61Q........................... 5.24; 8.06, 8.08, 8.13, 8.16; 9.28 61R............................ 8.06, 8.08; 9.28 (1)....................................8.14 61S............................ 8.06, 8.08, 8.13; 9.28 61T............................ 8.06, 8.08, 8.25; 9.28, 9.41 (4), (5).......................... 8.27; 9.43 (6)....................................8.28

xiii

Table of Statutes Income Tax (Earnings and Pensions) Act 2003 – contd s 61U............................ 8.06, 8.08; 9.28 61V........................... 8.06, 8.08, 8.31; 9.28, 9.42 (4), (5).............................8.31 61W.................8.06, 8.08, 8.16; 9.28 61X............................ 8.06, 8.08; 9.28 71B........................................3.70 289A......................................4.36 Pt 5 Ch 1 (ss 327–332).............7.45 Pt 5 Ch 2 (ss 333–360A)..........7.45 s 336–338.................................4.26 339.........................................4.26 (2), (3)..............................4.09 (5)....................................4.09 (a)(ii)...........................4.10 339A......................... 2.84; 4.31, 4.41, 4.45 (3).................................4.41 (5)(a).............................4.41 (7).................................4.48 340.........................................4.26 Pt 5 Ch 3 (ss 361–365).............7.45 Pt 5 Ch 4 (ss 366–368).............7.45

Income Tax (Earnings and Pensions) Act 2003 – contd Pt 5 Ch 5 (ss 369–377).............7.45 s 688(1A).................................3.61 688A................................... 4.06; 5.43 (2).................................5.43 (a).............................5.44 689.........................................3.62 Income Tax (Trading and Other Income) Act 2005 s 863G(4).................................8.13 Social Security Contributions and Benefits Act 1992..........2.02 s 2(1)........................................2.01 Social Security Contributions (Transfer or Functions, etc) Act 1999............................ 2.02; 6.26 Taxes Management Act 1970...... 2.03; 3.81, 3.84 s 36...........................................10.179 Pt VI (ss 60–70A)....................4.46 s 98(1)(b)..................................3.75 100(1)....................................3.79 Tribunals, Courts and Enforcement Act 2007.........2.38

xiv

Table of Statutory Instruments

Income Tax (Pay As You Earn) Regulations 2003 – contd reg 97ZL, 97ZM.......................4.46 Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727................9.28 reg 6.........................................7.32 (1)(c)................................7.32 7.........................................6.23 Social Security (Contributions) Regulations 2001, SI 2001/1004 Sch 3 Pt VIII para 3, 3ZA, 3ZB.............4.31 Social Security (Decisions and Appeals) Regulations 1999, SI 1999/1027........................2.03

Agency Workers Regulations 2010, SI 2010/93..................2.230 Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2019, SI 2019/725 reg 13.......................................9.51 Conduct of Employment Agencies and Employment Businesses Regulations 2003, SI 2003/3319 reg 13A.....................................1.55 Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682............................2.02 Pt 4 Ch 3B (ss 97ZG–97ZM)...4.46 reg 80.......................................6.26

xv

Table of Cases

A Addison v London Philharmonic Orchestra Ltd [1980] 10  WLUK  203, [1981] ICR 261........................................................................................... 2.120 Airfix Footwear Ltd v Cope [1978] 6  WLUK  174, [1978]  ICR  1210, [1978] IRLR 396.......................................................... 2.103, 2.122, 2.123, 2.151 Albatel Ltd v R & C Comrs [2019] UKFTT 195 (TC), [2019] 3 WLUK 340, [2019] STI 1042..................................................  1.45; 2.29, 2.30; 10.144, 10.161 Alternative Book Co Ltd v R & C Comrs [2008] 5 WLUK 427, [2008] STC (SCD) 830................................................................................................... 10.116 Ansell Computer Services Ltd v Richardson (Inspector of Taxes) [2004) 7 WLUK 902, [2004] STC (SCD) 472, [2004] STI 1995........................... 10.63 Atholl House Productions Ltd v R  & C  Comrs [2019]  UKFTT  242 (TC), [2019] 4 WLUK 325..............................................  1.45; 2.29, 2.30, 2.163; 10.155 Australian Mutual Provident Society v Chaplin [1978] 18 ALR 385..........  2.84, 2.119, 2.121, 2.122 Autoclenz Ltd v Belcher [2011] UKSC 41, [2011] 4 All ER 745, [2011] IRLR 820......................................................................  2.40, 2.198, 2.199; 11.35, 11.37 B BSM (1257) Ltd v Secretary of State for Social Services [1978] 3 WLUK 54, [1978] ICR 894....................................................................2.19, 2.217; 6.04, 6.05 Barnett v Brabyn (Inspector of Taxes) [1996] STC 716, [1996] 5 WLUK 315, 69 TC 133................................................................................................... 2.208 Battersby v Campbell (Inspector of Taxes) [2001] 9 WLUK 127, [2001] STC (SCD) 189, [2001] STI 1498.....................................................10.33, 10.34, 10.41 Bell (Paul Anthony) v R  & C  Comrs [2011]  UKFTT  379 (TC), [2011] 6 WLUK 135............................................................................................ 2.82, 2.86 Bhadra v Ellam (Inspector of Taxes) [1988] STC 239, [1987] 11 WLUK 279, [1988] BTC 25................................................................................ 3.17, 3.34, 3.39 Byrne Brothers (Formwork) Ltd v Baird [2001] 9 WLUK 209, [2002] ICR 667, [2002] IRLR 96........................................................................................... 2.189 C Cable & Wireless plc v Muscat [2006] EWCA Civ 220, [2006] 3 WLUK 298, [2006] IRLR 354......................................................................................... 2.145 Canal Street Productions v HMRC [2019] UKFTT 647 (TC), [2019] 10 WLUK 513, [2020] SFTD 245................................................................ 1.45; 2.30; 10.181 Carmichael v National Power plc [1999] 1 WLR 2042, [1999] 4 All ER 897, [1999] 11 WLUK 590....................................................... 1.10; 2.96, 2.105, 2.107, 2.108, 2.136, 2.153; 10.78, 10.105 Castle Construction (Chesterfield) Ltd v R & C Comrs [2008] 12 WLUK 80, [2009] STC (SCD) 97, [2009] STI 91..................................1.21; 2.23, 2.34, 2.66, 2.85, 2.97, 2.113, 2.201, 2.210; 3.32, 3.33; 10.35 Chadwick v Pioneer Telephone Co [1941] 1 All ER 522...........2.45, 2.46, 2.116, 2.121

xvii

Table of Cases Christa Ackroyd Media Ltd v R & C Comrs [2019] UKUT 326, [2019] STC 2222, [2019] 10 WLUK 404............................................... 1.44, 1.48; 2.29, 2.30, 2.163, 2.164; 10.147, 10.153, 10.160, 10.165, 10.175 Christianuyi Ltd v R & C Comrs [2019] EWCA Civ 474, [2019] 1 WLR 5272, [2019] 3 All ER 178.............................................................  5.24, 5.25, 5.28, 5.32, 5.47, 5.57, 5.70, 5.71 Consistent Group Ltd v Kalwak [2007] 5 WLUK 476, [2007] IRLR 560......2.198, 2.200 Construction Industry Training Board v Labour Force Ltd [1970] 3 All ER 220, [1970] 7 WLUK 58, 9 KIR 269.................................................................. 2.212 Cornwall County Council v Prater [2006]  EWCA  Civ 102, [2006] 2  All ER 1013, [2006] 2 WLUK 673................................................... 1.13; 2.152, 2.158 Cotswold Developments Construction Ltd v Williams [2005] 12 WLUK 726, [2006] IRLR 181......................................................................................... 2.145 D Datagate Services Ltd v R  & C  Comrs [2007] 12 WLUK  630, [2008]  STC (SCD) 453, [2008] STI 146........................................................................ 10.91 Dragonfly Consulting Ltd v HMRC [2007] 12 WLUK 200, [2008] STC (SCD) 430, [2008] STI 143; aff’d [2008] EWHC 2113 (Ch).................1.12; 2.97, 2.161; 7.36, 7.37; 8.02; 10.90, 10.100, 10.101, 10.102, 10.111, 10.118, 10.139 E ECR Consulting Ltd v R & C Comrs [2011] UKFTT 313 (TC), [2011] 5 WLUK 268, [2011] STI 2174.................................................................................. 10.119 Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, [1955] 3 WLR 410, [1955] 3 All ER 48...................................................................................... 10.55 Edwards (Inspector of Taxes) v Clinch [1979] 1 WLR 338, [1979] 1 All ER 648, [1979]  STC  148; rev’sd [1981] Ch  1, [1980] 3 WLR  521, [1980] 3 All ER 278; aff’d [1982] AC 845, [1981] 3 WLR 707, [1981] 3 All ER 543.... 10.22 Eric Newman Developments v R & C Comrs [2012] UKFTT 111 (TC), [2012] 2 WLUK 214, [2012] STI 1478............................................................. 2.60, 2.112 Expiron Silverstone Ltd v R  & C  Comrs [2018]  UKFTT  460 (TC), [2018] 6 WLUK 478............................................................................................... 3.78 Express & Echo Publications v Tanton [1999] 3 WLUK 216, [1999] ICR 693, [1999] IRLR 367........................................... 1.14, 1.15, 1.16; 2.176, 2.178, 2.179, 2.181, 2.187, 2.188, 2.192, 2.195; 6.34; 10.97, 10.140; 11.14 F FS Consulting Ltd v McCaul (Inspector of Taxes) [2002] 1 WLUK 359, [2002] STC (SCD) 138, [2002] STI 209.............................................  10.37, 10.38, 10.39 Fall (Inspector of Taxes) v Hitchen [1973] 1 WLR 286, [1973] 1 All ER 368, [1973] STC 66............................................................................................. 2.213 First Word Software v R & C Comrs [2007] 12 WLUK 240, [2008] STC (SCD) 389........................................................................ 1.18; 2.183; 6.41; 10.91, 10.92, 10.98; 11.14, 11.77 Future Online Ltd v Foulds (Inspector of Taxes) [2004]  EWHC  2597 (Ch), [2005] STC 198, [2004] 10 WLUK 586..................................................... 10.73 G George Mantides Ltd v R  & C  Comrs [2019]  UKFTT  387 (TC), [2019] 6 WLUK 499........................................................................................2.92; 10.138

xviii

Table of Cases Global Plant Ltd v Secretary of State for Health & Social Security [1972] 1 QB 139, [1971] 3 WLR 269, [1971] 3 All ER 385..................... 2.43, 2.52, 2.73, 2.74, 2.217 Great Western Rly Co v Bater (Inspector of Taxes) [1920] 3 KB 266, [1920] 6 WLUK 8; aff’d [1921] 2 KB 128, [1921] 2 WLUK 72; revs’d [1922] 2 AC 1, [1922] 3 WLUK 74, 8 TC 231....................................................... 10.21 Green v St Nicholas Parochial Church Council [2005] 10 WLUK 189......2.181, 2.191 H Hall (Inspector of Taxes) v Lorimer [1992] 1  WLR  939, [1992]  STC  599, [1992] 5 WLUK 281..............................................1.24; 2.17, 2.207, 2.209, 2.223; 6.30, 6.42; 10.66, 10.186 I Island Consultants Ltd v R  & C  Comrs [2007] 7  WLUK  134, [2007]  STC (SCD) 700, [2007] STI 1871...................................................................... 10.83 J JLJ  Services Ltd v R  & C  Comrs [2011]  UKFTT  766 (TC), [2011] 11 WLUK 770.................................................................................. 10.132, 10.135 Jensal Software Ltd v R & C Comrs [2018] UKFTT 271 (TC), [2018] 5 WLU K315, [2018] SFTD 1176........................................................................... 10.119 K Kickabout Productions Ltd v R & C Comrs [2019] UKFTT 415 (TC), [2019] 6 WLUK 598, [2019] STI 1363.......................... 1.07, 1.45; 2.29, 2.30, 2.52, 2.55, 2.215; 10.144, 10.145 L Lewis (t/a MAL Scaffolding) v R & C Comrs [2006] 3 WLUK 713, [2006] STC (SCD) 253, [2006] STI 1272...............  2.71, 2.73, 2.74, 2.110, 2.231; 3.46; 11.43 Lime-IT  Ltd v Justin (Inland Revenue Officer) [2002] 10  WLUK  466, [2003] STC (SCD) 15, [2002] STI 1653........................ 2.169; 6.41; 10.41, 10.64, 10.65; 11.33, 11.34 Littlewood (t/a JL  Window & Door Services) v R  & C  Comrs [2009] 1 WLUK 560, [2009] STC (SCD) 243, [2009] STI 516.............  2.56, 2.64, 2.154, 2.166, 2.169, 2.201, 2.209; 10.182 M MBF  Design Services Ltd v R  & C  Comrs [2011]  UKFTT  35 (TC), [2011] 1 WLUK 12, [2011] SFTD 383.................................................................. 10.119 MDCM Ltd v R & C Comrs [2018] UKFTT 201 (TC), [2018] 4 WLUK 120......10.119 MKM  Computing Ltd v R  & C  Comrs [2007] 12 WLUK  241, [2008]  STC (SCD) 403, [2008] STI 139...........................2.161, 2.162; 10.90, 10.101, 10.111, 10.114, 10.115, 10.124, 10.139 MPG Contracts Ltd v England [2009] 5 WLUK 189......................................... 2.190 MacFarlane v Glasgow City Council [2000] 5 WLUK 461, [2001] IRLR 7...... 2.186, 2.192; 10.39, 10.140 McManus v Griffiths (Inspector of Taxes) [1997] STC 1089, [1997] 7 WLUK 419, 70 TC 218........................................................................................... 2.166 McMeechan v Secretary of State for Employment [1996] 12  WLUK  192, [1997] ICR 549, [1997] IRLR 353.......................................................  2.57, 2.106

xix

Table of Cases Market Investigations Ltd v Minister of Pensions & Social Security [1969] 2 QB 173, [1969] 2 WLR 1, [1968] 3 All ER 732...............  1.24; 2.10, 2.14, 2.43, 2.51, 2.53, 2.60, 2.129, 2.204; 6.30, 6.38; 10.66 Marlen Ltd v R & C Comrs [2011] UKFTT 411 (TC), [2011] 6 WLUK 594, [2011] STI 2439..............................................2.162; 6.41; 10.119, 10.121, 10.122 Massey v Crown Life Insurance Co [1978] 1 WLR 676, [1978] 2 All ER 576, [1977] 11 WLUK 30................................................................... 2.214, 2.216; 6.05 Matthews v R & C Comrs [2012] UKUT 229 (TC), [2014] STC 297, [2012] 3 WLUK 830...........................................................................................  2.52, 2.55 Midland Sinfonia Concert Society Ltd v Secretary of State for Social Services [1980] 11 WLUK 61, [1981] ICR 454........................................................ 2.69 Mitchell v R  & C  Comrs [2011]  UKFTT  172 (TC), [2011] 3  WLUK  456, [2011] STI 1703.......................................................................................... 2.83 Montgomery v Johnson Underwood Ltd [2001]  EWCA  Civ 318, [2001] 3 WLUK 294, [2001] IRLR 269.......................2.40, 2.57, 2.59, 2.61, 2.89, 2.106, 2.107, 2.108, 2.113; 6.32; 10.105 Morren v Swinton & Pendlebury Borough Council [1965] 1 WLR 576, [1965] 2 All ER 349, [1965] 2 WLUK 76.............................................................. 2.88 N Narich Pty v Comr of Payroll Tax [1983] 12 WLUK 34, [1984] ICR 286......2.39, 2.87 Netherlane Ltd v York [2005] 1  WLUK  171, [2005]  STC (SCD) 305, [2005] STI 165............................................................................................ 10.81 Nethermere (St Neots) Ltd v Gardiner [1984] 5 WLUK 26, [1984] ICR 612, [1984] IRLR 240................................................ 2.104, 2.128, 2.134, 2.137, 2.151, 2.160; 10.105, 10.106 Northern Lights Solutions Ltd v R  & C  Comrs [2020]  UKFTT  100 (TC), [2020] 2 WLUK 478.......................................................................... 2.165; 10.119 Novasoft Ltd v R & C Comrs [2010] UKFTT 150 (TC), [2010] 4 WLUK 19......... 10.119 O O’Kelly v Trusthouse Forte plc [1984]  QB  90, [1983] 3  WLR  605, [1983] IRLR 369......................................................................2.103, 2.124, 2.128, 2.132, 2.153, 2.210; 10.35 Oziegbe v R  & C  Comrs [2014]  UKFTT  608 (TC), [2014] 6  WLUK  517, [2014] STI 2932.......................................................... 3.30, 3.35, 3.36, 3.37, 3.48, 3.107; 10.135; 11.33 P Parade Park Hotel v R & C Comrs [2007] 3 WLUK 96, [2007] STC (SCD) 430, [2007] STI 1183..................................................................................  2.110, 2.144 Paya Ltd v R  & C  Comrs [2019]  UKFTT  583 (TC), [2019] 9 WLUK  372, [2019] STI 1615..............................................  1.07, 1.44, 1.47; 2.29, 2.30, 2.163; 10.144, 10.172; 11.59, 11.82 Pimlico Plumbers Ltd v Smith [2017] EWCA Civ 51, [2017] 2 WLUK 293, [2017] ICR 657........................................................................................... 2.193 Primary Path Ltd v R  & C  Comrs [2011]  UKFTT  454 (TC), [2011] 7 WLUK 118, [2011] STI 2499.......................................... 10.119, 10.121, 10.126 Professional Game Match Officials v R & C Comrs [2018] UKFTT 528 (TC), [2018] 8 WLUK 274, [2019] SFTD 74.............................  2.76, 2.95, 2.155, 2.207 Propertycare Ltd v Gower [2003] 11 WLUK 389........................2.137; 10.105, 10.106 R R v Welch Esquire (1853) 2 El & Bl 357, 118 ER 800, [1853] 5 WLUK 101...... 2.115

xx

Table of Cases R  & C  Comrs v Wright [2007]  EWHC  526 (Ch), [2007]  STC  1684, [2007] 2 WLUK 121................................................................................... 2.64, 2.73, 2.74 R & C Comrs v Talentcore TA Team Spirit see Talentcore Ltd (t/a Team Spirits) v R & C Comrs R  (on the application of Professional Contractors Group) v IRC [2001] EWHC Admin 236, [2001] STC 629, [2001] 4 WLUK 27; aff’d [2001] EWCA Civ 1945, [2002] STC 165, [2001] 12 WLUK 713..................6.03; 10.12, 10.120; 11.59, 11.60 RALC  Consulting Ltd v R  & C  Comrs [2019]  UKFTT  702 (TC), [2019] 10 WLUK 660....................................................................................2.174; 10.119 RS Dhillon & GP Dhillon Partnership v R & C Comrs [2017] UKFTT 17 (TC), [2017] 1 WLUK 5....................................................................................2.27, 2.28 Ready Mixed Concrete (South East) Ltd v Minister of Pensions & National Insurance [1968] 2 QB 497, [1968] 2 WLR 775, [1968] 1 All ER 433...... 1.04, 1.05, 1.06; 2.10, 2.13, 2.15, 2.16, 2.40, 2.41, 2.42, 2.45, 2.53, 2.63, 2.88, 2.106, 2.117, 2.118, 2.125, 2.130, 2.137, 2.178, 2.179, 2.203, 2.204, 2.206; 6.30, 6.32, 6.33, 6.36, 6.37, 6.38; 10.66, 10.84, 10.85, 10.94, 10.181, 10.186; 11.14 Red, White & Green Ltd v R  & C  Comrs [2020]  UKFTT  109 (TC), [2020] 1 WLUK 476, [2020] STI 404................................ 1.44; 2.29, 2.30, 2.165; 10.183 Reed Employment plc v R  & C  Comrs [2012]  UKFTT  28 (TC), [2012] 1 WLUK 42, [2012] SFTD 394.................................................................. 4.37 S Sherburn Aero Club Ltd v R  & C  Comrs [2009]  UKFTT  65 (TC), [2009] 3 WLUK 764, [2009] STC (SCD) 450................ 2.56, 2.63, 2.209, 2.226; 10.182 Snook v London & West Riding Investments Ltd [1967] 2  QB  786, [1967] 2 WLR 1020, [1967] 1 All ER 518............................................................. 2.199 Stephenson v Delphi Diesel Systems [2002] 11 WLUK 303, [2003] ICR 471..... 2.96, 2.99, 2.108, 2.139, 2.140, 2.141, 2.142, 2.145, 2.162, 2.165 Stevedoring & Haulage Services Ltd v Fuller [2001] EWCA Civ 651, [2001] 5 WLUK 244, [2001] IRLR 627................................................................. 2.137 Stringfellow Restaurants Ltd v Quashie [2012]  EWCA  Civ 1735, [2012] WLUK 805, [2013] IRLR 99..................................................................2.97, 2.114 Synaptek Ltd v Young (Inspector of Taxes) [2003]  EWHC  645 (Ch), [2003] STC 543, [2003] 3 WLUK 817................. 2.157, 2.167, 2.213; 6.40, 6.41; 8.02; 10.49, 10.55, 10.61, 10.78 T Talentcore Ltd (t/a Team Spirits) v R & C Comrs [2011] UKUT 423 (TCC), [2011] STC 2377, [2011] 10 WLUK 395................................................3.07, 3.20 Thoerne v R & C Comrs [2016] UKFTT 454 (TC), [2016] 6 WLUK 608.....3.38, 3.49 Tilbury Consulting Ltd v Gittins (Inspector of Taxes) (No 2) [2003] 11 WLUK 23, [2004] STC (SCD) 72, [2003] STI 2278................................. 7.19; 9.29, 9.73; 10.58, 10.59 Turnbull v R & C Comrs [2011] UKFTT 388 (TC), [2011] 6 WLUK 191........ 2.27, 2.28, 2.146 Turner v Sawdon & Co [1901] 2 KB 653, [1901] 7 WLUK 3........................... 2.115 U UK Mail Ltd v Creasey [2012] 9 WLUK 438.................................................... 2.181

xxi

Table of Cases US v Silk 331 US 704 (1947)............................................................................. 2.204 Usetech Ltd v Young (Inspector of Taxes) [2004] EWHC 2248 (Ch), [2004] STC 1671, [2004] 10 WLUK 196.........................  2.151, 2.159, 2.192; 7.35; 8.02; 10.07, 10.09, 10.13, 10.74, 10.102; 11.34, 11.59, 11.60 V Various Claimants v Catholic Child Welfare Society; Various Claimants v Institute of the Brothers of the Christian Schools [2012] UKSC 56, [2013] 2 AC 1, [2012] 3 WLR 1319....................................................................1.22; 2.79 W WF & RK  Swan (Hellenic) Ltd v Secretary of State for Social Services (unreported, 1983)....................................................................................... 2.44 Weight Watchers (UK) Ltd v R & C Comrs [2010] UKFTT 54 (TC), [2010] 2 WLUK 25, [2010] STI 1620; aff’d [2011] UKUT 433 (TCC), [2012] STC 265, [2011] 10 WLUK 399......................................2.70, 2.203; 6.37; 10.181 White v Troutbeck SA [2013] EWCA Civ 1171, [2013] 10 WLUK 280, [2013] IRLR 949.................................................................................................2.92, 2.93 Willers v Joyce [2016] UKSC 43, [2018] AC 779, [2016] 3 WLR 477............. 2.39 Wright (Philip John) v R  & C  Comrs [2011]  UKFTT  824 (TC), [2011] 12 WLUK 373, [2012] STI 222.................................................................. 3.40 Y Yewens v Noakes (1880) 6 QB 530, [1880] 3 WLUK 55............. 2.08, 2.41, 2.77, 2.78 Yetis v R & C Comrs [2012] UKFTT 753 (TC), [2012] 12 WLUK 208, [2013] STI 1248...................................................................................................... 2.146

xxii

Chapter 1

Outline and Recent Developments

SIGNPOSTS •

The core principles of whether an individual is an employee are whether personal service is required, whether there is mutuality of obligation and a sufficient degree of control over the individual. These factors can determine the question on their own, but the courts will also consider any other factors inconsistent with an employment relationship and if there are a sufficient number of inconsistencies, this may also be enough for the relationship not to be one of employment.

•

IR35 considers the employment status of an individual providing services through their own personal service company. If the individual carrying out the work would have been an employee of the client, were it not for their limited company, IR35 will apply, meaning additional tax and National Insurance will be assessed.

•

In April 2014 the agency legislation (ITEPA 2003, s 44) was amended so that agencies can only pay individuals on a self-employed basis if there is a lack of supervision direction or control (or the right of) as to the manner in which the services are provided, by any person.

•

The area of employment status seems to move at a fast pace at the moment and just when one change is bedding in, another seems to be around the corner. The government changed the agency legislation in 2014 and changed IR35 in respect of public sector work in 2017. From April 2021, IR35 will also be amended for the private sector but only in respect of medium and large companies and there was also a consultation on employment status in recent years with the government considering bringing in clearer legislation as to when someone is an employee.

BACKGROUND – EMPLOYMENT STATUS 1.01 The question over whether an individual is an employee or not has been subject to considerable debate over many years, whether it be individuals challenging their employment status for employment rights purposes or HMRC 1

1.02  Outline and Recent Developments trying to recover lost revenues because of lower tax and National Insurance rates when paying someone on a self-employed basis. 1.02 In order to determine whether an individual is an employee or not, it is first important to consider what the key components of an employment relationship are. The government have not, to date, introduced any meaningful legislation in this regard and the definition of ‘employee’, ‘self-employed’ and ‘contract of service’ are all incredibly basic and vague and provide very little, if any, assistance in resolving the issue. 1.03 The result is that in practice, it is left to the courts to decide what is actually meant by a ‘contract of service’. This is the crux of the matter because if the contract is not one of service, ie  employment, the individual will not be entitled to any associated employment rights nor will HMRC be entitled to recover unpaid PAYE and National Insurance contributions. Once the true meaning of a contract of services is established it starts to become possible to apply this to working relationships so that the question over employment status can be answered. 1.04 If we rewind 100 years, the approach adopted by the courts was quite simple. If there was control over the manner in which the work was undertaken, the company would be deemed to be the master and the individual the servant and an employment relationship would exist. As times changed, so did the law and in 1968 the High Court confirmed that control could no longer be the only factor to consider as there would be many occasions where an individual is subject to control as to the manner in which they work, yet clearly are selfemployed (see Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2  QB  497). Mr Justice Mackenna then gave fresh thought to the meaning of a contract of service and concluded as follows: ‘A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.’ 1.05 To date, the above passage cited in the Ready Mixed Concrete case is still regarded as the best authority for when a contract is a contract of service. This definition has been analysed in great detail in subsequent cases and three core principles have evolved that must be considered before moving on to any other reasons or tests regarding employment status. 1.06 The first of MacKenna J’s points has created two separate limbs which are commonly referred to as mutuality of obligation and personal service. The second part of the definition keeps the previous and essential element of control as a vital part of an employment relationship. The last part of the passage is to consider the contract in question and whether any parts of that agreement are inconsistent with a contract of service. 2

Outline and Recent Developments 1.10 Focus Point The three main principles for deciding employment status are personal service, mutuality of obligation and control as per the Ready Mixed Concrete case. Once these factors have been considered the courts can move on to consider other factors inconsistent with an employment relationship.

1.07 This may all seem very straightforward, and it is, in principle! The problem comes when one starts to apply this to the seemingly endless possible ways in which people work and ironing out the finer details of those principles and how they can apply to slightly different circumstances. Even once all the facts are obtained and the law applied, a subjective judgment is still required, and this alone can lead to a difference of opinion. Two of the most recent cases on IR35 illustrate this point perfectly where the tribunal members reached a different decision and the cases had to be decided by a casting vote – see Kickabout Productions v HMRC [2019] UKFTT 415 (TC) and Paya Ltd and Others v HMRC [2019] UKFTT 583.

Mutuality of obligation 1.08 Let’s jump straight in at the deep end. Mutuality of obligation is a difficult concept and one that has created a great deal of uncertainty and unpredictability over the years. Mutuality of obligation is generally accepted as being an obligation for an employer to offer work (or pay in the absence of available work) and an obligation on the employee to undertake work. The idea being that in an employment relationship there is a higher level of trust and commitment between the parties than in a relationship that is at arm’s length. 1.09 The problem however is that the above understanding of mutuality of obligation was originally considered in cases where individuals were trying to claim employment rights (as opposed to it being a tax consideration) by linking various contracts together to create continuity of service. Example If an individual wanted to claim unfair dismissal but only had a number of short isolated contracts, they would need to establish there was a continuing obligation in between each of those short-term contracts in order for the whole contract period to be one of employment. In doing this an ‘umbrella’ or ‘overarching’ contract spanning all the work is created. 1.10 This led to cases such as Carmichael and another v National Power plc [1999] 1 WLR 2042 in which the House of Lords concluded that the case foundered on the rock of the absence of mutuality of obligation. 3

1.11  Outline and Recent Developments 1.11 As HMRC have been quick to point out in the past however, those cases relate to employment rights where establishing mutuality is essential to make a claim. For example if an individual wants to claim unfair dismissal they will have to demonstrate they have been working for the employer for two years – this may not be possible under the separate contracts but if the individual can show there is ongoing mutuality of obligation there will be an overarching contract linking the separate ones together meaning they may total beyond the necessary two years. Where does that leave us for tax and National Insurance though, where the tax tribunals will not need to be concerned about an overarching contract and will instead focus on whether a single isolated contract is one of service? This is where the courts have reached different conclusions with some even going as far as suggesting that mutuality of obligation is nearly meaningless when it comes to employment status and IR35 for tax purposes. 1.12 The courts have been troubled by this principle for a long time and there are many judgments which highlight the judges’ caution about what is meant by mutuality. Thankfully over the last five or six years, the tribunals have started to be more consistent with giving mutuality of obligation the weight it requires and how it applies in practice. Although HMRC may disagree, the lowest level mutuality of obligation which tends to be given in the courts is set out in Dragonfly Consulting Limited v HMRC [2007] SpC 655 in which Special Commissioner Hellier held that the obligation on the employee to perform work was a precondition for a contract of service to exist. He did not, in that case, believe that the obligation on the employer to offer work (or pay if no work was available) was vital to the existence of a contract of employment but held that this part of mutuality was still inconsistent with a contract of service and a very important factor. 1.13 There are many other cases however where both the obligation to offer and the obligation to accept work are deemed to meet the criteria for mutuality of obligation. One of the most important aspects to note with mutuality of obligation for tax purposes is that the taxpayer will have to show there are no such obligations during a contract, not just in respect of whether further contracts that are offered (see Chapter 2 and Chapter 6 for more details and specifically Cornwall County Council v Prater [2006] EWCA Civ 102). This is often referred to as mutuality of obligation ‘within’ an agreement. Focus Point Mutuality of obligation is one of the most contested areas of law when it comes to employment status and IR35 but the courts have generally followed the approach that it is the obligation on the employer to provide work and a reciprocal obligation on the employee to carry out work.

Personal service 1.14 In addition to mutuality of obligation, another critical part of an employment relationship is whether an individual must carry out the work 4

Outline and Recent Developments 1.19 themselves personally. In the case of Express and Echo Publications v Tanton [1999] IRLR 367 the company engaged Mr Tanton as a driver but in his terms they agreed that he was not required to provide the services himself and he was free to engage a substitute driver to carry out the work. The Court of Appeal agreed that it would be incompatible for a contract of employment to include a provision where the individual never need turn up and do the work and can use substitutes at their discretion. 1.15 This principle still stands although, over the years since there have been similar cases, but the client has only provided a restricted right for others to be sent in their place. Where there are too many restrictions and approval procedures in place as to when someone else can undertake the work, it will be held that no ‘right’ of substitution actually exists at all because of the number of limitations in place. In that case the individual may merely have a right to ‘suggest’ a replacement which may still be somewhat inconsistent with an employment relationship, but it is far removed from the circumstances in Express and Echo when the right of substitution determined the employment status issue. 1.16 There are a few important aspects of personal service that must be at the forefront when applying this principle. The first is that it is the ‘right’ of substitution which is important, not whether a substitute is actually sent. If an individual has the right to send someone else to provide the services, personal service is not required and therefore it falls within the remit of Express and Echo. Focus Point It is the right of substitution which is important, not whether a substitute is actually used in practice. 1.17 The right to send a substitute must also be genuine and the courts will dismiss the contractual term if they believe the contract or substitution clause is a sham or simply window dressing to create the impression of selfemployment. 1.18 The last point to note is that the right of substitution is just an example of a lack of personal service and whilst it is a good way to show a lack of personal service, the right to assign can also show a lack of personal service (see First Word Software v HMRC [2007] Spc 652).

Control 1.19 The second part of Mr Justice MacKenna’s definition of a contract of service is that there must be a sufficient degree of control over the work to create an employee relationship. 5

1.20  Outline and Recent Developments 1.20 Control can include the thing to be done, when, where and how it is to be done. The weight given to each of these different aspects of control will vary from case to case depending on the nature of the work being undertaken. 1.21 In Castle Construction (Chesterfield) Ltd v Revenue & Customs [2008] UKSPC SPC00723 for example the Special Commissioner considered the employment status of bricklayers and when it came to control he noted that it was natural that the bricklayers would be told where the site was and where the houses needed building, this could therefore not have any bearing on employment status. He continued by commenting that the bricklayers will have to fit in with site operating hours and other tradespeople and so control over when the services are provided would be a neutral factor. The key in that case was that the bricklayers were not told how to lay the bricks. 1.22 In contrast to the above, many of the IR35 cases have concluded that control over the manner in which the work is done is not overly helpful when it comes to highly skilled and professional people as they will naturally require less control. This was also considered in Various Claimants v Catholic Child Welfare Society [2013] 2 AC 1, where Lord Philips stated: ‘In days gone by, when the relationship of employer and employee was correctly portrayed by the phrase “master and servant”, the employer was often entitled to direct not merely what the employee should do but the manner in which he should do it. Indeed, this right was taken as the test for differentiating between a contract of employment and a contract for the services of an independent contractor. Today it is not realistic to look for a right to direct how an employee should perform his duties as a necessary element in the relationship between employer and employee. Many employees apply a skill or expertise that is not susceptible to direction by anyone else in the company that employs them. Thus, the significance of control today is that the employer can direct what the employee does, not how he does it.’ 1.23 This was deemed to be a unique case however and it is usually accepted that whilst there may not always be the need to control how a skilled worker provides their services on a day to day basis, there would still be a right of control in an employment relationship. The right of control will therefore be a fundamental aspect of an employment relationship. Focus Point Control can include what work is done, when, where and how but it has to be a sufficient degree of control to create an employee relationship and includes the right of control.

6

Outline and Recent Developments 1.26

All other factors 1.24 The third of MacKenna J’s tests is to consider what other provisions in the agreement would be inconsistent with an employment relationship. This can include whether the individuals are in business on their own account as per Market Investigations Ltd v Minister of Pensions and Social Security [1969] 2  QB  173 or any other factors which don’t sit well with it being a contract of employment, such as not being entitled to the same benefits of other employees. The courts may then go on to stand back and look at the overall picture as was the case in Hall v Lorimer [1992] 1 WLR 939 to reach their final decision. If, after considering all of the above, the courts are still not sure of the employment status they can, as a last resort, rely on the intention of the parties to determine the issue.

THE RISE OF PERSONAL SERVICE COMPANIES 1.25 The intermediaries legislation as set out in Chapter 8 and Chapter 10 of ITEPA 2003 (commonly referred to as IR35) was introduced in 2000 to try and combat the increasing trend of people that would otherwise be employed, from setting up a limited company in order to receive their money in a more tax efficient way. This was happening at an alarming rate and individuals would effectively leave their jobs on a Friday and come back in on a Monday with a limited company but continue to work in exactly the same way. This represented a substantial risk and loss to the Treasury and so IR35 was introduced. 1.26 The principle behind IR35 is that one effectively ignores the existence of the limited company and considers whether an individual would have been deemed an employee of the client had they contracted directly with them. The courts will consider the terms agreed between the parties and the working practices and then construct a hypothetical contract. If that hypothetical contract is then deemed to be a contract of service (the same tests for employment status), IR35 will apply and the company will have to either operate the deemed payment for IR35 or HMRC will raise assessments for the tax and National Insurance that would have otherwise been paid, plus penalties and interest.

Focus Point IR35 effectively ignores any intermediaries in the supply chain and considers whether the individual carrying out the work, should have been an employee of the end client.

7

1.27  Outline and Recent Developments Diagram 1.1 of how IR35 works Client

PS

Is this ‘hypothetical contract’ one of employment?

1.27 The hypothetical contract may be reasonably easy to figure out when the contract is just between a personal service company and the client, but once there is an agency in the contractual chain, the contractual position can quickly become less clear and in many cases, unknown to the personal service company. The courts acknowledge that contractors will not be privy to the contract between an agency and the client, but equally the legislation requires the formulation of a hypothetical contract from the arrangements and that includes all contracts. As the agency contract forms part of the contractual matrix, it must be considered. This unsurprisingly leads to cases where the lower contract with the agency contradicts parts of the contract the agency has with the client and so it is very important again to ensure not only that the wording of the lower contract is carefully considered but that the working practices are in line with that agreement.

AGENCIES PAYING PEOPLE ‘OFF-PAYROLL’ 1.28 Recruitment companies will often pay temporary workers in a number of ways including using their own PAYE scheme, a PAYE umbrella company, on a self-employed basis (directly or indirectly) or paying the individuals via their own Personal Service Companies (PSC). There are of course other methods, such as offshore schemes, but those arrangements are less common, vary considerably and are outside the scope of this book. 1.29 The use of umbrella companies grew significantly following the introduction of the Managed Service Company legislation (see Chapter 5) and the corresponding demise of composite companies. There was also a further surge in people working through PAYE umbrella companies when the government in 2014, tackled people being paid on a self-employed basis for agency work with the amendment to the agency legislation as set out in ITEPA 2003, s 44. 8

Outline and Recent Developments 1.35 1.30 Prior to 2014, in some industries, such as construction, agency workers were regularly being paid on a self-employed basis. The previous version of the agency legislation would have stopped this practice but it was quite easy to circumvent and so gradually the self-employed route was pushed out further to the point where agency workers were being paid on a self-employed basis when there was really no prospect of them being genuinely self-employed had it not been for the failings of the agency legislation. 1.31 The government addressed this black hole in the Treasury’s pocket by amending the agency legislation so that anyone deemed an ‘agency’ (and the definition is very broad), can only pay an individual on a self-employed basis if they can demonstrate there is no supervision, direction or control (or the right of) as to the manner in which the services are provided, by anyone in the contractual chain. This is a difficult hurdle to pass and the intention was that it would, at the very least, mean unskilled workers would no longer be categorised as selfemployed as they will typically be subject to control over how they work. Focus Point Agencies can only pay individuals on a self-employed basis if they can demonstrate there is a lack of supervision, direction and control (including the right of) over the manner in which the services are provided and this is by anyone in the contractual chain. 1.32 As mentioned above, this change in the agency legislation led towards another shift in the agency market where more individuals moved over to PAYE umbrella. 1.33 Umbrella companies were attractive for individuals who incurred a reasonable amount of expenditure in the performance of their work as agencies were not able to reimburse the expenses tax free whereas the umbrella company could. The reason as to why and how umbrella companies could pay out expenses is discussed in more detail in Chapter 4. 1.34 As a result of umbrella companies not operating correctly and the sheer volume of agency workers being paid through umbrella companies, in 2016 the government decided to legislate to place greater restrictions on when and if umbrella companies could pay out expenses. This has virtually wiped out an agency worker’s ability to claim expenses relating to a temporary workplace, but it has not wiped out the use of umbrella companies, as agencies had become somewhat reliant on them to handle payments, employment queries and obligations and all associated paperwork.

RECENT DEVELOPMENTS IR35 public sector 1.35 HMRC’s success at challenging companies under IR35 has been exceptionally poor. They have chalked up a few notable victories in the 9

1.36  Outline and Recent Developments tribunals, including High Court cases and have even won a few cases in the last couple of years but overall it is a pretty dismal picture for HMRC. 1.36 In the author’s opinion a lack of resources coupled with mismanagement of cases and workload is a significant factor as to why HMRC do not get the results they believe they should. There also appears to be a fundamental misconception in the government and media that IR35 applies in far more many cases than it actually does in practice. This can be evidenced by the number of successful IR35 appeals. 1.37 Whatever the reason, the first version of IR35 which stood for the best part of two decades was deemed to be ineffective in tackling the problem and further action was required. With this, the government changed IR35 in the public sector as of April 2017 so that the responsibility and liability for IR35 moved up the contractual chain – see Chapter 8 for more information. This would enable HMRC to consider IR35 on a larger scale as they could open enquiries into large corporations for all the ‘off-payroll’ contractors rather than opening hundreds of individual enquiries. The other advantage was that the bigger the company under enquiry, the more likelihood of recovery of any liabilities due. Small PSC’s would typically have very little by way of assets or company reserves and as such, even if HMRC were successful in arguing IR35, they would often fail to secure the debt. 1.38 The change in legislation was a success in the government’s eyes as many public sector bodies were completely risk averse and unwilling to take the chance of getting an IR35 status incorrect. There were many rumoured examples of public sector bodies introducing blanket decisions and bans on the use of PSCs and so it was inevitable that a similar change would be implemented in the private sector given the potential tax at stake.

IR35 private sector 1.39 From April 2021, the IR35 legislation will be amended again (so much for tax simplification), in theory, to bring it in line with the changes to the public sector amendments. However, the revised legislation in the private sector only applies to medium and large organisations, meaning that if an end client is deemed to be small, the old rules will continue to apply. This raises many questions which are considered in Chapter 12 but the starting point for anyone is to determine whether an end client is medium to large. 1.40 The definition for this is the same as the Companies Act 2006 which confirms a company is small provided it does not satisfy two or more of the following: •

Annual turnover not more than £10.2m;

•

Balance sheet total not more than £5.1m;

•

Number of employers not more than 50. 10

Outline and Recent Developments 1.44 1.41 If this is triggered, the end client will have to determine whether IR35 applies, instead of the contractor and they will need to pass this information down to anyone else in the supply chain. The fee payer (that is the company paying the PSC) will be the party responsible for acting in accordance with the end client’s determination, whether that be an agency, a third party or the end client themselves. 1.42 The end client will have to show they have taken reasonable care in reaching an opinion on IR35. If not, they will remain liable irrespective of who pays the PSC. HMRC point towards their Check Employment Status for Tax (CEST) tool to assist with this but the CEST tool has come under a great deal of criticism and companies certainly should not feel compelled to use this to reach an opinion. The government confirmed in 2019 that they will re-review CEST in light of the criticism but despite it being revamped, it still contains many of the same issues it was previously criticised for. The best course of action would generally be to reach a well-informed opinion (whether that be by training and understanding IR35 in-house or using an independent party to review the position) as this will strike the right balance between what is correct with case law but what is also commercial for the business. Relying on the CEST is likely to result in a vast number of contractors being deemed within IR35 when they are in fact outside the legislation which could not only mean tax is paid at a higher rate than necessary but that key individuals will refuse the work under PAYE. Focus Point With the 2021 changes in IR35, end clients who are medium or large sized will be responsible for determining whether IR35 applies and for taking reasonable care in reaching that decision.

IR35 CASE LAW 1.43 The recent case law on IR35 has not moved the goal posts or changed anything we didn’t already know about IR35. It has merely enforced the previous decisions which can be helpful, but do not really add much direction to this area. 1.44 One industry that has been under HMRC’s spotlight is the media sector and HMRC are still in the middle of a large project to challenge people working through their own limited companies in this sector. HMRC have been successful in the tax tribunals in three of these cases so far (including one case at the Upper-tier Tax Tribunal): •

Christa Ackroyd v HMRC [2019] UKUT 326;

•

Paya Ltd & Others v HMRC [2019] UKFTT 583 (TC);

•

Red, White and Green Limited v HMRC [2020] UKFTT 109 (TC). 11

1.45  Outline and Recent Developments 1.45 In two of those cases the client was the BBC and in the other it was ITV. Although in the Paya case it was decided by a casting vote, all three courts ultimately held there was a sufficient degree of control over the work, there was mutuality of obligation within each contract and personal service was required. In the other four cases to reach the tax tribunals HMRC have not been successful. These cases were: •

Albatel Ltd v HMRC [2019] UKFTT 195 (TC);

•

Atholl House Productions Limited v HMRC [2019] UKFTT 242 (TC);

•

Kickabout Productions v HMRC [2019] UKFTT 415 (TC);

•

Canal Street Productions v HMRC [2019] UKFTT 647 (TC).

1.46 The first and last of these was for services being provided to ITV whilst the second related to the BBC and the last one was for work carried out at TalkSport which was also decided by a casting vote. 1.47 This string of cases is quite interesting, partly because it makes a change for a different sector to be challenged under IR35 rather than the IT industry but also because of the mixed bag of results. Three cases related to work at the BBC with different outcomes being reached, two were decided by a casting vote and one was unsuccessfully appealed. These cases highlight the mess that is created by IR35 and the uncertainty and difficulty faced by companies seeking to apply the legislation. In the Paya case the tribunal referenced that they would welcome government intervention into IR35 legislation because of how complicated it is. 1.48 There are still many similar cases being pursued by HMRC so I would not expect these to be the last in this sector especially now HMRC have been successful in the Upper-tier Tribunal case of Christa Ackroyd as it could give them confidence and justification for continuing with challenges in the media sector. 1.49 Even if the media cases are put to one side, HMRC have endured a very poor IR35 record over the last decade and lost the vast majority of the cases that have reached the tribunals. This begs the question as to whether companies are caught by IR35 as often as the Government believe given that they estimate non-compliance will cost £1.3bn by 2023/24 (see the Off-Payroll Working Rules Consultation).

EMPLOYMENT STATUS 1.50 Matthew Taylor was appointed by the government in 2016 to conduct a review as to how employment practices needed to change in order to keep up with modern working practices. Whilst employment status for tax purposes was not originally part of the remit of the review, it became a key part given the intertwining nature of employment status. 12

Outline and Recent Developments 1.55 1.51 Following the review, the Good Work Review of Modern Working Practices was published (https://www.gov.uk/government/publications/goodwork-the-taylor-review-of-modern-working-practices) which highlighted the current difficulties with employment status and recommended different options open to the government to explore to resolve some of the issues. Off the back of this report, the government then released a consultation on employment status whereby all available options were put up for consideration so that the law could be easier to understand and apply (https://assets.publishing.service. gov.uk/government/uploads/system/uploads/attachment_data/file/679853/ FINAL_-_Employment_Status_consultation_-_FOR_UPLOADING_and_ PRINTING.pdf). 1.52 The content of the consultation implies the best way forward may be to introduce primary and secondary legislation to set out when someone is an employee in the hope it will remove some of the question marks over this complex issue. The government could also decide to redefine some of the key status tests or remove them altogether from consideration (mutuality of obligation and personal service are the most likely to fall victims of being excluded from any legislation, or being demoted to just additional factors to be considered). 1.53 Whatever road lies ahead for employment status, it would need to be consulted on before any legislative change and so it is unlikely to fundamentally change within the next couple of years (if at all).

UMBRELLA COMPANIES 1.54 The Matthew Taylor review also considered the role played by umbrella companies and the confusion caused by the way in which they pay employees. The review accepted that umbrella companies now play an important role in the supply chain for many recruitment companies but that individuals were often unsure how and what they have been paid and they often take home far less pay than they initially anticipated when they agreed to the assignment. 1.55 The government acknowledged this was an issue in the industry and an easy one to fix. As such from April 2020, agencies must supply temporary workers with a key information document before the services are providedas set out in the Conduct of Employment Agencies and Employment Business Regulations 2003, SI 2003/3319, reg 13A.

Focus Point From April 2020 agencies have a requirement to provide a key information document to individuals working through an umbrella company to highlight how much they can expect to take home. 13

1.56  Outline and Recent Developments 1.56 The key information document does not have to set out all the contractual information but should provide the worker with an overview of their engagement and pay. The document will not have to be specific to the individual’s circumstances but will have to show how their rate of pay will be affected by fees and deductions in the supply chain. This is considered in more detail in Chapter 3 and Chapter 4 but will require a great deal more communication between the agency and the umbrella company and whilst it may initially be an inconvenience for the companies, any greater clarity over how payments will be made and what an individual can expect to take home, from the offset of a contract, can only be a positive step.

14

Chapter 2

Employment Status

SIGNPOSTS •

There is no helpful definition of what makes an individual an employee, and so we must turn to court judgments to consider how they have determined the issue. The best starting point is still regarded as the one set out in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497.

•

Three main principles have evolved from Ready Mixed Concrete that determine whether a contract is one of employment. These are the requirement of personal service, a sufficient degree of control (including the right of control) and mutuality of obligations.

•

Once the courts have considered the three factors above (the irreducible minimum), they will then go on to consider any other factors which are inconsistent with an employment relationship such as whether the individual is in ‘business on their own account’. They may then stand back and look at the overall picture to reach a conclusion.

•

It is easy to be swept-up in trying to (or believing you have to) establish that an individual operates a fully-fledged business when in fact the focus first and foremost should be to consider whether they tick the right boxes to make them an employee.

•

There are many misunderstandings about employment status and with such a vast array of case law judgments to consider it is easy to misunderstand or misapply how the facts of a case may tie in with the law. Poor advice can sometimes be more damaging and costly than no advice at all.

•

The government have consulted on changing the complex law on employment status a few times in the past and the most recent consultation (2018) sets out a number of ways in which the law could be changed so that it is easier to understand and apply, each however with its own benefits and drawbacks. To date no changes have been made due to the drawbacks.

15

2.01  Employment Status

LEGISLATION AND CASE LAW 2.01 The Income Tax (Earnings and Pensions) Act 2003, s 4 defines what is meant by employment: (1) In the employment income Parts ‘employment’ includes in particular (a)

any employment under a contract of service,

(b) any employment under a contract of apprenticeship, and (c) (2)

any employment in the service of the crown.

In those parts ‘employed’, ‘employee’ and ‘employer’ have corresponding meanings.

The Social Security Contributions and Benefits Act 1992 (SSCBA), s  2(1) defines the phrases ‘employed earner’ and ‘self-employed earner’ as follows: (a) ‘employed earner’ means a person who is gainfully employed in Great Britain either under a contract of service, or in an office (including elective office) with general earnings; and (b)

‘Self-employed earner’ means a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment).

These statements do not provide a great deal of insight and all focus is on what is meant by a ‘contract of service’, unfortunately this term was also defined very vaguely, as set out in the Social Security Contributions and Benefits Act 1992: ‘Contract of service means: any contract of service or apprenticeship whether written or oral and whether express or implied.’ The above definitions are all the ones in legislation that provide any guidance over employment status for the taxpayer or the courts. These are clearly, not very helpful in practice. 2.02 If HMRC reach the opinion that an individual was in fact an ‘employee’ working under a contract of service, they will issue a Section 8 Decision under the Social Security Contributions (Transfer or Functions, Etc.) Act 1999 for any unpaid national insurance and raise a Regulation 80 Determination under the Income Tax (Pay As You Earn) Regulations 2003, SI  2003/2682 for any tax due. 2.03 The onus of proof rests with the appellant under reg 10 of the Social Security (Decisions and Appeals) Regulations 1999, SI 1999/1027 for National Insurance and s 50(6) of the Taxes Management Act 1970 for tax. 2.04 If HMRC’s opinion is disputed the Notices and Determinations can be appealed and the case listed for a hearing at the tax tribunals. The tribunal’s task is then to considerer whether an individual should have been an employee or not and to do this, they will have to consider what is meant by a contract of service and whether it exists in the case under appeal. 16

Employment Status 2.10 2.05 It is important for the reader to know the difference between a contract of service and a contract for services for any of the case law to make sense. These terms are sometimes used interchangeably, which is incorrect as they are very different, and the case law discussed in this chapter may get confusing unless this distinction is clear. Focus Point A contract ‘of service’ is a contract to serve, ie, a contract of employment, in the same sense of the archaic term master and servant. A contract ‘for services’ however is a contract to provide services to another person in the sense of one business providing services to a client or customer.

BACKGROUND 2.06 The question of whether an individual is an employee or not has been argued in the courts many, many times, over many, many years, whether it be an employment rights dispute or an HMRC challenge over the tax and NI position. 2.07 This is primarily a result of there being no overly helpful definition of when an individual is an employee, working under a contract of service or when an individual is deemed to be self-employed agreeing to a contract for services. The matter then becomes an issue of common law whereby the courts decide what cases and what tests should be adopted to determine the issue.

The main employment status tests 2.08 The first core defining feature of an employee relationship was deemed to be control, as set out in Yewens v Noakes (1880) 6 QBD 530: ‘A servant is a person subject to the command of his master as to the manner in which he shall do his work.’ 2.09 The law remained largely unchanged from 1880 until 1968 when two High Court cases acknowledged that the working relationship between employers and their employees had changed and the courts should consider factors beyond merely control, rather than viewing employment status on such narrow grounds. The courts acknowledged that there were many examples when an individual would undoubtably be self-employed even though they were in fact subject to a high degree of control. 2.10 These two important cases were Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2  QB  497 and Market Investigations Ltd v Minister of Pensions and Social Security [1969] 2 QB 173. 17

2.11  Employment Status 2.11 This move away from purely focussing on control resulted in numerous other tests being considered and developed over the following 50 years, ultimately leading to the position where the taxpayer has an extremely complicated task of knowing not only which tests should be applied and in which order, but how much weight should be given to each test. 2.12 There are many misunderstandings as to when a person can be engaged on a self-employed basis including the belief that if an individual works for other companies they cannot be an employee or perhaps because they have their own tools, or even that they don’t work continuously or have a Unique Tax Reference number. Pointers such as these may have some foundation from the various case law judgments, but they will rarely determine the issue on their own. An employee for example, can have more than one employment and so why does working for others mean someone is self-employed? 2.13 The most widely accepted approach to employment status is to start with the main principles as set out in Ready Mixed Concrete. These principles have developed over time but are essentially whether there is mutuality of obligation and personal service, along with a sufficient degree of control over the individual to create an employer/employee relationship. If these factors are all present, the courts will go on to consider whether there are any other factors which are inconsistent with the contract being one for employment. 2.14 One of the ways of demonstrating the terms are fundamentally inconsistent with an employment relationship is by showing that the individuals are ‘in business on their own account’; an approach adopted in the Market Investigations case. Whether an individual is deemed to be ‘in business on their own account’ can incorporate many factors including whether the individual is subject to financial risk, if they have the ability to profit from the work and whether they have their own business structure such as providing tools, equipment or materials, their own website and marketing and the list goes on. 2.15 HMRC, taxpayers and even advisers will sometimes place too much reliance on the ‘in business on your own account’ approach at the expense of the tests set out in Ready Mixed Concrete. This is a significant flaw in applying and defending employment status and overlooks three very important principles which can be enough on their own to establish that an individual is not an employee. 2.16 It is understandable why HMRC would prefer to gloss over Ready Mixed Concrete and place more reliance on the ‘in business on your own account’ route because it can be difficult for a taxpayer to establish an individual has a ‘business’ of their own and HMRC can then side-step three areas that would be knock out blows for them. It is essential that the courts are directed towards Ready Mixed Concrete and once, and only once, the irreducible minimum has been considered, should the court be moved on to other tests. 18

Employment Status 2.20 Focus Point It is established case law that the tests in Ready Mixed Concrete of mutuality of obligation, personal service and control must be considered before moving on to look at any other factors that may influence whether the contract is one of employment.

2.17 The courts may then adopt a further approach as discussed in Hall v Lorimer [1992] 1 WLR 939 of standing back and looking at the overall picture to decide whether the relationship looks like one of employer/employee. This is perhaps the most unpredictable of all the tests as it is highly subjective. It does, however, provide sufficient latitude for the courts to take into account any other factors that do not sit well in the above categories where it would almost be perverse to hold the individual was an employee. In the case of Hall v Lorimer, Mr Lorimer was a vision mixer who had very little by way of ‘business factors’; he had no equipment, very little chance to make a profit or financial loss and so the ‘in business on your own account’ test would have pointed to Mr Lorimer being an employee. He did however work on 574 separate engagements over 800 days which flies in the face of an employee relationship and led the High Court to conclude that the ‘business on your own account’ test may not be overly helpful for individuals carrying out a profession or vocation. The court concluded that despite not having the hallmarks of a business, he was still selfemployed when you stood back and looked at the overall picture. 2.18 In the same way as standing back and looking at the picture, the courts may consider whether an individual is ‘part and parcel’ of the client’s organisation. This approach is seldom used however and will often only feature in case law judgments where the judge considers this approach to ensure all angles have been considered, thereby reducing the possibility for an appeal. 2.19 In the same way that the standing back approach works, being ‘part and parcel’ of a business can be a useful test in the right circumstances. A good example of someone being ‘part and parcel’ of a client’s business was seen in the case of B.S.M (1257) Ltd and another v Secretary of State for Social Services [1978] ICR 894 whereby the company persuaded all their driving instructors to work via their own limited companies so it could save employer’s National Insurance. The instructors continued to operate in the same way as when they were employees, the only difference being the tax loss to the government. They drove a company car, wore a company uniform and presented themselves as part of B.S.M. It would not be in the public interest for companies to be able to shift their responsibilities so easily and blatantly and it was not surprising that the court in this case held that when looking at the instructor, he was a ‘company man’ which enabled them to find the individuals were employees and the restructuring of the business to avoid employer’s National Insurance failed. 2.20 Last of all, if after considering all of the above, the courts are still in doubt as to the employment status of an individual, they will take into account the intentions of the parties to decide the matter. As employment status is a 19

2.21  Employment Status complex area of law, this acts as a backstop so that the courts will always be able to reach a decision.

DIFFICULTIES WITH EMPLOYMENT STATUS 2.21 The above is a simplistic overview of the core principles of employment status and on the face of it, there is a logical approach for considering whether someone is an employee or not. As they say however, the devil is in the detail and with employment status there are plenty of details to consider and apply. 2.22 Employment status cases are a mixed question of fact and law. In areas of tax where the law is clear such as whether filing a late return triggers a penalty, it is generally easy to apply the facts and reach a definitive conclusion. The law however in this area is complicated and the huge variation in every case over the facts and how they differ can make it extremely difficult to apply such complicated laws. The concept and application of mutuality of obligation is a perfect example of the law being complex where even some judges are unsure of what it actually means: 2.23 Special Commissioner Howard Nowlan, Castle Construction (Chesterfield) Ltd v Revenue & Customs [2008]  UKSPC SPC00723 made a couple of comments about mutuality in his judgment: ‘Whether this point is what is contemplated by the notion of the “want of mutuality” I do not know.’ ‘Thus two minor conclusions that I reach at this stage are that if there is any substance in the “want of mutuality” requirement, then, whatever it is, it was absent in this case.’ 2.24 If learned judges struggle to decipher the legal principles of employment status, what chance do us mere mortals have and does this demonstrate that the law on employment status needs an overhaul? 2.25 The future of employment status is considered in more detail later in the chapter but if a simplistic approach were applied to employment status which set out measurable and exact criteria such as an individual being put on PAYE if they work for the same client for three months, this would involve a radical change to the law and would mean many thousands of individuals that are currently self-employed would be brought within the PAYE scheme. This would be appealing to the government but from a political perspective, it would be a dangerous hand to play. It could also have serious consequences on the flexibility of the UK labour markets which is known for being one of the most flexible workforces in the world. 2.26 The close correlation between employment status for tax purposes and employment rights purposes muddies the water even further as both will often consider similar principles but need to consider them for slightly different purposes. This was so, with many cases involving mutuality of obligation where an individual claiming employment rights will have to demonstrate 20

Employment Status 2.32 mutuality of obligation for a different reason to HMRC challenging a company over employment status. 2.27 The employment status headache is then exacerbated even further because employment status is fact specific whereby a decision may be made in one case, but a similar business will have different facts over how they operate and require a different analysis of the law. The cases of Dhillon v HMRC [2017] UKFTT 17 (TC) and Turnbull v HMRC [2011] UKFTT 388 (TC) emphasise this issue where the tribunal in the Dhillon case commented as follows: ‘This conclusion differs from that reached by the First-tier tribunal in Brian Turnbull, which is of persuasive (but not binding) authority for us, on similar, but by no means identical, facts.’ 2.28 The chances of a case having identical facts will be extremely remote, if not impossible, and the fact that Dhillon and Turnbull had similar facts but reached a different outcome really does highlight the complexity of employment status and the difficult position the taxpayer will be in. Focus Point The nature of case law means that two cases can have similar facts and yet have different outcomes. This is problematic for anyone trying to achieve clarity and certainty over their legal position. 2.29 More recently, HMRC have challenged the working practices of seven presenters in the media sector; Christa Ackroyd Media Ltd v Revenue and Customs [2019]  UKUT  326 (TCC); Albatel Ltd v Revenue & Customs [2019]  UKFTT  195 (TC); Kickabout Productions Ltd v Revenue & Customs [2019] UKFTT 415; Atholl House Productions Ltd v Revenue & Customs [2019]  UKFTT  242 (TC); Paya Ltd & Ors v Revenue & Customs [2019] UKFTT 583 (TC); Canal Street Productions v HMRC [2019] FTT 647 (TC) and Red, White and Green Limited v HMRC [2020] UKFTT 109 (TC). 2.30 In the Ackroyd case, HMRC were successful in the Upper-tier Tribunal at demonstrating Mrs Ackroyd worked in a similar way to an employee. HMRC lost the Albatel, Kickabout Productions, Atholl House and Canal Street cases but won the Paya and Red White and Green cases. Two of the three cases were decided by a casting vote. 2.31 These cases all highlight that it is extremely difficult for anyone to engage a self-employed person with absolute confidence over the position. 2.32 It is an interesting point to note that the Office of Tax Simplification considered employment status over the course of seven years with a view of suggesting ways to improve its application and clarity and in the Foreword on their final report in 2015 (https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/537432/OTS_Employment_ Status_report_March_2016_u.pdf) they referenced the following commentary: 21

2.33  Employment Status ‘Employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to “solve it”, we should immediately move on to world peace as we’d clearly be on a roll.’ 2.33 Given the law is complicated and difficult to apply, how is the taxpayer supposed to apply employment status correctly in practice when over the course of the last 50 years, different approaches have been applied by the courts with different weight getting attributed to each approach? 2.34 To rub salt into the wound, if employment status is applied incorrectly, HMRC will seek retrospective liabilities plus interest and penalties which date back up to four years for tax and six years for National Insurance. This would be more understandable with a piece of law that was clear or where there was fraudulent or negligent behaviour, but it seems unduly unfair as it stands. Mr Justice Howard Nolan was sympathetic to this issue in the Castle Construction case although unable to change the position when he commented on the individuals being paid a higher rate because they were self-employed and so it wouldn’t be right to assess the employer on those rates: ‘it would seem to me to be fair and appropriate that this status should apply only in future, and not for past periods. Of course, I understand that I have no jurisdiction in relation to this suggestion.’

HIERARCHY OF THE COURTS 2.35 Before we examine the case law in more detail it is first important to consider the hierarchy of the courts in the United Kingdom. As can be seen above, the legislation surrounding employment status does very little to aid our understanding and so whether an individual is an employee or not is decided by considering previous cases and how they have been decided. If you are presenting your case to HMRC or the tax tribunal and wish to rely on case law to support your position, cases from the higher courts will carry far more weight and be binding on judgments at the lower courts. 2.36 If a taxpayer is challenged by HMRC over employment status and neither party will back down it will ultimately need to be resolved at the Firsttier Tax Tribunal. Any First-tier Tribunal judgment will only be persuasive in value and cannot bind any other court. Following the judgment from that case, either party may be granted the right to appeal to the Upper-tier Tax Tribunal. Any appeal from the Upper-tier would then go to the Court of Appeal and finally go to the Supreme Court. Each court judgment will be legally binding on the lower courts and so the judges must follow the case law precedents unless they are able to differentiate their case in any way. 2.37 This is similar if the matter in dispute is an employment law claim in which case the case will initially be heard at an Employment Tribunal then the Employment Appeals Tribunal before following the same track at the Court of Appeal stage. 22

Employment Status 2.40 2.38 There are references in this book to cases from the Special Commissioners. Prior to the Tribunals, Courts and Enforcement Act 2007 which came into force in 2009, cases would be heard at either the General Commissioners or the Special Commissioners instead of the First- and Uppertier Tax Tribunals. The taxpayer could elect for their case to be heard at the Special Commissioners who would generally have a greater tax knowledge and understanding than the Generals and the judgments would also be published. If a party wished to Appeal from either of these Commissioner hearings the case would go before the High Court before moving the Court of Appeal and Supreme Court (or House of Lords as it was then known). 2.39 Cases such as Narich Pty Ltd v Commissioner of Payroll Tax [1984]  ICR  286 were held in the Privy Council which are Appeals from Commonwealth Countries. The Privy Council usually consists of judges from the UK  Supreme Court plus senior judges from other Commonwealth Countries, In the case of Willers v Joyce & anr [2016] UKSC 43 and 44 the Supreme Court held that Privy Council judgements ‘should be afforded great weight and persuasive value’. Diagram of Court System Supreme Court

Court of Appeal

Upper Tier Tax Tribunal

Employment Appeals Tribunal

Lower Tier Tax Tribunal

Employment Tribunal

READY MIXED CONCRETE 2.40 Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2  QB  497 is the seminal case when it comes to employment status and is the foundation upon which the law has been built and developed. There is little point trying to understand employment status without first considering this case. Ready Mixed Concrete was reconfirmed as the continuing authority most recently in the Upper Tier Tribunal Christa Ackroyd case, in the Supreme Court case of Autoclenz Ltd v Belcher & Ors [2011] IRLR 820 as well as the Court of Appeal in Montgomery v Johnson Underwood Ltd [2001] IRLR 269 in which Buckley J stated: ‘For my part, I regard the quoted passage from Ready Mixed Concrete as still the best guide and as containing the irreducible minimum by way of legal requirement for a contract of employment to exist.’ 23

2.41  Employment Status 2.41 Employment status cases had been considered long before Ready Mixed Concrete but had focussed exclusively on the level of control over an individual and whether it was sufficient to create a ‘master/servant relationship’. This dates back as far as 1880 in the Yewens and Noakes case. 2.42 Mr Justice MacKenna in Ready Mixed Concrete recognised that the way in which individuals worked had changed over time and that there would be occasions where an individual may be subject to the same control as an employee but have other factors which clearly put them outside the scope of being treated as an employee: ‘The judge’s task is to classify the contract. He may, in performing it, take into account other matters besides control.’ 2.43 Control, as he later said, ‘is not everything’. This was supported in subsequent cases such as Market Investigations and Global Plant Ltd v Secretary of State for Health and Social Security [1971] 1 QB 139: ‘I  think it is well accepted now that the idea of the degree of control exercised by the employer over the servant being the decisive factor in this question has been largely modified. It is recognised nowadays that other factors, other, that is, than simply the degree of control exercised by the alleged master, have to be taken into account in separating a contract of service from a contract for services.’ 2.44 The High Court case of WF & RK Swan (Hellenic) Ltd v The Secretary of State for Social Services (unreported, 1983) also adopted a similar position: ‘It is now also well recognised that men who are subject to a very considerable degree of control may nethertheless be independent contractors. The self-employed labour only subcontractor in the building trade is perhaps the most obvious example, a class well recognised by, for example, the Commissioners of Customs and Excise.’ Focus Point Control used to be the sole determining factor for employment status, but it has been long recognised that other factors can also play a pivotal role. 2.45 Once it is clear the courts must consider factors in addition to control, the question over what makes an individual an employee or not must first turn to the basic question of what is actually meant by a contract of service (employment). Prior to Ready Mixed Concrete, this question was considered in the case of Chadwick v Pioneer Telephone Co [1941] 1 All ER 522 in which Mr Justice Stable considered the ingredients of a contract of service: ‘A contract of service implies an obligation to serve, and it comprises some degree of control by the master.’ 2.46 This provides a good basis from which to work but the reference to what a contract of service ‘implies’ is not absolute authority over what a contract 24

Employment Status 2.50 of service ‘is’. As already seen, this is not defined helpfully in legislation and so Mr Justice MacKenna used the Chadwick case as a benchmark and put the matter beyond doubt and elaborated on this even further: ‘A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.’ 2.47

MacKenna J then continued to explain the above points in more detail:

‘As to (i). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job either by one’s own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be: see Atiyah’s Vicarious Liability in the Law of Torts (1967) pp 59 to 61 and the cases cited by him. As to (ii). Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted.’ 2.48 Point (iii) was considered in more detail than the above but the essence is that ‘if the provisions of the contract as a whole are inconsistent with its being a contract of service, it will be some other kind of contract, and the person doing the work will not be a servant.’ 2.49 The wording of these three key points led to the evolution of the main employment status tests considered by the courts being mutuality of obligation, personal service, control and business on your own account, each of which will be considered in more detail below.

CONTROL The importance of control 2.50 HMRC’s view can sometimes be that the level of control does not provide much assistance for determining employment status. Example of HMRC’s stance on control Frank is a self-employed scaffolder for a large scaffolding business. Like many in the construction industry, he is told where the sites are that need the scaffolding and given drawings as to what scaffolding is required. He 25

2.51  Employment Status naturally has no choice over where the scaffolding goes and so HMRC argue that none of these point towards self-employment. Frank is also required to work within site hours and whilst he has flexibility within the site times, HMRC argue this is no different to an employee on a flexible hour’s contract. Frank is not subject to control over how he undertakes the work, except for health and safety purposes but HMRC maintain he is a skilled tradesman with 15 years’ experience and so control over how he undertakes the work does not provide much insight. HMRC’s overall view is that Frank is an employee and that the control test is of limited value and therefore not determinative of employment status.

2.51 To support this position, HMRC will quote the Market Investigations case in which Mr Justice Cooke confirmed that control was no longer a decisive test: ‘The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor’ 2.52 This statement has been quoted many times since, including in the Global Plant case and more recent cases such as Kickabout Productions Limited v HMRC  [2019]  FTT  415 and Matthews and anor v Revenue and Customs Commissioners [2012] UKUT 229 (TC) where a similar sentiment was applied: ‘The control test must be considered as a factor, but will not be decisive.’ 2.53 It is vital to consider cases like these in more detail however to ensure a full understanding of the legal position. The Market Investigations quote is often taken out of context and it is important to note that prior to Market Investigations and Ready Mixed Concrete, employment status was decided only on the issue of control. This had been the case since the previous century. Cooke J  does not demote the importance of control, in fact, he confirms it ‘has to be considered’ but he is actually agreeing with MacKenna J that other factors other than control must also be considered. 2.54 Approaching employment status in this way enables the courts to find an individual is self-employed even where there is control. As Cooke J said, it will no longer be the sole determining factor. 2.55 There are similar cases to the Matthews case and Kickabout Productions which have confirmed that ‘control may not be decisive’ and such cases appear to erode the importance of control. There is however a subtle but very important point to note here, and that is, control may not be decisive of employment status in cases where there is control, because other factors will still have to be considered which could mean the relationship is not one of employment. 2.56 The position is different however where there is a lack of control, and in that case the courts have made it clear that the relationship cannot 26

Employment Status 2.57 be one of employment. After all, cases such as Sherburn Aero Club v HMRC [2009] UKFTT 65 and Littlewood (trading as JL Window and Door Services) and another v HMRC [2009] STC (SCD) 243 were decided based pretty much solely on there being a lack of control. The agency legislation as set out in ITEPA 2003, s 44 was also amended in 2014 so that control is the sole determining factor and the more recent ‘Good Work’ review by Matthew Taylor (https://www.gov.uk/government/publications/good-work-the-taylor-reviewof-modern-working-practices) suggests that to simplify employment status, control over how the work is undertaken should be the main deciding factor. If you read the various IR35 cases in the media sector as well, control is a central point of discussion and it is apparent that it was a critical consideration in most of those cases. All these points go entirely against the stance that control is not determinative. Focus Point Control may not be decisive where it is present in a relationship because other factors may demonstrate an individual is self-employed. Where control is absent however, it will be decisive.

2.57 Explaining the above to HMRC may however be a waste of breath especially if they look at such statements without any context. Where this is the case and HMRC are not placing due weight on control, it will be important to know other case law which puts the matter beyond doubt. In the author’s opinion, the best case for addressing the importance of control is the Court of Appeal case of Montgomery v Johnson Underwood Ltd [2001] IRLR 269 where Lord Justice Longmore summarised the position concisely: ‘Whatever other developments this branch of law may have seen over the years, mutuality of obligation and the requirement of control on the part of the potential employer are the irreducible minimum for the existence of a contract of employment.’ In the same case, Mr Justice Buckley explained this even further: ‘McMeechan v Secretary of State for Employment [1997] IRLR 353 failed to do this, they reduced the two basic and essential facts to no more than material for the melting pot and thus found a contact of employment when one or both were absent. I agree with Mr Samek that, if this happened, the tribunal misdirected itself in law. It does not permit those concepts to be dispensed with altogether. As several recent cases have illustrated, it directs tribunals to consider the whole picture to see whether a contact of employment emerges. It is though, important that mutual obligation and control to a sufficient extent are first identified before looking at the whole.’ He summarised: ‘If he did intend to reduce the criterion of mutual obligation and be inference control as well to no more than matters to be weighed up with all other 27

2.58  Employment Status factors, with great respect, I disagree. More to the point, I consider such an approach to be contrary to the Ready Mixed Concrete case.’ 2.58 It is a compelling statement that if control is not given its true weight, the tribunal will be deemed to have misdirected itself in law. 2.59 Montgomery v Johnson Underwood supported the opinions reached previously by other courts such as the Privy Council case of Narich Pty v Commissioner of Payroll Tax [1984] ICR 286 which held: ‘The second principle is that, while all relevant terms of the contract must be regarded, the most important, and in most cases the decisive, criterion for determining the relationship between the parties is the extent to which the person, whose status as employee or independent contractor is an issue, is under the direction and control of the other party to the contract with regard to the manner in which he does his work.’ 2.60 This ties in perfectly with Market Investigations as in many cases, control may be decisive where it is absent. Its presence however does not preclude the contract from being one for services. Eric Newman Developments v HMRC [2012] UKFTT 111(TC) also addressed this perfectly: ‘This test is not decisive and will depend on the degree of control exercised in each case…In Market Investigations Ltd control was not determinative, where other factors pointed toward self-employment’ So, what do HMRC’s own Employment Status Manuals say on this point? 2.61 ESM0516 is a mixed bag, on the one hand it says ‘although the right of control is a significant factor and one which must be present in establishing whether someone is self-employed or employed, that right is not conclusive on its own’. It continues, ‘you must also bear in mind that the right of control is only one factor to take into account and must be considered in context.’ This is not ideal and could easily be misinterpreted. At the end of the document however it does go on to say: ‘Where the engager has no right of control whatsoever over the worker, there will not be a contract of service’ This in line with another statement in the Montgomery v Johnson Underwood case: ‘A  contractual relationship concerning work to be carried out in which the one party has no control over the other could not sensibly be called a contract of employment.’ 2.62 This manual is therefore somewhat contradictory and confusing. There are also a couple of points to bear in mind when quoting HMRC’s manuals and the first is that whilst it is handy to quote their own manuals if they support your argument, Employment Status Manuals have no bearing on the law and are not even persuasive, so a judge may be quick to dismiss them. The statement in ESM0516 is also a sweeping statement (no right of control whatsoever) and it would be a highly unusual and rare case for there to be a 28

Employment Status 2.67 complete and absolute absence of all aspects of control (health and safety is just one example). This is why the employment status test for control is that it must be a sufficient degree of control which will be discussed in more detail below. This statement in ESM0516 therefore provides HMRC with plenty of wriggle room if one were to use it to highlight that control is a vital component of an employment relationship.

Sufficient degree of control 2.63 In the Ready Mixed Concrete judgment, MacKenna J  commented ‘whether the right exists in a sufficient degree to make one party the master and the other his servant’. It is clear that the control test is not simply whether there is any control over the individual. A greater level of control is required, and it must be sufficient to create an employer/employee relationship. The was set out nicely in the Sherburn Aero Club Ltd case where Special Commissioner John Clarke held: ‘The Control must relate to the performance of the service. It must also be of a type, quality and extent to result in the relationship being that of employer and employee. Rules of general application to everyone, in whatever capacity they were present on SAC’s premises, cannot be seen as control of the nature being considered by McKenna J.’ 2.64 In the JL Windows case the same Special Commissioner found there to be aspects of control over the work but that it did not amount to a sufficient degree of control. The High Court reached a similar conclusion in the case of HMRC v Philip John Wright [2007] EWHC 526 (Ch): ‘The real question which it seems to me the General Commissioners ought to have answered but did not was whether Mr Wright had sufficient day to day control over his workers to make them his employees.’ 2.65 Once again this is a subjective test and it is very difficult to know for certain whether the control exercised over a self-employed person will breach this threshold. There are however some useful guidelines that can be extracted from case law. 2.66 In the case of Castle Construction (Chesterfield) Ltd v HMRC  [2008]  UKSPC SPC00723 Special Commissioner Howard Nowlan confirmed: ‘The enforcement of safety rules, required by legislation…are hardly indications of whether the Appellant is exercising the sort of control that would indicate that the people indisputably working for it were employees.’ 2.67 HMRC generally accept that health and safety or other rules of general application that apply to all individuals regardless of their employment status do not demonstrate the right of control. These are imposed on the companies 29

2.68  Employment Status by law or regulatory bodies and are there for good reason, not simply because the company likes to retain control over the individuals. 2.68 This in itself is not always as simple as it sounds however and HMRC will often cite the use of method statements in the construction industry as showing a company retains control over how the work is carried out even though in 99% of cases, method statements are implemented purely for health and safety compliance. 2.69 In other cases such as Midland Sinfonia Concert Society Ltd v Secretary of State for Social Services [1981] ICR 454 the members of an orchestra were told where to perform, what time and had to follow the instructions of the conductor, but Mr Lord Justice Glidewell held that whilst there was some degree of control by the respondents while the applicants were actually working, it was no more than what was required by the very nature of the work: ‘I regard the facts as establishing no more than the minimum arrangement necessary to ensure that the various musicians assembled in the right place at the right time in order to form an orchestra for an engagement, while the control exercised by the conductor was clearly a fundamental part of the orchestra playing. Neither, in my judgment, amounts to the sort of control of the manner in which an employee carries out his work which is one of the important characteristics of a contract of employment.’ 2.70 All these cases make it clear that incidental elements of control will not alter the status of the relationship and for it to be one of employment, there must be a high level of control. In contrast, in the case of Weight Watchers (UK) Ltd & Ors v Revenue & Customs [2010] UKFTT 54 (TC) the individual leaders who ran Weight Watchers’ classes were told they had to maintain a certain body weight. The court in that case found that control was at such a high level it was actually affecting their personal lives and as such was clearly within the remit of being ‘a sufficient level of control’. Focus Point Control over incidental matters will not be enough for an employment relationship. There must be a sufficient degree of control.

2.71 HMRC can be quick to assume control or ignore the fact that there is a threshold for control and having an aspect of control does not necessarily mean it is the same level of control as an employee. In the Mal Scaffolding case Special Commissioner David Williams was unimpressed with HMRC’s approach to the case when he made this blunt assessment: ‘The Commissioners appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking. They have totally failed to persuade me.’ 30

Employment Status 2.76

Who controls the individuals? 2.72 From time to time the situation arises whereby a company uses the services of self-employed sub-contractors and the company itself has little involvement with the services being provided, perhaps because they are on a main client’s premises. 2.73 The court have previously considered whether third parties and end client representatives can be deemed to carry out the control function on behalf of the company engaging the self-employed individuals. The first notable case to consider this was Global Plant Ltd v Secretary of State for Health and Social Security [1971] 3 All ER  385 in which Chief Justice Widgery stated in the High Court: ‘It is perfectly true that the control on the sites was not exercised by the company’s representatives but by the representative of their customer, the site foreman. For my part, I cannot see that this makes any difference, and in my judgment the position would be exactly the same if the company had sent its own representatives to the site to transmit to Mr Summers the necessary instructions.’ This question has also arisen more recently in HMRC  v Philip John Wright [2007] EWHC 526 (Ch): ‘I would not regard the mere fact that workers were told what to do by a site foreman as amounting to control’. As well as the Special Commissioners’ case of Mark Andrew Lewis (t/a MAL Scaffolding) v Revenue & Customs [2006] UKSPC SPC00527: ‘I  do not accept the argument that the site agents could be regarded as carrying out the control function over the workers for MAL  Scaffolding, the site agents have independent statutory safety obligations that apply to employee and self-employed worker alike.’ 2.74 There is a fairly mixed message in case law when it comes to control being exercised by other people. In the author’s opinion the dividing line is whether control is delegated to another company or individual and for what purpose. In the case of Global Plant, the company was not on site and it would appear that the customer adopted the right of control whereas in Philip Wright and Mal Scaffolding, there were foremen on site but for different reasons, and they were not there to undertake a supervisory role over the individual’s work but rather to ensure the compliance with regulations and for the smooth running of the site. 2.75 Applying this in practice, it is important to consider whether any other individual may also be deemed to control the self-employed contractor and where this is the case, consider what purpose there is over such a control and whether the company delegated such control to that person.

The different aspects of control 2.76 We know that control is fundamental to an employment relationship and that there must be a sufficient degree of control but in order to apply this 31

2.77  Employment Status in practice, it is crucial to understand what the courts mean by control. In the recent case of Professional Game Match Officials v HMRC [2018] UKFTT 528 (TC) Judge Sarah Faulk noted that this part of an employment relationship is not a straightforward one. 2.77 Going all the way back to Yewen and Noakes in 1880, the court’s main consideration was whether there was control as to the manner in which the services are provided; that is, whether the individual is subject to control over how they undertake the work. When MacKenna J elaborated on control he held: ‘Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted.’ 2.78 This expansion from the Yewens and Noakes application of control then includes control over what work is done, where and when in addition to the manner. The problem with breaking control down in this way is that depending on the nature of the case, each element may not actually assist with establishing whether there is control. There are countless cases whereby each of these aspects have been deemed to be neutral or of limited assistance to the courts. Example – control over what services are provided Jane is an electrician, she works for a couple of main contractors and also does some domestic work. In each case, Jane needs to be told by either the main contractor or the private customer what the nature of the work is. A customer will not simply phone Jane and say they need an electrician and provide no further information; she will have to be told what the problem is or what work needs doing. This cannot logically be deemed to be the control MacKenna J had in mind. 2.79 Going against this logic, the case of Various Claimants v Catholic Child Welfare Society & Ors [2012]  UKSC  56 held that the significance of control is that the employer can direct what is done, not necessarily how he does it, although this was a somewhat unusual case. 2.80 Control over when and where the services are provided can generally provide more assistance than control over what services are provided. If for example a company provided services nationally to its customers but its subcontractors retained control over which jobs they accepted, and therefore ultimately where they chose to work, the subcontractors would have the ultimate right to pick the jobs at locations that suited them and the company would not have the right of control over where they work. Even with this 32

Employment Status 2.85 scenario, HMRC could still argue that once they arrive at that site, they will be told where they are needed which potentially implies control. 2.81 In many cases however the client will inform the individual what work is available and where it is. The nature of the work may again mean the individual will have no ability to control where the work is. 2.82 The same is true over when the services are provided. The subcontractor may be able to determine what hours and days in which to provide services but in most cases they will have to fit in with the customer’s needs, site or operational hours and potentially other individuals that are dependent on that work being completed at a specific time. It is common for a self-employed individual to need information as to what work needs doing, where and when and they have no ability to control those factors. For this reason, in the case of Paul Anthony Bell v HMRC [2011] UKFTT 379 (TC), the First-tier Tribunal found that the times of work being specified by the client did not amount to control. 2.83 The tribunal judge in Mitchell v Anor v HMRC [2011] UKFTT 172 (TC) had a similar difficulty and used the following example to highlight the problem: ‘If you say to a plumber, for example, please fix my leaking pipe at my home on Thursday morning that cannot, in our view, turn a self-employed plumber into an employee…the circumstances (rather than the hirer) may dictate the nature of the job that needs to be done, as well as the place and the time.’ The above are all standard examples that quickly highlight the difficulties emerging when looking at whether there is control. 2.84 This leads us onto control over the manner in which the services are provided. This was the original test when it came to control and is also now the sole test for the agency legislation (ITEPA 2003, s 44) and the expenses legislation for intermediaries (ITEPA 2003, s 339A) so there is a very strong argument that this is, and should be, the most influential aspect of control when it comes to employment status. Although it was some time ago now, in the case of Australian Mutual Provident Society v Chaplin and Another [1978] 18 ALR 385 the judge adopted this very position when he quoted: ‘The older test was simple. It all turned on the right to control the manner of doing the work. There is no magic touchstone. The court has to look at a number of indicia and then make up its mind…but the power of control over the manner of doing the work is very important, perhaps the most important of such indicia.’ 2.85 In the Castle Construction case, the Special Commissioner was tasked with considering the employment status of 321 individuals, the majority of whom were bricklayers. The case is an interesting one and a good judgment to read for any businesses in construction as it deals with a fairly typical way in which builders operate. When it came to the issue of control, Special Commissioner Howard Nowlan found as follows: 33

2.86  Employment Status ‘There was obviously complete control over where, and in what sequence, walls should be built. This was almost entirely dictated of course by the principal contractor, in that the principal contractor was naturally working to plans, and also as overall manager of the site, specified the order in which the various trades, bricklayers, scaffolders, plasterers, electricians, plumbers and others, were needed, and naturally these calculations often dictated the order in which walls would be built. I  might observe at this point that I find it difficult to discern too much significance from this aspect of control. After all, if the brickwork had been sub-contracted to a team of brickies who provided all the equipment, and the bricks and mortar, and priced the job in one single quote for all the brickwork on the whole site (in other words to a team that would plainly have been sub-contractors on any test), the main contractor would have still had to ensure that the walls were built in accordance with the plans, and would still have needed to coordinate the bricklaying with the different trades being undertaken by others. The more relevant aspect of control, it seems to me, is the issue of whether the Appellant or perhaps even the main contractors exercised control as to how bricks were actually laid. All of the Appellant’s own witnesses consistently suggested that they knew how to lay bricks, and that no-one ever gave them any instructions as to how to exercise their craft. And had anyone done so, such instructions would not have been welcomed.’ 2.86 A simplified version of this was adopted in the case of Paul Anthony Bell v HMRC [2011] UKFTT 379 (TC) when the tribunal stated that provided the work was done to a required standard and in the position required, no other control was exercised over the manner in which it was done. Focus Point The importance of control over the different aspects of control, ie what, when, where and how will vary depending on the facts of the case and where there is scope for control. 2.87 These cases show how the law can be applied in practice and they both follow the same approach over control as Narich Pty Ltd v Commissioner of Payroll Tax [1984] ICR 286, PC: ‘The second principle is that, while all relevant terms of the contract must be regarded, the most important, and in most cases the decisive, criterion for determining the relationship between the parties is the extent to which the person, whose status as employee or independent contractor is an issue, is under the direction and control of the other party to the contract with regard to the manner in which he does his work.’ 2.88 Where this theory starts to fall down is if the individual providing the services is highly skilled because HMRC will argue that there will naturally be no need to control someone over how they work if they are an expert in their field. This is a perfectly plausible rationale and has a basis in case law dating back prior to Ready Mixed Concrete, when the case of Morren v Swinton and 34

Employment Status 2.95 Pendlebury Borough Council [1965] 1 WLR 576 was heard at the High Court and pointed out that whilst it was accepted that a person is an employee, if they are under the control as to the manner in which the work is done, the ‘absence of control as to the detailed way in which work is performed is not inconsistent with the employment of a skilled person’. 2.89 This is an approach seen from time to time in cases involving professional people and in fact applies to anyone with a skill in principle. If this is correct it would mean that all the individual elements of what MacKenna J  confirmed to be control, would be of very little assistance and control at that point could not be a deciding factor which we know from Montgomery v Johnson Underwood Ltd [2001] IRLR 269 would be a misdirection of law. 2.90 In cases involving IR35 this issue is present in nearly every case because of the type of work being undertaken which will usually be for professional or skilled services. For every case where the judge decides that control over the manner is the most important factor there will be another judge who holds that how they do the work is less important because of their skill set. 2.91 So, if the what, where and when can all be neutral factors and the how is of less significance with highly skilled professions, where does this leave us? 2.92 Cases such as George Mantides v HMRC  [2019]  UKFTT  387 and White and another v Troutbeck SA [2013] EWCA Civ 1171 help in this regard. In the Mantides case the judge commented that ‘something which can be called control is a necessary feature of an employment relationship even for a skilled employee.’ This suggests that whilst a skilled employee will be subject to less control, they will still ultimately be subject to the right of control. 2.93 In the Troutbeck case the judge accepted that whilst many workers (especially those who are professional or skilled) have substantial autonomy in the work they do, they may still be employees where the client retains the right to step in and give instructions. 2.94 This leads us nicely on to the right of control. The courts have made is clear that they will not just look at whether the company exercises a sufficient degree of control over the individual but more crucially whether they have the right to do so. Focus Point Whether there is a right of control, regardless of whether it is exercised in practice, is a fundamental part of determining employment status. 2.95 There will be many occasions where an experienced and skilled worker may not need to be subject to control but in an employment relationship the employer will still retain the right. In addition to the above cases, this was seen recently in the First-tier Tribunal decision of Professional Game Match Officials when Judge Sarah Faulk held that a ‘sufficient framework of control 35

2.96  Employment Status must exist in the sense of ultimate authority rather than there necessarily being day to day control.’ This is a good summary of the position over control and sets out the difference between how an employee and self-employed individual are subject to control. Example of right of control Susan has been an IT database specialist for 20 years and has agreed a contract with a new client. The client informs Susan what outcome she needs to achieve and whilst she is left to carry out the work with minimum supervision, other than progress meetings with a manager, the client does retain the right to change the scope of work and ensure Susan is working in accordance with the methodologies it deems suitable. The client does not control Susan on a day to day basis but has the ultimate right to control how Susan undertakes the work even though she specialises in that field.

MUTUALITY OF OBLIGATION 2.96 The concept of mutuality of obligation is the most complicated and challenging aspect of employment status. There have been (and still are) conflicting cases as to not only what is meant by this term but also whether it is important for considering employment status. There have been cases such as Stephenson v Delphi Diesel Systems [2003] ICR 471 whereby mutuality of obligation has been deemed irrelevant to the question over whether a contract is one of employment or not, and others, such as Carmichael and another v National Power plc [1999] 4 All ER 897 where the case has been determined solely on this issue. 2.97 As mentioned in the background of this chapter, even the courts can be non-committal or unsure about what is meant by mutuality of obligation. In the Special Commissioner case of Dragonfly Consulting Ltd v HMRC [2007] UKSPC SPC00655 Special Commissioner Charles Hellier set out his conclusions in relation to mutuality ‘with some diffidence’. This hardly inspires confidence for the taxpayer over the position. An even more reserved approach on mutuality was evident in Castle Construction (Chesterfield) Ltd v Revenue & Customs [2008] UKSPC SPC00723 when Special Commissioner Howard Nolan referred to not knowing what was meant by the notion of mutuality or ‘whatever it is’ and even in the Court of Appeal case of the case of Stringfellow Restaurants Ltd v Quashie [2012] EWCA Civ 1735 the judge referred to trying to bring together some of ‘strands’ of mutuality. 2.98 The road is long, winding and bumpy when it comes to mutuality and just when the dust appears to settle and some form of direction over this area can be seen, along comes another case to churn up the dust again. 2.99 As a result of mutuality being unclear with some mixed court decisions, when a company is under enquiry and the question of employment 36

Employment Status 2.103 status rears its head, HMRC will often not even consider whether there is mutuality of obligation in the relationship and proceed on the basis that this will automatically be present where a contract (of some sort) is in place (which will nearly always be so, even if it is just a verbal or implied contract). This is primarily because HMRC follow the stance seen in the Delphi case that mutuality does very little, if anything, in determining the nature of the relationship. Focus Point HMRC will regularly skim over or completely ignore whether there is mutuality of obligation and proceed on the basis that it is present. Taxpayers should not accept this and mutuality of obligation must always be considered when there is a question over employment status.

2.100 HMRC’s approach to mutuality of obligation was highlighted perfectly when changes were made to the public sector IR35 legislation in 2017 and HMRC made available its Check Employment Status for Tax (‘CEST’) tool which was designed to provide taxpayers with certainty over employment status decisions. The tool however fails to consider mutuality of obligation at all, let alone give it any weight. This was regarded as one of the major shortcomings of the CEST tool by many taxpayers and advisers and despite the government reviewing the CEST tool in late 2019, mutuality was still excluded.

Is mutuality of obligation important? 2.101 When a taxpayer finds themselves on the receiving end of an HMRC challenge over employment status they will need to demonstrate two main points on mutuality of obligation in order to move on to the evidence supporting the case. The first is that mutuality of obligation is a fundamental prerequisite of a contract of employment and the second is what is actually meant by mutuality of obligation. 2.102 There appears to be all round consensus that mutuality of obligation is an essential part of a contract. One of the key debates however is whether it is an essential part of a contract of employment or just a contract in general. If it were the latter and just something that one would see in every contract, it would have no bearing on the question of employment status for tax purposes. 2.103 The first notable cases regarding the importance of mutuality of obligation were Airfix Footwear Ltd v Cope [1978]  IRLR  396 and O’Kelly v Trusthouse Forte plc [1983]  IRLR  369. In O’Kelly, Lord Justice Ackner approved the passage from the Industrial Tribunal that the relationship had many of the characteristics of a contract of service but in their view, the one important ingredient missing was mutuality of obligation. 37

2.104  Employment Status 2.104 This was followed by the Court of Appeal case of Nethermere (St Neots) Ltd v Taverna and Gardiner [1984]  IRLR  240 which considered mutuality of obligation at length. The three judges in that case each agreed on the importance of establishing mutuality of obligation in an employment contract with Lord Justice Dillon’s comments being particularly concise: ‘It is said nonetheless that there is one sine qua non which can firmly be identified as an essential of the existence of a contract of service and that is that there must be mutual obligations on the employer to provide work for the employee and on the employee to perform work for the employer. If such mutuality is not present, then either there is no contract at all or whatever contract there is must be a contract for services.’ 2.105 The House of Lords then went on to consider mutuality of obligation in the case of Carmichael and another v National Power plc [2000] IRLR 43 and upheld the decision of the Industrial Tribunal that the case ‘founders on the rock of absence of mutuality’. The House of Lords’ judges then added to this further: ‘There would therefore be an absence of that irreducible minimum of mutual obligation necessary to create a contract of service.’ ‘Once it is accepted that tribunal’s finding as to the lack of mutuality of obligation between the respondents and the CEGB cannot be disturbed, it follows that the engagement of the respondents as guides in 1989 cannot have constituted in itself a contract of employment.’ 2.106 Perhaps the most succinct case for setting out the importance of mutuality of obligation is Montgomery v Johnson Underwood Ltd [2001] IRLR 269 where Mr Justice Buckley stated in the Court of Appeal: ‘McMeechan v Secretary of State for Employment [1997] IRLR 353 failed to do this, they reduced the two basic and essential facts to no more than material for the melting pot and thus found a contact of employment when one or both were absent. I agree with Mr Samek that, if this happened, the tribunal misdirected itself in law. If he did intend to reduce the “criterion of mutual obligation” and by inference “control” as well to no more than matters to be weighed up with all other factors, with great respect, I disagree. More to the point, I consider such an approach to be contrary to the Ready Mixed Concrete case.’ Lord Justice Longmore agreed with Mr Justice Buckley and added: ‘Whatever other developments this branch of law may have seen over the years, mutuality of obligation and the requirement of control on the part of the potential employer are the irreducible minimum for the existence of a contract of employment.’ 2.107 One would assume that the Carmichael and Montgomery cases surely put this matter to bed. How could it follow that mutuality is not important, when these cases were in the House of Lords and the Court of Appeal and contain such definitive statements. 38

Employment Status 2.110 Focus Point It is evident from all the case law judgments that mutuality of obligation is a vital component of an employment relationship. When the want for mutuality of obligation is satisfied however it is a different and more complicated question.

2.108 HMRC differentiate cases such as Carmichael v National Power and Montgomery v Johnson Underwood on the basis that they were employment rights cases and so have less bearing on employment status for tax purposes. This is because employment law cases will approach employment status from a different angle such as, trying to demonstrate there was a continuous contract throughout a particular period, which is not necessary for HMRC. Mutuality may then in theory be relevant, and in fact determinative, for the purposes of establishing continuous employment but not for whether a single contract is one of employment. This was discussed in the case HMRC love to quote, Stephenson v Delphi Diesel Systems Ltd [2002]  UKEAT  1314_01_1111, where Mr Justice Elias considered the difference in importance of mutuality for employment law purposes: ‘It is often necessary then to show that the contract continues to exist in the gaps between the periods of employment. Cases frequently have had to decide whether there is an over-arching contract or what is sometimes called an “umbrella contract” which remains in existence even when the individual concerned is not working. It is in that context in particular that the courts have emphasised the need to demonstrate some mutuality of obligation between the parties but, as I have already indicated, all that is being done is to say that there must be something from which a contract can properly be inferred . Without some mutuality, amounting to what is sometimes called the “irreducible minimum of obligation”, no contract exists. The question of mutuality of obligation, however, poses no difficulties during the period when the individual is actually working.’ 2.109 This clearly is a fly in the ointment and enables HMRC scope to differentiate all the above cases from any challenge they will make under tax law. It is some consolation that this was only an Employment Appeal Tribunal case and since this case, the concept of mutuality of obligation ‘within’ a contract has been developed further to assist the courts for tax purposes (covered in more detail below at paras 2.149–2.155). 2.110 There are also other tax cases that have since considered mutuality including the Mal Scaffolding case whereby Mrs Hodge on behalf of HMRC agreed there is a need to establish a fundamental minimum of obligation as set out in the judgment. Parade Park Hotel v HMRC & Anor v Revenue & Customs [2007]  UKSC SPC00599 was also a tax status case in which the Special Commissioner held that mutuality of obligation was an essential element of the irreducible minimum and it must follow that the relationship cannot amount to a contract of service. These are only First-tier Tribunal judgments and so are 39

2.111  Employment Status only persuasive rather than binding, but they do demonstrate that mutuality is equally important for tax. 2.111 This is not always deemed to be the case however and as a result of there being different understandings relating to what is meant by mutuality, some cases have concluded that demonstrating mutuality is easily satisfied (see para 2.138 below) and therefore given it no weight for employment status. 2.112 One of the starkest examples of this is in the case of Eric Newman Developments v HMRC  [2012]  UKFTT  11(TC) where the tribunal judge understood mutuality of obligation to be satisfied by simply getting paid for the work done. To this end the tribunal judge believed mutuality of obligation did not provide much assistance to the question over employment status as it would be present in every contract regardless of whether it was a contract of service or not. 2.113 Special Commissioner Howard Nowlan in the Castle Construction case did not go quite as far as saying that mutuality of obligation wasn’t much help, but he took the view that to say mutuality of obligation was an absolute prerequisite to establishing a contract of employment goes too far. An approach such as this would clearly water down the importance of mutuality and given the contradictory statements in Montgomery v Johnson Underwood, one assumes that the Special Commissioner was not suggesting that mutuality of obligation was not an essential part of a contract, but he didn’t view it as essential for a contract of employment. The courts would be unlikely to place much, if any weight on the Castle Construction commentary on mutuality of obligation however as the judge was very clear that he was divided over what mutuality of obligation actually meant and so arguably any comments on this should be given very little weight. 2.114 The above cases are also lower court decisions and so are not binding on any other court, but they did not reach these conclusions out of the blue and against all the case law mentioned above. To fully understand why there is such a difference in the weight attached to mutuality, it is necessary to first understand what the different ‘strands’ of mutuality are, as mentioned in the Stringfellow case, and therefore what it actually means.

What is meant by mutuality of obligation? 2.115 Mutuality of obligation was discussed in cases as far back as 1853 when the courts could convict workmen for breaches of contract for failure to serve their masters as seen in cases such as R v Welch (1853) 2 E&B 357. At the time, mutuality of obligation was an obligation to provide work as well as wages with a corresponding obligation on the servant to undertake the work. At the turn of the century this approach changed a little where the obligation on the employer to provide work and wages was removed and the courts would focus on the employee’s obligation to serve as per Turner v Sawdon [1901] 2 KB 653. 40

Employment Status 2.123 2.116 The employee’s obligations were then set out in Chadwick v Pioneer Telephone Co [1941] 1 All ER 522 as being where: ‘a servant agrees that in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.’ 2.117 This may sound familiar as it was used in Ready Mixed Concrete when Mr Justice MacKenna set out what was meant by a contract of service. Ready Mixed Concrete does not therefore specifically refer to mutuality of obligation as a standalone concept but the definition of a contract of service is inextricably linked to this. 2.118 The difficulty with this is that it is not evidently clear from reading the Ready Mixed Concrete definition (and without knowing the background) that this passage related to mutuality and neither does it make it clear as to what mutuality of obligation really is. 2.119 The Privy Council provided clarity on mutuality of obligation in Australian Mutual Provident Society v Chaplin and Another [1978] 18 ALR 385 when they said: ‘Absence of an obligation to do any work for the society is, in their Lordships’ opinion a strong indication that he is not their servant.’ 2.120 The same sentiment was followed in Addison and Others v London Philharmonic Orchestra Ltd [1981] ICR 261 where the judge confirmed that in order to find that contracts of service existed, they would have expected a contractual obligation to attend particular engagements. 2.121 These cases relate only to the employee’s obligation to perform work as per the Chadwick case and in the Australian Mutual case, it is referred to as being a strong indication rather than a must.

Airfix 2.122 In the same year as Australian Mutual, the Employment Appeal Tribunal had to look at mutuality of obligation involving shoemakers for Airfix Footwear Ltd v Cope [1978]  IRLR  396. Their approach to mutuality was broader and more in line with the cases in the 1800s: ‘Now we are of the view that it may well be that if the arrangements between a company and a person are such that work may be provided and may be done at the will of either side – in other words the company may provide or not, as it chooses and the other person may accept the work or not, as he pleases – it may well be that this is not properly to be categorised as a contract of employment.’ 2.123 The Airfix case started paving the way for mutuality of obligation to relate to the obligation to offer and accept work andhelps to establish that it was an important part of an employment contract. 41

2.124  Employment Status

O’Kelly 2.124 O’Kelly v Trusthouse Forte plc [1983] IRLR 369 was an interesting case for mutuality of obligation. In this case the individuals were casual workers for a banqueting business who claimed unfair dismissal. The company had taken the view that they were not employees and were in fact ‘casual workers’ as defined in the Wages (Licenced Residential Establishment and Licenced Restaurant) Order 1982 (Order (LR65)): ‘a worker who undertakes engagements on either an hourly or day to day basis and has the right to choose, without penalty, whether or not to come to work’. 2.125 It was found as fact by the tribunal that Trusthouse Forte plc was under no obligation to offer the individuals any work and they were under no obligation to accept work. There were commercial reasons for either side continuing to offer and accept work, but no contractual commitment. The Court of Appeal referenced that when making the initial decision, the tribunal considered: •

Factors consistent with employment relationship;

•

Factors not inconsistent with an employment relationship;

•

Factors inconsistent with an employment relationship.

This being in line with the third condition under Ready Mixed Concrete. There were held to be many factors that were consistent with an employment relationship against the one main factor against, which was, the lack of obligation to offer and accept work: ‘In our view the one important ingredient which was missing was mutuality of obligation. The respondents entered into their relationship with the employers in the expectation that they would be provided with any work which was currently available. It was purely a commercial transaction for the supply and purchase of services for specific events, because there was no obligation for the employers to provide further work and no obligation for the respondents to offer their further services.’ The Tribunal continued by saying: ‘We are, of course aware that lack of mutuality of obligation is not, in itself, a decisive factor and that outworkers can, in appropriate circumstances be employees working under a contract of employment, even though there is no obligation to provide work or perform it. Nethertheless, this was a factor on which we placed very considerable weight in making our assessment.’ 2.126 This approach was approved by the Court of Appeal who agreed that the contract was not one of service because the individuals were in ‘business on their own account’, effectively because there was a lack of mutuality of obligation. 2.127 At this point there was little doubt that mutuality of obligation meant an obligation to offer work and an obligation to perform it. The difficulty 42

Employment Status 2.134 was that it was only being considered as one of the factors inconsistent with an employment relationship and therefore its weight was important but not conclusive.

Nethermere 2.128 The O’Kelly case was followed very shortly by another Court of Appeal case, Nethermere (St Neots) Ltd v Taverna and Gardiner [1984]  IRLR  240 which went into great detail over mutuality of obligation both in respect of whether it is needed in a contract of employment and what it means. 2.129 This case has probably had the single biggest influence over this area and considered whether the tribunal had erred in law by using the Market Investigation ‘business on your own account’ test as fundamental without considering mutuality of obligation. 2.130 Lord Justice Stephenson referred to Ready Mixed Concrete and quoted a passage from the case whereby McKenna J  states that there must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration, no contract at all. The servant must be obliged to provide his own work and skill. Stephenson LJ then confirmed: ‘There must, in my judgment, be an irreducible minimum of obligation on each side to create a contract of service. I doubt it can be reduced any lower than in the sentences I have just quoted.’ 2.131 This interpretation of mutuality of obligation boils down to there being an obligation on the employee to provide work and the employer to pay for it. 2.132 This was supported further by LJ Stephenson when Mr Jones for the respondent ‘rightly’ withdrew one of his concessions and instead submitted that an obligation to accept work is a prerequisite of a contract of service but an obligation to provide it is not. This may appear to be at odds with O’Kelly at first glance because O’Kelly referred to the obligation to offer and accept work but if part of their finding in O’Kelly was that there was no obligation on the individual to perform work, this would be enough to demonstrate they were not employees. 2.133 Lord Justice Dillon agreed with Stephenson LJ that mutuality of obligation must be considered but adopted the position that mutuality extends to the employer’s obligation to provide work as well: ‘For my part I  would accept that an arrangement under which there was never any obligation on the outworkers to do work or on the company to provide work could not be a contract of service.’ 2.134 So, one case with seemingly two different interpretations of mutuality of obligation even though both do at least confirm that mutuality of obligation is a necessary part of a contract of service. It is worth noting at this stage that 43

2.135  Employment Status Lord Justice Stephenson did take a narrow view on mutuality but also made the point the mutuality could not be reduced any further than the obligation on the employee to work for remuneration. This should therefore be at least the minimum baseline one can rely on when arguing mutuality of obligation. Focus Point Following Nethermere, the lowest form mutuality of obligation can be interpreted as is that the employer will have an obligation to pay and the worker an obligation to work. 2.135 We have however only considered case law in detail up to the 1980s at this stage and so whilst it paints a blurry backdrop thus far, there is plenty more scope for twists and turns.

Carmichael 2.136 In Carmichael and another v National Power plc [1999] 4 All ER 897 the individuals worked as tour guides at National Power as and when it was available, and they were free to undertake the work. The tribunal acknowledged that it was in both parties’ best interests to be accommodating to one another and that there was a moral commitment to the work but no contractual commitment. The case ended up at the House of Lords where it was held: ‘I would hold as a matter of construction that no obligation on the CEGB to provide casual work, nor on Mrs Leese and Mrs Carmichael to undertake it, was imposed. There would therefore be an absence of that irreducible minimum of mutual obligation necessary to create a contract of service.’ 2.137 This supported the view expressed by Lord Justice Dillon in Nethermere that mutuality of obligation is more than an obligation on the employee to perform work and it encapsulates an obligation on the part of the employer to offer it as well. As this is a House of Lords case, it would be binding on all lower courts unless they are able to differentiate their case on some other ground. The same approach was then applied in cases such as Stevedorring & Haulage Services Ltd v Fuller and others [2001] EWCA Civ 651: ‘There could be no such mutuality if the position was simply that the appellants were under no obligation to offer work and the respondents were under no obligation to accept it.’ As well as Propertycare v Gower [2003] UKEAT 0547_03_1411: ‘The cases starting with Ready Mixed Concrete show that mutuality of obligations means more than a simple obligation on the employer to pay for work done; there must generally be an obligation on the employer to provide work and the employee to do the work.’ 44

Employment Status 2.141

Stephenson v Delphi Diesel Systems Ltd 2.138 All seemed to be going well at this stage; mutuality was part of the irreducible minimum of a contract of service and although there was some question over whether it included an obligation on the employer to provide work or not, it was all relatively straightforward. 2.139 Then came along Stephenson v Delphi Diesel Systems Ltd [2002] UKEAT 1314. In the same way in which this case cast doubt on the importance of mutuality for tax cases it also created a legacy of issues for what was meant by mutuality of obligation when Mr Justice Elias stated: ‘The significance of mutuality is that it determines whether there is a contract in existence at all. He then went on to say: ‘The question of mutuality of obligation, however, poses no difficulties during the period when the individual is actually working. For the period of such employment a contract must, in our view, clearly exist. For that duration the individual clearly undertakes to work and the employer in turn undertakes to pay for the work done. This is so, even if the contract is terminable on either side at will. Unless and until the power to terminate is exercised, these mutual obligations (to work on the one hand and to be paid on the other) will continue to exist and will provide the fundamental mutual obligations. The issue of whether the employed person is required to accept work if offered, or whether the employer is obliged to offer work as available is irrelevant to the question whether a contract exists at all during the period when the work is actually being performed.’ 2.140 This quote made its way into HMRC status manuals on the topic of mutuality and so if a taxpayer were to defend their case based on there being a lack of mutuality of obligation it would be fairly routine for this quote to be thrown back at you and for HMRC to adopt the stance that mutuality of obligation exists in every contract and the offer and acceptance of work does not matter. As already mentioned, this approach led to HMRC not including questions about mutuality of obligation in their 2017 CEST tool. Focus Point The judgment in the Delphi case is problematic for arguing what is meant by mutuality of obligation but this is an Employment Appeals Tribunal case and relates to employment rights so can be distinguished from employment status cases.

2.141 It may be possible (although a little difficult) to distinguish this case on the basis that it was an employment rights claim and as such mutuality is important for different reasons. The statement may have also been specific to 45

2.142  Employment Status the facts of that case because in that case it may well have been that there were mutual commitments between the parties until such time as the contract was terminated, but that does not mean this will be so in other cases. Example of differentiating from the Delphi case As mentioned above, in Delphi the individual was obliged to provide services until the contract was terminated. A  brickwork company may however be in a different position whereby the bricklayers have no such obligation and if it rains or they just don’t want to work, they simply do not work. The contract is not being terminated and within that contract, there is no mutuality of obligation.

Cases since the Delphi case 2.142 Stephenson v Delphi Diesel Systems was decided in 2002 and prior to mutuality ‘within’ a contract (discussed in more detail at para 2.149) and so it is possible to question its relevance to employment status for tax and NIC purposes. If the Delphi approach were correct and the obligation to offer and accept work is irrelevant to the question of mutuality of obligation, it would be difficult to envisage that it would still be considered by the courts much beyond the Delphi Diesel case. 2.143 The issue of mutuality of obligation is however considered in detail in the vast majority of employment status cases right up until the current date. It follows, on that logic alone, that it must mean more than the mere existence of a contract otherwise why would the courts take time to consider and explore it? 2.144 In the Parade Park case HMRC accepted that for something to amount to mutuality of obligation, each party had to bind itself to something, and a relationship where a party could choose whether to commit itself could not be a contract of employment. 2.145 In the same year the judge in Cable & Wireless plc v Muscat [2006]  IRLR  354 referenced that other cases had considered mutuality of obligation many times and that ‘the irreducible minimum of obligation necessary to support a contract of employment is the obligation on the employer to provide work and the obligation on the worker to perform work’. Cotswold Developments Construction Ltd v Willams [2006]  IRLR  181 also drew to a similar conclusion although it should be noted that these cases were employment law cases again so do not necessarily address the comments in Delphi Diesel. They just reinforce the fact that the offer and acceptance of work is not irrelevant. 2.146 Brian Turnbull v HMRC [2011] UKFTT 388 (TC) and Yurdaer Yetis [2012] UKFTT 753 (TC) were however both tax status cases and placed great importance on there being a lack of mutuality. The tribunal judge in Brian Turnbull commented as follows: 46

Employment Status 2.150 ‘Although Mr Turnbull was obliged to pay Mr Bhangal for work he had done he had no obligation to provide work for Mr Bhangal who was not required to drive the lorry if he chose not to… In the circumstances we therefore find that there can be no mutuality of obligation.’ This all bodes well until the government set out their understanding of mutuality of obligation in their consultation on employment status in 2018 (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/679853/FINAL_-_Employment_Status_consultation_-_ FOR_UPLOADING_and_PRINTING.pdf) which was not overly beneficial for any taxpayer trying to show a lack of mutuality: ‘For Tax, if mutuality of obligation exists, this simply establishes whether a contract exists; the courts will then need to establish if this is a contract of service through the existence of other factors. Generally, if an individual is paid for services that are personally performed by them, mutuality of obligation exists. 2.147 It does however go on to reference that the tax tribunals focus on single assignments rather than looking at what happens between contracts and that mutuality of obligation can be difficult when it comes to atypical or casual working arrangements where there is no obligation to offer and accept work. Considering this is a government message in their consultation document, it is a fairly confusing message as it implies there will be no mutuality in casual arrangements even though mutuality is apparently simply whether a contract exists in the first place. 2.148 The document continues by questioning whether mutuality of obligation should still be important in today’s modern labour market which again suggests HMRC have no intention of changing their stance on the subject.

Mutuality of obligation ‘within’ a contract 2.149 As seen above, employment law tribunals will often be tasked with considering whether there is mutuality of obligation to ascertain whether there is an overarching or umbrella contract spanning the different engagements undertaken by the individual. This means the separate engagements can be stitched together creating one longer contract (rather than several shorter isolated ones) which may then trigger certain employment rights such as unfair dismissal. 2.150 This will not be necessary however for tax status cases as HMRC can look at each contract separately and do not need to consider mutuality of obligation over the course of different contracts. Example – Employment claim Jermaine works as a self-employment project manager for a construction company. He has worked for the same company on and off for the last four years. The company then stops offering him further projects and so Jermaine claims unfair dismissal. 47

2.151  Employment Status Each project Jermaine worked under was a separate agreement and they lasted a maximum of eight months. The company was under no obligation to offer Jermaine any further projects once the work was complete and Jermaine was under no obligation to accept any further projects. Either party could walk away at the end of any given project. In this case there was no mutuality of obligation outside the current project and so there is no overarching contract of employment. Jermaine’s claim must therefore fail. Example – Status claim Unhappy with his treatment, Jermaine informs HMRC that the company was incorrectly treating people as self-employed. HMRC open an investigation and the question of mutuality of obligation rears its head. Whilst there may have been no mutuality of obligation for further projects as per the employment tribunal, HMRC establish that once Jermaine agreed to a specific project, the company was obliged to let him undertake the work and he was obliged to complete it. Mutuality of obligation therefore existed during each contract meaning each contract would have been a separate contract of employment (subject to the other terms) which is all that is necessary for HMRC to issue assessments. 2.151 The subject of mutuality within a contract first arose in the Airfix case and was touched upon by one of the judges in Nethermere. The High Court also talked about this issue in the case of Usetech Ltd v Young [2004] EWHC 2248 (Ch): ‘If there is a relationship between a putative employer and employee, but it is one under which the ‘employer’ can offer work from time to time on a casual basis, without any obligation to offer the work and without payment for periods when no work is being done, the cases appear to me to establish that there cannot be one continuing contract of employment over the whole period of the relationship, including periods when no work was being done…That leaves open the possibility that each separate engagement within such an umbrella contract might itself be a free-standing contract of employment.’ 2.152 It was not however until the case of Cornwall County Council v Prater [2006]  EWCA  Civ 102 that such a clear example was presented to the courts. In this case the Cornwall County Council would use the services of Mrs Prater to tutor children, the council was under no obligation to offer any pupils to Mrs Prater and she was equally under no contractual obligation to accept pupils. Once Mrs Prater agreed to take on a pupil however, she was obliged to fulfil her commitment to that particular pupil and the council was obliged to continue to provide that work until the particular engagement ceased. 2.153 Lord Justice Mummery in the Court of Appeal made the following observations: 48

Employment Status 2.155 ‘The judgments in O’Kelly do not assist the council’s case on the alleged absence of mutuality of obligation in this case. The industrial tribunal in that case decided that there was no overall or continuous contract of employment, but it did not deal with the point of whether there were individual contracts of service. In this case there was a succession of individual contracts in that period and that within the duration of each of which there was a mutuality of obligation in the sense described above.’ Mummery LJ differentiated Carmichael in the same way as O’Kelly for not considering mutuality for each individual contract and concluded as follows: ‘The important point is that, once a contract was entered into and while that contract continued, she was under an obligation to teach the pupil and the council was under an obligation to pay her for teaching the pupil. That was all that was necessary to support the finding that each individual teaching engagement was a contract of service.’ 2.154 J  and C  Littlewood T/A  JL  Window and Door Services v HMRC [2009] UKSPC SPC00733 applied mutuality of obligation within and reached the decision that ‘within a single assignment, I  question whether it is necessary to look for an obligation to provide work and an obligation to perform it’. The assumption here must be that because each assignment was extremely short, once it was offered and accepted there was very little scope for there being a lack of mutuality of obligation within that assignment. This approach could be problematic in many industries and trades where the nature of the work means that any assignments are short. Focus Point Mutuality of obligation within a contract is necessary for tax cases because the appellant is not trying to show there is no overall contract of employment spanning the different assignments (therefore meaning they are entitled to certain rights). Instead, the taxpayer must show there is a lack of mutuality of obligation within each separate agreement.

2.155 There is however hope that mutuality of obligation within short assignments will not be a foregone conclusion at the tribunals as was seen in the recent case of Professional Game Match Officials v HMRC [2018] UKFTT 528 (TC) – although this case was subsequently appealed by HMRC. The appellant in this case provided referees to the Football Association and although there were overarching contracts covering each season the tribunal still considered whether the individuals engagements (ie  the matches) were contracts of service. The tribunal held that even after a referee had accepted a contract, they could withdraw at any stage until they arrived and equally the appellant could cancel the appointment at any stage, and this constituted a lack of mutuality of obligation. The appeal hearing in this case could be very influential on the future development of mutuality of obligation. 49

2.156  Employment Status

Mutuality of obligation in IR35 cases 2.156 The question of employment status is raised with a great deal more frequency in the field of IR35 than if the relationship is a direct one between a worker and its client (presumably because of the more complex contractual matrix in IR35). It would therefore be remiss to overlook how the courts have considered mutuality in IR35 when it also considers whether an individual’s contract is one of service. 2.157 One of the first cases to consider mutuality of obligation for an IR35 case was Synaptek Ltd v Young [2003] EWHC 645 (Ch) but in this case the tribunal said that it was not necessary to consider mutuality in detail as HMRC had accepted that ‘if, taking the period of the notional contract as a whole, the client was under no obligation to provide work, the necessary element of mutuality was indeed lacking for that period’. This concession by HMRC is helpful but as it was not fully explored by the appeal court, it is questionable as to whether it can be really be given too much weight in future cases. 2.158 In the High Court of this appeal it was said that if there was no obligation to offer work nor to pay when no work available, there was no continuing contract of employment over the whole period but that left open the possibility that each separate engagement might itself be a free-standing contract of employment, ie a lack of mutuality in respect of further work does not stop the current agreement being one of employment and one must look at mutuality within the agreement. This was a similar line of thought as the Prater case and the concept of mutuality of obligation within a contract. 2.159 In Usetech, the High Court gave mutuality of obligation further thought and there was an obligation to provide work and an obligation to pay for a minimum of 37.5 hours a week and on that basis the mutuality requirement was satisfied. Park J went on to say: ‘I would accept that it is an oversimplification to say that the obligation of the putative employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship… However, in this case it was at the lowest open to the Special Commissioner.’ ‘It is only where there is both no obligation to provide work and no obligation to pay the worker for time in which work is not provided that the want of mutuality precludes the existence of a continuing contract of employment.’ 2.160 This makes it clear that there is scope for mutuality of obligation to be satisfied by the simple payment for work done (following the Nethermere case). The judgment does go on to confirm however that where there is no obligation to provide work or to pay when no work is available, there will be no contract of employment. The implication is that the latter approach is the main one to follow but if a tribunal decides a case on the former, they will not be incorrect. 50

Employment Status 2.165 2.161 In Dragonfly Consulting Limited v HMRC  [2007] SpC 655 and MKM Computing Ltd v HMRC [2007] SpC 653 Special Commissioner Hellier held that whilst the obligation on the employer may be an important factor, it is the obligation on the employee which is the condition of (and therefore fundamental to) employment. 2.162 MKM was used as a contrast in the case of Marlen Ltd v HMRC [2011] UKFTT 411 (TC) where the taxpayer in the latter case was sent home without pay if the computers went down, whereas in MKM, the appellant was paid to sit around and wait until they were fixed. This was an important difference in the application of IR35. In Marlen the Special Commissioner commented that Ms Smith (for the appellant) was correct in her view that there was no mutuality of obligation within any of the individual contracts because Mr Hughes was sent home when the computers were down and one of the contracts was terminated early. Going back to the Delphi case, the conclusion in Marlen suggests that early termination of a contract can be important in respect of demonstrating a lack of mutuality of obligation. 2.163 There has also been a spate of IR35 cases in the last couple of years relating to work in the media sector. These have provided some good examples of mutuality of obligation, such as the Christa Ackroyd Media Limited v HMRC [2018] UKFTT 69 (TC) in which the BBC was not obliged to call upon the appellants services but was obliged to pay her whether they did call upon her on not. Ms Ackroyd was also committed to providing a minimum number of days over the year, for a five-year period and so it was more than apparent that in that case there was mutuality of obligation. The same was also true in Atholl House Productions Ltd v HMRC [2019] UKFTT 242 and Paya and others v HMRC [2019] UKFTT 583 where the taxpayers also worked for the BBC and had similar commitments. 2.164 The Upper Tier Tribunal case of Christa Ackroyd briefly touched on mutuality of obligation and held that: ‘The case law establishes that mutuality of obligation in this context requires at least that the employee provides the services through his personal work or skills, and that the employer pays the employee for any work actually done.’ 2.165 This statement does appear to apply mutuality more in line with the Delphi case but it is important to be aware that not only does the judge say that this is the ‘least’ mutuality can be but also that mutuality of obligation was not a point under appeal and so neither party put forward any representation in this regard. Two other First-tier Tribunal judgments were also released in early 2020. The first being Northern Lights Solutions Ltd v HMRC  [2020] 2 WLUK  478 in which it concluded that mutuality only establishes whether a contract is in place rather than what type of contract it is. The second was Red, White and Green Ltd v HMRC  [2020]  UKFTT  109 (TC) which confirmed mutuality related to the obligation to offer and accept work. There appears to be little consistency in this approach and the outcome on mutuality will be very much dependent on the tribunal judge and how the legal arguments are presented. 51

2.166  Employment Status

Notice periods 2.166 The question of whether notice periods impact mutuality of obligation is not overly clear from the case law judgments, partly because mutuality of obligation is complicated in the first place. In the JL Windows case, the tribunal judge said that terminating a contract without notice did not affect whether there was mutuality of obligation and on the other side of the notice spectrum, in McManus v Griffiths [1997] STC 1089 Mr Justice Lightman held that a three month notice period was neutral when it came to the question of employment status. 2.167 In the Synpatek case the judge questioned why there would be termination provisions in the contract if there was genuinely no obligation to offer work during the contract. This is a fair point and can only really be explained by commercial reasons for needing a notice period but that the parties still acknowledge there is no commitment to complete the contract. 2.168 In the author’s opinion, notice periods can play an important part when it comes to mutuality of obligation. If for example neither party has the right to terminate the contract early on their own free will, they are obligated to the contract and there must surely be mutuality of obligation. Equally if a sixmonth contract can be terminated without reason and without notice, how can it be supported that there is mutuality of obligation between the parties within that contract? 2.169 The commentary in JL  Windows may not appear to support this position but one must bear in mind that in that case their engagements were extremely short and so there would have been little need for a notice period in the first case, the judge may well have held differently if for example the engagements were for longer and there was still no requirement for notice. In Lime-IT v Justin (2002) Spc 342 the Special Commissioner found it compelling that the agency could terminate the contract without notice, especially as this had been specifically negotiated into the contract by the appellant.

Summary on mutuality of obligation 2.170 Mutuality of obligation is evidently a complex and sometimes misunderstood area of tax and employment law. Several judges have made it clear that they do not know what the position is in relation to mutuality of obligation and even the government’s consultation on employment status has mixed messages. 2.171 It is unquestionable that mutuality of obligation is a key part of a contract of service. The courts have put the matter beyond doubt that without mutuality of obligation, there can be no contract of service. 2.172 There are then different approaches to what is meant by mutuality of obligation and therefore how easy it is for it to be satisfied. There are cases 52

Employment Status 2.176 which have interpreted mutuality to be just getting paid for work completed, but the number of these cases are quite significantly outweighed by the judgments that follow a different approach. 2.173 Payment for services rendered can be taken as being the very lowest a court can interpret mutuality as. At the other end of the scale, mutuality of obligation can also be interpreted as an obligation on the employer to offer the individual work and a reciprocal obligation on the employee to provide services. This must be a continuing obligation throughout the contractual period. This is equally an approach that the courts have followed and applied in various cases and would be the approach that one would recommend adopting when defending an HMRC challenge. 2.174 The IR35 cases over the last decade and the High Court IR35 decisions from the previous decade have considered mutuality of obligation extensively and the most commonly applied approach tends to be that the obligation on the worker to continue providing services and the obligation on the employer to pay the individual even if no work is available is a prerequisite for a contract of service to exist. An obligation on the employer to continue offering work is a very important factor, but not as crucial as the above.The case of RALC Consulting Limited v HMRC [2019] UKFTT 702 (TC) provides an excellent overview of the case law position on mutuality of obligation to date for anyone wishing to read the long but interesting judgment.

PERSONAL SERVICE 2.175 Lord Justice Peter Gibson in the Court of Appeal case of Express and Echo Publications Ltd v Tanton [1999] IRLR 367 stated: ‘Where a person who works for another is not required to perform his services personally, then as a matter of law, the relationship between the worker and the person for whom he works is not that of employee and employer.’ You could search high and low but still not find a more succinct and clear statement as to when an individual is not an employee. It is so helpful in fact it is worth going over it again: if personal service is not required ‘as a matter of law’ they will not be an employee. What then, is meant by personal service being required? 2.176 To answer this question, a good starting point is to look at the facts of the case of Express and Echo. In this case Mr Tanton was employed as a driver for the appellants before being made redundant. He was then engaged later in the year on a self-employed basis. Mr Tanton was subsequently sent an agreement which included the following statement ‘in the event the subcontractor is unable or unwilling to perform the services personally, he shall arrange at his own expense entirely for another suitable person to perform the services’. Mr Tanton refused to sign the agreement but did continue to work and did, from time to time, use the right to provide a substitute driver. 53

2.177  Employment Status 2.177 It was clear from the agreement (and the actions of the parties) that Mr Tanton was not required to undertake the work personally as he was free to use other people in the performance of the services. Where this is the case, it is not possible to argue that a company requires a specific individual to carry out the work. Example Joanne is a website designer and works for two main companies, one as an employee and the other on a freelance basis. The company that employs Joanne require her to go into the office and she is allocated work to complete, they know her style and would not tolerate Joanne not turning up and sending someone in her place. When they allocate work to her, they expect her to be the one completing it. Joanne’s personal service is required. The other company retains much less control over the process and essentially quotes for work to its own customers and then outsources it to web designers. The company does not care about the means and resources used to complete the work and Joanne is entirely free to use any other people as she sees fit to carry out some or all of the work. The company just want the product delivered to specification and on time. Joanne is not required to provide personal service. 2.178 The Court of Appeal in Express and Echo reached their view on personal service following on from MacKenna J’s more detailed explanation of a contract of service in Ready Mixed Concrete where he stated: ‘As to (1). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job either by one’s own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be.’ 2.179 Lord Justice Peter Gibson pointed out that in Ready Mixed Concrete, the truck driver had the right to appoint a suitable driver in his place, (with consent of the company) but the company retained the right to require the personal service of the truck driver for certain periods in the contract. Even though the company had to give consent and they required personal service some of the time, in Ready Mixed Concrete, this right to substitute was still deemed a significant feature in determining the contract was for services. Focus Point If an individual is not required to carry out the work personally, they cannot be deemed an employee. In Express and Echo, the position was even more clear than in Ready Mixed Concrete as he was not required to personally perform the services if ‘unable’ or ‘unwilling’ to work and therefore in theory he never need turn up at all. 54

Employment Status 2.183

The ‘right’ of substitution 2.180 The reader should attach great importance to the fact it is the ‘right’ to send someone else that is important not whether a substitute is actually used in practice. This is because the test is whether personal service is ‘required’ not whether it is ‘provided’. Focus Point The right to use others is enough to establish a lack of personal service irrespective of whether that right is utilised. 2.181 This was partly addressed in Express and Echo when Gibson JL said, ‘If a term is not enforced, that does not justify its conclusion that such a term is not part of the agreement. The obligation could be temporarily waived.’ This point was also addressed in Green v St Nicholas Parochial Church Council & Anor [2005] UKEAT 0904_04_0710: ‘They rightly acknowledged that, in practice, he would be unlikely to exercise his power of delegation to any major extent: but the fact remains that he had the right and power to do so.’ More recently and an even more stark example was seen in the Employment Appeals Tribunal case of UK Mail Ltd v Creasey [2012] UKEAT/0195/12ZT: ‘That as a matter of fact for 10 or 15 years he did himself do the work does not change the nature of the right he has to send someone else.’ The judge went on later to confirm: ‘That he did not carefully read the contract, did not take advantage of substitution and did not notice others doing it, does not diminish the genuineness of the right, or the potency of his signature.’

Right to assign 2.182 The right of substitution can be an example of when personal service is not required. In most cases it is the best example and easiest to argue when considering personal service, but taxpayers and advisors should not be blinkered purely to looking for a substitution clause in a contract and then assuming the contract will be for services. There may be other provisions in the contract which are beneficial or detrimental to an argument around personal service irrespective of whether there is a clause allowing for substitution. 2.183 The right to assign the contract for example was deemed sufficient in demonstrating a lack of personal service in the case of First Word Software v HMRC [2007] UKSPC SPC00652: ‘Accordingly I  find that, although Mr Atkins did in fact do the work personally, the intention of the parties was that the Appellant could assign the 55

2.184  Employment Status obligations and benefits of its agreement with Plexus so long as the assignee was acceptable to Reuters. In other words, the intention of the parties was that Mr Atkins did not necessarily have to do the work personally.’ 2.184 The right to assign part or all of the contract is very different to using another person to carry out part of the services as under the right to assign, the benefits and burdens of the contract (or relevant part) will pass to the assignee whereas when a substitute is utilised, the original individual who agreed to carry out the work will still be responsible for the contract and the work. From time to time the author has come across contracts that confuse the two and use the clauses interchangeably. Not only does this demonstrate that the contracts are not accurate but it creates a mess where no one can be 100% sure what the parties are agreeing to.

Too fettered 2.185 When is a right to send a substitute, not a right at all? When it is badly drafted and ends up being more detrimental in showing the contract is for services than if it had just remained silent on the issue. If a company would theoretically allow a sub-contractor to send someone in their place but they place too many restrictions on when, where and how that can happen, the courts may infer that the sub-contractor does not actually have a right to use others at all and that personal service is required unless, and until, it agrees otherwise. Focus Point If there are too many restrictions in place as to when others may be used to provide the service. The courts may find that it is merely a right to suggest someone else and that personal service is required until it is agreed otherwise.

2.186 The most notable case in this respect was MacFarlane and another v Glasgow City Council [2001] IRLR 7 EAT in which gym instructors could engage others to carry out their services subject to certain conditions: •

Only when they were ‘unable’ to attend;

•

Any substitute had to be from the council’s own register of gym instructors;

•

The council would sometimes organise the replacements;

•

The council would always pay the substitutes directly.

2.187 The Employment Appeals Tribunal in this case held that this case was distinguishable from Express and Echo whereby Mr Tanton could freely choose anybody as a replacement so long as the substitute was trained and suitable and the employer had no veto so long as those requirements were met. 56

Employment Status 2.193 2.188 They believed the clause in the Express and Echo agreement was extreme as Mr Tanton in theory, could by his own choice never turn up for work himself. In this case, the gym instructors at best could simply swap shifts with someone else the council approved of and only if they were unable to work rather than it being when they chose. 2.189 The case of Byrne Brothers (Formwork) Ltd v Baird & Ors [2001]  UKEAT  542_01_1809 drew a similar conclusion when they also confirmed that only being able to send a substitute when you are ‘unable’ to provide services means you must provide the services personally when you are able. 2.190 In relation to the client’s approval of a substitute, it is a commercial reality that any company will want to be assured that the person providing the services has the necessary skills and expertise and the courts accept restrictions for these reasons. An example of where this was addressed was in MPG Contracts Ltd v Mr A England (Junior) & Anor [2009] UKEAT 0488_08_0805 where it was held: ‘That any such labour should have suitable skills and experience to do the work is precisely analogous to the contractual term in Tanton, where the driver had to satisfy the company that any relief driver was trained and was suitable to undertake the driving services. Plainly Express & Echo could not be expected to accept a disqualified driver as a substitute any more than MPG could be expected to accept an individual wholly inexperienced in drylining or ceiling fixing. In our judgment this was an unfettered right of substitution on the face of the written contract.’ 2.191 This followed a similar decision previously reached in the Employment Tribunal case of Green v St Nicholas Parochial Church Council & Anor [2005] UKEAT 0904_04_0710 in which Mr Justice Rimmer stated: ‘Not surprisingly, he could only delegate the powers to a competent substitute, and had to obtain the Rector’s consent to the proposed substitute, such consent not to be unreasonably withheld. But that qualification was no different in substance from the like qualification on the power in Tanton. In our judgement, the tribunal were entitled to regard clause 3 as falling on the Tanton side of the dividing line.’ 2.192 It is therefore evident from the above that in order to rely on a lack of personal service being sufficient on its own to render the contract one for services, it will need to fall within the ratio decidendi of Express and Echo and not that of MacFarlane. The High Court in the Usetech v Young case approved such an approach in 2005: ‘The presence of a substitution clause is an indicium which points towards self-employment, and if the clause is as far reaching as the one in Express and Echo Publications, it may be determinative by itself.’ 2.193 The case of Pimlico Plumbers v Smith [2017]  EWCA  Civ 51 considered employment status and whether an individual was a ‘worker’ of the 57

2.194  Employment Status client and entitled to certain rights. The case ended up at the Supreme Court but it was some of the passage in the Court of Appeal which set out the position neatly with regard to personal service: ‘Firstly an unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally. Secondly, a conditional right to substitute another person may or may not be inconsistent with personal performance depending on the conditionality. It will depend on the precise contractual arrangements and, in particular, the nature and degree of any fetter on a right of substitution, or, using different language, the extent to which the right of substitution is limited or occasional. Thirdly, by way of example, a right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance. Fourthly, again by way of example, a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will subject to any exceptional facts, be inconsistent with personal performance. Fifthly, again by way of example, a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.’

Substitution clauses in contracts 2.194 In most cases where it is argued there is a lack of personal service, there will usually be a contract or agreement in place addressing this principle. It can, for example, be very difficult for a taxpayer to adequately demonstrate there is a lack of personal service when it is just based on the verbal understanding of the individuals involved.

CASE STUDY ON VERBAL RIGHT OF SUBSTITUTION HMRC enquire into a civil engineering company who engage individuals on a self-employed basis. There are no written contracts in place as the company wants to keep the relationship ‘informal’ and so the terms under which they work (there will still be a contract after all, it is just not a written one) are based on the parties’ understanding. The enquiry turns to whether personal service is required, and the company are adamant that personal service is not required, and the individuals have the right to send others in their place. HMRC then meet with some of the individuals to discuss the way in which they work. They too initially agree that personal service isn’t required (as they have heard this is important for being self-employed) but HMRC start asking questions such as: •

When was that discussed?

•

How do they know they could send someone else in their place if it wasn’t actually discussed or written down anywhere? 58

Employment Status 2.197 •

In what circumstances would they be able to send someone else in their place?

•

Could they send anyone or would the client have a right to refuse certain people?

•

Would the ‘substitute’ have to be known to the company?

•

Would the substitute have to have the right skills and be suitable?

•

Would they have to undergo health and safety training on site?

•

Who would pay the substitute?

•

If the subcontractor was going to pay them, they would have to register as a contractor under the CIS scheme and account for CIS tax and complete monthly returns and provide CIS statements to the individuals. Are they aware of this?

•

Have they ever sent anyone else?

•

Would they know of other people they could send?

All of a sudden, the individuals realise they are in too deep and can’t blag their way through this and it quickly becomes apparent that they may have a very limited right of substitution, but it will not be enough to demonstrate that personal service isn’t required.

2.195 It is for this reason that the easiest way of establishing a lack of personal service is by addressing it in a written contract with an individual. The judge in Express and Echo commented that the initial tribunal approached the case incorrectly by focussing on what happened in practice rather than what the parties agreed. 2.196 That said, any such provision must be an accurate reflection of the working relationship as the courts are fully aware that such clauses are added to assist the argument of self-employment and where the courts believe the contract is a sham, they will discard it as evidence in the case.

Sham contract 2.197 Substitution clauses are a source of great pain to HMRC, so much so that they amended the agency legislation (ITEPA  2003, s  44) in 2014 to remove the requirement of personal service from the legislation. One of the proposals on the Employment Status Consultation in 2018 was also to place more reliance on control and less reliance on personal service. Why? Because it is very easy for companies to include substitution provisions in their contracts which show a lack of personal services and it can be difficult and very time consuming for HMRC to try and prove that such a clause does not reflect the working relationship. 59

2.198  Employment Status 2.198 The Supreme Court highlighted this issue in the employment dispute between Autoclenz Limited v Belcher [2011]  UKSC  41 where it quoted the EAT judgment from Consistent Group Ltd v Kalwak [2007] IRLR 560 when Mr Justice Elias commented: ‘The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship.’ 2.199 In cases such as this where the documents do not reflect reality, any contract will be in danger of being deemed a sham contract and the whole thing cast aside and given no weight. What is meant by a sham contract was discussed in the case of Snook v London and West Riding Investments Ltd [1967] 2  QB  786 and has also been approved by the Supreme Court in Autoclenz: ‘It means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.’ 2.200 One of the important aspects of this definition is that for the contract to be a sham, the parties must have had ‘intention’. HMRC for example cannot simply put forward the proposition that because a substitute was not sent, the contract is a sham. If it remains a genuine right to use other people in the performance of the services, it cannot be a sham. This was made clear in the Supreme Court in Autoclenz when it again gave considerable force to the following passage in Consistent Group Ltd v Kalwak (‘Kalwak’) [2007] IRLR 560: ‘In other words, if the reality of the situation is that no one seriously expects that a worker will seek to provide a substitute, or refuse the work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship. But if these clauses genuinely reflect what might realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless.’ 2.201 As can be seen by the case law in this area, the issue of sham contracts is more prevalent in the employment tribunals, usually because an individual has disputed the terms set out by a company. It does still have a place in the tax tribunals however as can be seen in Castle Construction where the Special Commissioner said that the substitution clauses in the contract were added by advisors despite the fact that they were clearly nonsense in practice. The Special Commissioner in J and C Littlewood T/A JL Window and Door Services 60

Employment Status 2.205 v HMRC [2009] UKSPC SPC00733 was equally cautious when it came to the right of substitution. 2.202 In light of the above, contracts can be crucial for supporting an employment status defence but they should be drafted in accordance with the actual terms under which individuals work (assuming there is scope for selfemployment) and they should be read and reviewed from time to time so they are up to date and will carry the necessary weight and remain important in determining a status dispute.

FACTORS THAT ARE INCONSISTENT AND ‘IN BUSINESS’ TEST 2.203 The third criteria from the Ready Mixed Concrete definition of an employee is that the provisions of the contract are consistent with a contract of service. This approach was more recently considered in the Upper-tier Tax Tribunal case of Weightwatchers v HMRC  [2011]  UKUT  433 (TCC) in which the court held: ‘Putting it more broadly, where it is shown in relation to a particular contract that there exists both the requisite mutuality of work-related obligation and the requisite degree of control, then it will prima facie be a contract of employment unless, viewed as a whole, there is something about its terms which places it in some different category. The judge does not, after finding that the first two conditions are satisfied, approach the remaining condition from an evenly balanced starting point, looking to weigh the provisions of the contract to find which predominate, but rather for a review of the whole of the terms for the purpose of ensuring that there is nothing which points away from the prima facie affirmative conclusion reached as the result of satisfaction of the first two conditions.’ This approach suggests that if there is mutuality of obligation, personal service and control, the default position will be that it is an employment relationship unless there are other reasons that point sufficiently away from this. 2.204 A  slightly different test to MacKenna’s was seen in the Market Investigations case which was heard seven months after Ready Mixed Concrete. In this case Mr Justice Cooke agreed control was no longer the sole determining factor and other provisions should be considered. He followed a similar, although slightly different, approach to looking at factors consistent with an employment relationship. Mr Justice Cooke instead went for the same approach as laid down in the USA Supreme Court case of US v Silk 331 U.S. 704 (1947): ‘Is the person who has engaged himself to perform these services performing them as a person in business on his own account’. 2.205 There may seem like a negligible difference between whether someone is in business on their own account and whether the terms are consistent with 61

2.206  Employment Status an employer/employee relationship but there can be a distinction and it is always worth bearing this in mind. 2.206 If a taxpayer is focussing on what factors are consistent with an employment relationship, it will be a broader approach especially if there are other people employed by the company who have different rights and benefits. For example, if they were an employee of the company perhaps they would get bonuses, holiday pay, pensions, health care, different accesses or passes to a building, invited on company events like Christmas parties, company cars etc. whereas the absence of those factors does very little to show that a person is in ‘business on their own account’ and if one relies solely on the business test rather than the third of the Ready Mixed Concrete conditions, these factors may be overlooked. 2.207 Being ‘in business’ requires much more, as an individual may need to have tools, equipment, other assets, multiple clients, financial risk, ability to profit, a website, provide materials, tender for the work etc. The more factors that show an individual is in business, the greater the chance of them not being an employee. Unfortunately for some, there are many types of workers who do not have, nor need, to invest in a ‘business’ as such and just supply their labour or skill. The tribunal judge in Professional Game Match Officials echoed previous commentary from Hall and Lorimer [1992] 1 WLR 939: ‘The test of whether in business on own account may also be of little assistance where the individual carries on a profession or vocation.’ In the case of Hall v Lorimer the High Court considered the employment status of a vision mixer who did not have many trappings of being in business: ‘It is said that Mr Lorimer provides no equipment, he provides no workplace or workshop, where the contract is to be performed, he provides no capital for the production, he hires no staff for it. No, he does not. But that is not his business. He has his office, he exploits his abilities in the market place. He bears his own financial risk which is greater than that of one who is an employee, accepting the risk of bad debts and outstanding invoices and of no or an insufficient number of engagements. He has the opportunity of profiting from being good at being a vision mixer. According to his reputation, so there will be a demand for his services for which he will be able to charge accordingly.’ 2.208 In the case of Barnett v Brabyn [1996]  STC  716, HMRC were in the fairly unusual position of trying to argue that someone was in fact selfemployed. In that case, HMRC successfully contended before the General Commissioners that it was quite possible for a person to be in ‘business on his own account’ when all they supplied was their own services without providing any equipment or having any risk of loss of prospective profit. 2.209 The threshold for one to be deemed in ‘business on their own account’ therefore appears to be quite low. The judgments of JL Windows and Sherburn Aero Club also concluded that the individuals were in ‘business on their own account’ and yet when the facts of the case are considered, there appears to be little by way of tangible factors that truly support this. If the courts stand back 62

Employment Status 2.214 and look at the picture, as was the case in Hall v Lorimer, and feel that the relationship is not an employment one, perhaps having many business factors becomes less important. 2.210 In the case of O’Kelly the Court of Appeal referenced that industry practice was for casual workers in that industry to be self-employed and industry practice should not be overlooked when considering employment status. Special Commissioner Nowlan drew a similar conclusion in Castle Construction when he spoke of the bricklayers having a ‘trade’ which may not be decisive in considering employment status, but it had far more importance than the respondents gave it credit for. 2.211 There are pros and cons to both, looking for factors consistent with an employment relationship and considering whether they are in ‘business on their own account’. 2.212 The main problem is that the law is very unpredictable when applying these approaches. The courts have made it clear that the weight to be attached to each of these factors will vary from case to case (see Construction Industry Training Board v Labour Force [1970] 3  All ER  220) depending on the circumstances but where does that leave the taxpayer who has to make the decision and pay the price for getting it wrong. 2.213 In a bid to cause real confusion and uncertainty, cases such as Synaptek v Young (the General Commissioners’ decision rather than the High Court) and Fall v Hitchen, both found that the individual was in fact in ‘business on their own account’ and yet, the contract was one of employment! It may be argued that this shows there is no justice in the world and whilst it is difficult to comprehend how a taxpayer can have certainty over their position when they can be both in ‘business on their own account’ and an employee, there is a strand of logic hidden within. This is essentially that being in business on the one hand does not stop a completely separate engagement being a contract of employment. Example of being in business and an employee Sophie is an App developer, she has her own business premises, equipment, software, website, marketing methods and works on her own projects as and when she chooses. She answers to nobody and clearly has an established business. As the work can be unpredictable however she also works part time at a local shop where she is without doubt, an employee. The two ways of working are entirely different and her being in business does not stop her also accepting work as an employee.

THE INTENTION OF THE PARTIES 2.214 If, after considering personal service, control, mutuality of obligation and any other factors inconsistent with an employment relationship, the court 63

2.215  Employment Status is unable to reach a conclusion either way about an individual’s employment status they can turn to the intention of the parties as per the Court of Appeal case of Massey v Crown Life Insurance [1978] 2 All ER 576 in which Lord Denning held: ‘If their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another.’ 2.215 This was seen recently in the IR35 case of Kickabout Productions v HMRC [2019] UKFTT 415 (TC) in which the tribunal clearly found it difficult to determine the case and it was decided not only on narrow grounds but by the casting vote of a judge. The tribunal acknowledged that its view may not be one which would be reached by others in which case, if it were deemed to be doubtful or a borderline case, the intention of the parties must be taken into account which supports the tribunals conclusion. Focus Point If the courts are unable to decide the issue of employment status, they can determine the case according to the common intention of the parties. 2.216 A  side note to the above is that whilst the intention of the parties will be considered in such cases, the parties cannot change the nature of the relationship merely by changing what they call it. An example of this was seen in Massey v Crown Life Insurance [1978] 2 All ER 576 when a branch manager was employed by an insurance company but was advised by his accountant that he would be better off if he worked on a self-employed basis. The company agreed to this change and he carried on working in the same way until he was dismissed, at which point, he claimed unfair dismissal. Normally an individual’s employment status would not change simply by changing the label they put on it, especially if they carry on working in exactly the same way. In this case the Court of Appeal were unimpressed with the individual’s approach and held that he cannot simply decide to be self-employed for the tax benefits and then claim he is an employee when it no longer suits him and to find otherwise would mean the union between fairness, common sense and the law would be strained, almost to breaking point. 2.217 The Court of Appeal also commented that once the individual has made their bed, they must lay in it and they cannot alter the true relationship by putting a different label on it. This approach was also seen in other cases such as Global Plant and B.S.M.

MYTHS AND MISUNDERSTANDINGS 2.218 There are many, many misunderstandings about when an individual is an employee or self-employed. This can vary from the fact that an individual works for other businesses, sends invoices, has a UTR number, has equipment, 64

Employment Status 2.225 doesn’t get holiday pay, right through to stating they must be employed because they work for the client during standard business hours. In fact, if I had £10 for every time someone told me these things (usually with some conviction), I  would be sitting on a sunny beach somewhere instead of writing a book about tax. 2.219 With so many myths about self-employment, it is worth considering some of these details and the standard responses you would get from HMRC if you presented them to defend your position.

They have a UTR so must be self-employed! 2.220 Incorrect. A Unique Tax Number is given to anybody that is registered for self-assessment, it has nothing to do with employment status whatsoever. Employment status is determined by the terms under which an individual works, not by whether they have a UTR. If only it were that simple.

They submit invoices 2.221 If this argument is advanced to HMRC, they will simply say that is because they thought they were self-employed. This may help establish the intention of the parties but nothing more. The Intention of the parties is only considered in borderline cases so the fact that someone invoices really does very little, if anything, for determining employment status.

They work for other people 2.222 An employee can have more than one job. Just because they have different jobs doesn’t mean they are self-employed. Each engagement will have to be considered on its own merits. 2.223 There is at least some case law basis for this argument however and that derives from the case of Hall v Lorimer in which a vision mixer had 574 separate engagements over the course of 800 days which was compelling in showing he was in business on his own account. 2.224 If an individual works for many clients, it may well be enough to show that they have a ‘business’ but the right to work for others and simply doing the odd bit of work for others here or there will not be of great significance.

They provide their own equipment and/or materials 2.225 This may be important but will depend on the extent and value of the expenditure. Merely providing basic equipment or hand tools will not go very far in showing an individual is self-employed. If, however an individual owns 65

2.226  Employment Status or hires their own plant or specialist equipment or has assets of their own, it will go a long way towards showing they are not an employee. 2.226 On the flip side of this, an individual does not have to provide equipment to be deemed self-employed as there are many other factors to consider. In the Sherburn Aero Club case, one of HMRC’s arguments was that the flying instructors could not be self-employed because they did not provide the planes – this may well seem, and in fact is, ridiculous but it shows what kind of argument you may be up against with HMRC.

They work five days a week most of the year so must be employees 2.227 The length of an engagement has no impact on employment status. If a company has plenty of work and the individual is a skilled and reliable person, it is just a commercial reality that the engagement may be ongoing. 2.228 It is possible for the relationship to change over time but unless the way in which the individual actually works, changes, they will not become an employee just because they work five days a week.

Once they have worked for three months (or two years), they have to be put on PAYE 2.229 The length of time can vary with this rumour but either way there is no substance to it at all. There is no case or piece of legislation that stipulates that an individual must be put on PAYE after a certain amount of time, whether that be three months or two years. 2.230 The three month period may well come from things like the Agency Workers Regulations 2010, SI  2010/93, which stipulate that agency workers are afforded certain rights after 12 weeks. Likewise, the two year period may come from the expenses legislation whereby a workplace will no longer be considered temporary after two years or perhaps because that is when an employee is entitled to certain rights. Whatever the reason, pay little attention to the length of duration.

They work alongside another employee so can’t be self-employed 2.231 This is not the case and it depends entirely on the terms under which the individuals work. In some cases, it may actually make it easier to establish one party is self-employed because of the direct comparison to the employee who works in a different way. Mal Scaffolding considered this point and held that it is entirely possible for an employee and self-employed person to work side by side. 66

Employment Status 2.238

THE FUTURE 2.232 There are many flaws in relation to employment status. It can be very hard for taxpayers to really understand where they sit with the law, it can be unpredictable as well as costly to defend and can create an unfair playing field where some companies have additional costs of employing individuals where others engage their workforce on a self-employed basis. From the government’s perspective, it costs the Treasury hundreds of millions in lost revenue from incorrect classification and it is very costly in terms or resources for HMRC to monitor, track and challenge businesses on. 2.233 The way in which employment status has evolved however does provide the economy with a very flexible workforce and with the bureaucracy, employment rights and costs now associated with employing people, it is essential to have that ability for companies to maintain that flexibility. 2.234 Just over a decade ago, the Labour Government considered a radical change to employment status and consulted on whether employment status should be determined by three factors. These were whether an individual was VAT registered, whether they provided all the materials to undertake the work and whether they had other people working for them. It is unclear why these were deemed to be determining factors but the consequences of such a change would have been far reaching (and no doubt led to a mass of VAT registrations). This proposal was ‘parked’ and fortunately never reared its head again. 2.235 The Office of Tax Simplification was also tasked with considering the area of employment status and in 2015 they released their Employment Status Report but this provided little insight into how to tackle the problem as all possible avenues attracted a host of new problems. 2.236 The latest government review took place in 2016 in which Matthew Taylor undertook a comprehensive review of modern working practices. The scope of this was not initially geared towards employment status for tax purposes but because of its close relationship with employment law and rights, it was considered under the review. 2.237 Following the conclusion of the review, the Good Work Review of Modern Working Practices document was released: https://www.gov.uk/government/publications/good-work-the-taylor-reviewof-modern-working-practices 2.238 This raised various questions and concerns about employment status and suggested some possible ways forward for the government but concluded that any changes would have to be heavily consulted on first. It then followed that in 2018 the government released the Consultation on Employment Status: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/679853/FINAL_-_Employment_Status_consultation_-_ FOR_UPLOADING_and_PRINTING.pdf 67

2.239  Employment Status 2.239 The purpose of this consultation was to set out the issues with the law in relation to employment status and canvas opinion as to what changes would be workable, if any and how. It would appear that this consultation was also put on the backburner, perhaps in part because of Brexit and the changes in leadership, as there has been very little from the government since. It may come to be that this consultation is forever cast aside but the author suspects that at some point the government will be asked to look into this area again. With this in mind, it is well worth considering what possible proposals were in the consultation and what impact they may have had.

Legislation change? 2.240 The most likely and credible route forward would be for there to be primary legislation setting out the main principles of employment status. This would at least remove the question over what aspects have to be considered. The Consultation then moves on to consider whether this could be further clarified with secondary legislation that will go into much greater detail whilst enabling the government to adapt the law as it is deemed necessary. Focus Point One of the main proposals for employment status going forward was to introduce primary legislation setting out what concepts must be considered. Secondary legislation would then cover those in more detail. 2.241 This would keep the status quo with employment status rather than meaning thousands find their employment status changing overnight and it would potentially clarify the law for all. The problem however is that the law is rarely written in a way in which the layman can really understand and this is a complicated and extensive area and so it may not be possible to provide clarity within the confines of legislation. Once legislation is passed and it is in black and white, it also makes it much easier for people to avoid and although the government are hot on tackling avoidance nowadays, it may be hard to prove in this field. 2.242 As part of this consideration the consultation also considers the importance of control and goes back to whether employment status should be determined purely on control. This would bring it in line with the agency legislation and would create a more direct approach to employment status but would be taking the law back more than 50 years when it was firmly established that there are many occasions when a self-employed person may be subject to control. 2.243 The next option to be considered was that a more precise test is adopted with definitive boundaries and results. This would provide the taxpayer with clarity but would come at the expense of classifying many individuals as employees when traditionally they would have always been deemed selfemployed. 68

Employment Status 2.247

How do other countries deal with status? 2.244 In Greece and Netherlands for example, once an individual has worked for an engager for a certain time, they are automatically classed as employees. Another option for the government is to consider how much of the individual’s income comes from one engager although this would be very problematic because neither party may not know this until the end of the year. The Consultation also looked at an approach based on the percentage of work carried out at the engager’s premises but again this as a test on its own would have a number of issues. In Germany, there are five tests and if more than three apply the individual is deemed to be an employee, these are: 1.

Does not employ other workers at a certain minimum wage per month;

2.

Depends on one employer for a long time;

3.

Is employed with tasks for which the employer usually employs dependent workers;

4.

Does not act as an entrepreneur;

5.

Is employed with the same tasks by the same employer for whom he or she previously worked as an employee.

These are open to some debate but again could have a major impact in the UK and cripple certain industries like construction. 2.245 The last test-based approach considered was the American one whereby an individual is presumed to be an employee until they are free from the company’s control, perform work outside the company’s usual course of business or are engaged as an established business. This approach is also very open to interpretation and may not actually help clarify employment status that much other than focus upon which areas the government wish to place reliance on.

Moving forward 2.246 It is unclear which of the above will be considered in more detail, if they are at all. The most likely scenarios are likely to be legislation either in line with the current case law (but perhaps with less emphasis on mutuality and personal service – unless other workers are actually used in practice) or centred around how much control there is. Only time will tell. 2.247 It is unlikely there will be any statutory changes to employment status in the coming year or so and if the government did decide to tackle the issue of employment status, it would have to be consulted on at length beforehand. 69

2.248  Employment Status 2.248 Time will tell as to where employment status ends up, but in the meantime, a thorough understanding of the guiding principles and case law should provide taxpayers and advisers with the tools to be confident of their position and provide them with a map and metal detector to navigate through the labyrinth of mines.

70

Chapter 3

Agency Workers

SIGNPOSTS •

Recruitment agencies make up a significant part of the labour market and they engage individuals in a variety of ways. The most common ways of paying agency workers are under direct PAYE, through an umbrella company, via personal service companies, on a self-employed basis or occasionally on a hybrid/elective deduction model whereby PAYE and NIC is operated even though they are engaged on a self-employed basis.

•

Direct PAYE and umbrella companies are the most common among these and are generally an approach that sits well with HMRC because they are getting full PAYE and NICs.

•

When an agency engages personal service companies the agency will need to consider the IR35 rules, including the 2000 rules and the provisions which were implemented in 2017 and are due to be amended in 2021. Whilst the liability and obligations on the parties may differ, the main element of the legislation remains the same – if the workers provided services directly to the client, would it be akin to an employment relationship.

•

If an agency engages an individual on a self-employed basis (directly or indirectly), they will need to demonstrate there is no right of supervision, direction and control over the manner in which the services are provided. HMRC will assume there is control until the agency proves otherwise.

•

Since April 2015 agencies have had a legal requirement to send quarterly reports to HMRC confirming details of anyone they have paid who was not on their payroll. As part of this report the agency is required to confirm why PAYE was not operated. This provides HMRC with a perfect tool for profiling companies and making targeted compliance reviews.

•

With the changes to IR35 in 2021, some agencies will look at moving away from supplying people in the traditional way to tendering for the work as a project and carrying out the work on a consultancy basis. The logic being that they will then be the client and it will move the liability away from their client and onto them or even the PSC depending on their size. 71

3.01  Agency Workers

BACKGROUND 3.01 Temporary agency workers have been a vital part of the economy for many years because they enable companies to fill skill shortage gaps and allow a great deal of flexibility to deal with the peaks and troughs in staffing requirements. 3.02 Agencies will typically engage the individuals in a variety of ways including under PAYE (either directly or through an umbrella company), via an intermediary such as a personal service company or on a self-employed basis. Less common than these, the agency may also engage individuals on a PAYE/self-employed hybrid or on a ‘project basis/consultancy’. This chapter will consider each of these ways of working, the tax implications of them along with the advantages and drawbacks of each. 3.03 In most circumstances agency workers do not technically meet the conditions for the individuals to be employees of the recruitment company because when looking at that agency/worker relationship in isolation the agency themselves will not normally require the personal service of the individual, they do not have a sufficient degree of control over the work and there is often no mutuality of obligation between the parties. 3.04 The default position would therefore be that the individual is engaged under a contract for services. However, the agency legislation as introduced in the Income Tax (Earnings and Pensions) Act 2003, s  44 bridged the gap between the worker and the client meaning most agencies operated PAYE and NICs and engaged the individuals as employees under a contract of service.

Self-employment 3.05 In the original version of the agency legislation, the legislation took effect where an individual was subject to supervision, direction or control as to the manner in which they provided services – much like the current version of s 44 albeit worded slightly differently. The older version also contained the key component of the contract between the agency and the worker being deemed an ‘agency contract’ which meant that the legislation would only apply where the individual was under an obligation to provide the services personally. 3.06 This inclusion of the need for an agency contract made it easier to avoid being caught by the old agency legislation. An agency merely had to include a clause in their contracts allowing for the right of substitution and as if by magic, the contract was not an ‘agency contract’ and the legislation could not apply so the individuals could be paid on a self-employed basis. The ease with which a company could avoid being caught by the legislation almost rendered the legislation useless. 3.07 It was difficult and time consuming for HMRC to challenge the validity of such substitution clauses especially on such a large scale (the case of HMRC  v Talentcore TA Team Spirit [2011]  UKUT  423 (TCC) was cited 72

Agency Workers 3.14 by the government as one such case) and so the government decided it was necessary to amend the legislation to ensure it was harder for agency workers to be engaged on a self-employed basis. After consulting on possible changes, the agency legislation was amended in 2014. 3.08 Accurate data on what methods agencies used to pay people and the extent of each was almost unknown to HMRC and so with the amendments to the agency legislation HMRC also introduced new reporting requirements for intermediaries that came into effect the following year.

IR35 3.09 In the same way that the old agency legislation was not up to scratch and deemed largely ineffective, HMRC were getting little joy in making headway in their task of challenging companies under IR35. 3.10 This was owing to many factors but some of the main reasons are down to resourcing, the need to challenge one contractor at a time and HMRC losing a lot of cases at the tax tribunals. The deterrent of an IR35 investigation and associated liability had worn thin and so the use of personal service companies kept increasing, causing the government to reconsider the position and the legislation. 3.11 The first stage of this process was to include new provisions for IR35 in respect of public sector work. This change was implemented in 2017 and saw the responsibility and liabilities for IR35 moving up the contractual chain for any work in the public sector. The government deemed this to be effective in addressing non-compliance and so in April 2021 the legislation will be amended again, this time rolling the same type of provisions out for medium and large companies in the private sector. 3.12 These changes shift the responsibilities, and agencies now have a far greater need to consider the application of IR35 than they did pre-2017. IR35 where the client is a small organisation will continue to operate in the same manner as it always has – for now.

PAYE 3.13 The most common route for agencies paying their workers is to employ the individuals directly under PAYE or for the individuals to be employed by an umbrella company (how and why umbrella companies operate is considered in more detail in Chapter 4). 3.14 As the individual is an employee of the agency or the umbrella company, full PAYE and National Insurance contributions are accounted for and paid to HMRC, and as such there is very little risk to HMRC and therefore no real interest in challenging this type of work. That is not to say that HMRC will not review the PAYE processes and procedures but provided the 73

3.15  Agency Workers parties operate correctly, it should be the safest route for an agency in terms of HMRC risk. 3.15 The disadvantages of operating PAYE are more from a commercial perspective than for risk. The costs of an agency employing someone are naturally higher than alternative methods. The agency will have to account for 13.8% employer’s National Insurance, 12.07% holiday pay, pension contributions as well as providing other employment rights and benefits such as statutory sick pay as and when necessary. As with all employers, this adds a considerable chunk onto the base rate the agency agrees to pay the individual. 3.16 This would pose less of a problem in a level playing field (although it could potentially still price out some companies from using agencies once their fees are added as well). Where other agencies are happy to look at alternative ways of paying individuals, PAYE may become less attractive to the agency and the client, as the agency will either need to quote higher rates to its clients to cover the additional costs therefore making it less competitive, meet the costs from its own margin which would eat heavily into the company profits or push the costs towards the individual by engaging them through an umbrella company or offering lower rates of pay to the individuals. The latter option could lead to a shortage of suitable candidates where they can obtain higher rates elsewhere but this of course will be influenced by the economy and employment rates. The above factors all lead agencies and individuals to look for alternatives.

SELF-EMPLOYMENT 3.17 There has always been a concern over employment status by HMRC where agencies pay individuals on a self-employed basis. This can be seen in cases such as Bhadra v Ellam (H M Inspector of Taxes) 1988 BTC 25 where the High Court held that a Registrar Doctor supplied to a hospital by an agency could not have been self-employed because of the control over his work: ‘Although little supervision was in fact exercised, the Hospital through their Consultants, had the right to supervise, direct or control the manner in which Dr Bhadra carried out his duties.’

The old version of the agency legislation 3.18 ITEPA 2003, s 44(1) dictated that PAYE and NICs must be accounted for where: ‘(a) an individual (“the worker”) personally provides, or is under an obligation personally to provide, services (which are not excluded services) to another person (“the client”), (b) the services are supplied by or through a third person (“the agency”) under the terms of an agency contract, (c) the worker is subject to (or the right of) supervision, direction or control as to the manner in which the services are provided, and 74

Agency Workers 3.21 (d) remuneration receivable under or in consequence of the agency contract does not constitute employment income of the worker apart from this Chapter.’ The term ‘agency contract’ was essential for the legislation to bite and that term was defined in s 47 as a contract between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client. 3.19 This old version of the legislation meant that for an agency to pay an individual on a self-employed basis there would have to be no right of supervision, direction or control over the manner in which the services were provided or no requirement for the services to be provided personally. 3.20 In what turned out to be an important case, HMRC challenged Talentcore Limited over the way in which their business operated (Talentcore (t/a Team Spirits) v HMRC  [2011]  UKUT  423). Talentcore supplied individuals to work at duty free shops and stands at airports and HMRC disputed they could be self-employed. The case first went to the First-tier Tax Tribunal who allowed the taxpayer’s appeal against HMRC’s assessments on the basis that there was a lack of personal service as the individuals could, and did, use substitutes to provide the services when they were not able or willing to undertake the work. The tribunal did agree with HMRC about there being control over the work: ‘I infer that if a manager from the cosmetics company were present he or she would have a similar right to exercise supervision, direction or control over consultants as he or she would over other retail staff who were employees.’ HMRC appealed the decision to the Upper-tier Tribunal who upheld the previous decision. Mr Justice Roth made the following comments in his judgment relating to personal service and control: ‘The fact that original consultant had complete freedom to arrange for a substitute if he wished, even if he did not actually do so, constitutes in my view an unfettered right of substitution.’ ‘It is correct that the FTT found there was little supervision in practice. But the FTT found that World Duty Free would be in a position to give directions to those consultants.’ The loss of this case turned out to be a key trigger point in HMRC’s need for the legislation to change as they believed the right of substitution in the Talentcore case was a sham and inserted purely to avoid the legislation (despite the court viewing the matter differently). This is not only a disservice to the judges in both the First-tier and Upper-tier Tribunal who would have considered whether the right of substitution was an accurate reflection of the working practices but it always went against the evidence in this case where there were examples of substitutes actually being utilised. 3.21 The agency legislation was subsequently consulted on and amended so that companies could not engage people on a self-employed basis by including substitution provisions in the contract. 75

3.22  Agency Workers

The 2014 legislation 3.22 The ITEPA 2003, s 44 was amended in 2014 as follows: ‘(1) This section applies if– (a) An individual (“the worker”) personally provides services (which are not excluded services) to another person (“the client”) (b) There is a contract between – (i)

The client or a person connected with the client, and

(ii) A  person other than the worker, the client or a person connected with the client (“the agency”), and (c)

Under or in consequence of that contract – (i)

The services are provided, or

(ii) The client or any person connected with the client pays, or otherwise provides consideration, for the services. (2) But this section does not apply if – (a) It is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person, or (b) Remuneration receivable by the worker in consequence of providing the services constitutes employment income of the worker apart from this Chapter. (3) If this section applies – (a)

The worker is to be treated for income tax purposes as holding an employment with the agency, the duties of which consist of the services the worker provides to the client, and

(b) All remuneration receivable by the worker (from any person) in consequence of providing the services is to be treated for income tax purposes as earnings from that employment, but this is subject to subsections (4) to (6). (4)

Subsection (5) applies if (whether before or after the worker begins to provide the services) – (a)

The client provides the agency with a fraudulent document with is intended to constitute evidence that, by virtue of subsection (2)(a), this section does not or will not apply, or

(b) A  relevant person provides the agency with a fraudulent document which is intended to constitute evidence that, by virtue of subsection (2)(b), this section does not or will not apply. (5) In relation to services the worker provides to the client after the fraudulent document is provided – (a)

Subsection (3) does not apply, 76

Agency Workers 3.25 (b) The worker is to be treated for income tax purposes as holding an employment with the client or (as the case may be) with the relevant person, the duties of which consist of the services, and (c) All remuneration receivable by the worker (from any person) in consequence of providing the services is to be treated for income tax purposes as earnings from that employment.’ The ITEPA 2003, s 47 includes the interpretation of excluded services: ‘(2) In this chapter “excluded services” means(a)

services as an actor, singer, musician, or other entertainer or as a fashion, photographic or artists model, or

(b) services provided wholly – (i)

in the worker’s own home, or

(ii)

at other premises which are neither controlled or managed by the client nor prescribed by the nature of the services.’

3.23 When the revised legislation was first introduced, HMRC released its draft Employment Status Manuals and within ESM2073 (which no longer exists) it stated when the legislation would not apply, citing the above points in the legislation plus one additional point. That additional point was that the agency legislation would not apply when a worker was legitimately selfemployed. It would appear HMRC realised the error of its ways with this and quickly removed it, given it would have undermined the entire legislation if you could simply argue the individual was self-employed and so the legislation did not apply.

Personal service 3.24 The most notable point in the amended legislation is that the ‘agency contract’ requirement was removed. From 2014 the legislation applies when an individual personally provides services and so whenever they undertake work for the client, they are personally providing the services and the right of substitution would not stop this. This is a significant step forward in HMRC’s ability to challenge companies under the agency legislation. HMRC’s Employment Status Manual (ESM 2035) says that a worker is providing their personal services when they are working for the client.

When is a company an agency? 3.25 The definition of agency was also changed and is now set out in ITEPA 2003, s 44(2)(a) as ‘a person other than the worker, the client or a person connected with the client’ which is broader than the previous definition. HMRC’s view according to ESM2030 is that an agency is any third party interposed between the worker and the client for whom the worker is providing services. This would include all types of intermediaries from agencies and umbrella companies to personal service companies. 77

3.26  Agency Workers Focus Point The definition of an ‘agency’ is broad and is any entity in the chain that is not the worker or the client.

3.26 HMRC take it one step further however and from their Guidance on Employment intermediaries: personal services and supervision, direction or control under ESM2036a it makes it clear they will be aiming to push this legislation far and wide to test the boundaries. 3.27 It gives the example of Nicky entering into a contract with a local building company, Tyne Builders Limited (TBL) to build an extension, HMRC states that in that example Nicky is the client, TBL would be the agency and the individuals undertaking the work would be the individuals. This example seems absurd as it would be a standard building company working for domestic clients and it seems inconceivable for such a business to be deemed an agency. 3.28 It remains to be seen whether HMRC would pursue such a case to the tax tribunal, but it is certainly possible they will challenge companies in this way. In the author’s opinion the tribunals would not apply the legislation this way and would look ultimately at who the individual completes the work for and deem that entity the client. In this case, the individual would consider they are working for TBL, not the homeowner and there is no third party interposed between TBL and the individual and so the agency legislation would not apply.

Control 3.29 The legislation does not apply if it can be shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control (SDC) by any person. 3.30 As referenced in HMRC’s ESM 2055, this is the only employment status test to consider. An individual may have many other factors that demonstrate that they are genuinely self-employed such as their own tools, equipment, vehicles, website, multiple clients, financial risk etc but if they are subject to the right of SDC, the legislation may apply even if they would normally be self-employed. This was seen in the case of Gabriel Oziegbe v HMRC [2014] UKFTT 608 where HMRC accepted the individuals were selfemployed under normal circumstances but still pursued the company under the agency legislation. Focus Point The agency legislation will not apply if it can be shown that there is no right of supervision, direction or control by any party over the manner in which the services are provided. 78

Agency Workers 3.35

Control over the manner 3.31 The ITEPA 2003, s  44 (2)(a) is only short but contains a lot of information to dissect. The first is that it specifically relates to the manner in which the services are provided rather than focussing on what services are provided, when and where. 3.32 The various aspects of control (what, where, when and how) have been considered by the courts for many years in relation to employment status and it is not surprising that the focus on the agency legislation remains on the manner in which the services are provided; as what work needs completing, when and where will often be deemed to be neutral factors. This can be seen perfectly in the case of Castle Construction Ltd v HMRC  [2008]  UKSPC SPC00723 when Special Commissioner Howard Nowlan made the following comment: ‘There was obviously complete control over where, and in what sequence, walls should be built….The more relevant aspect of control, it seems to me, is the issue of whether the Appellant or perhaps even the main contractors exercised control as to how bricks were actually laid. All of the Appellants own witnesses consistently suggested that they knew how to lay bricks, and that no-one ever gave them any instructions as to how to exercise their craft.’ 3.33 Castle Construction was an employment status case rather than an agency legislation case but it does highlight the need to really break down and strip back the services being provided and in the case of the bricklayers look at whether they are controlled over how they actually lay the bricks. 3.34

This can also be seen in the Bhadra v Ellam case (1988 BTC 25):

‘It was accepted by Mr Moses (for the Crown) that it was not sufficient for the section to be able to say that Dr Bhadra was subject to direction as to what task he should next embark upon; a higher standard than that was required.’ 3.35 There are only a few cases involving the agency legislation (whether it be the current or previous version) and so it is important to consider how those cases that have reached the tribunals have been decided and what the position was in relation to the application of the control test. One such case was Gabriel Oziegbe v HMRC [2014] UKFTT 608 and whilst this was only a First-tier Tribunal decision, there is some very insightful commentary within the judgment. The judge in this case was again Howard Nowlan who provided a few examples of when one may or may not expect to see control: ‘The provision is most likely engaged when the agency worker fulfils a role in which it is natural and obvious that the client will exercise control over how the worker performs his or her services. This in the case, for instance, of secretaries provided by an agency who perform an identical function to secretaries that the client might directly employ, and who will be expected to fit in with all the work practices of the particular client, the control requirement will clearly be satisfied. 79

3.36  Agency Workers The most obvious situation in which the “control” requirement will not be satisfied is where the particular service being rendered is one that is extraneous to the basic activity of the client, such that it is entirely natural that the client will have no control or right of control over the way in which the services are provided. The example we gave during the hearing was of the service that the same construction companies might contract to receive from a specialist provider responsible for services their mechanical equipment… we would not expect a worker or subcontracted worker of the maintenance firm to be regarded as working under the control of the client.’ 3.36 In the context of the Oziegbe case, the individuals were security guards on construction sites. It is logical in that case that the construction company would not be able to tell the security guard how to undertake the work because they would have no knowledge or understanding of that type of work. Equally the individuals worked on their own and so it would not have been possible for the security company to control how they undertook their work. This is a very important point to consider in other cases, for example where a company has instructed a specialist IT agency worker to build them software because they do not have the knowledge or resources internally to complete the work. How could the client control the IT contractor over how it undertakes the work when it has no idea itself? 3.37 The judge in Oziegbe also commented ‘the question is not whether the client indicates the particular job to be done, but rather the issue of how it is to be done’ which reinforces the position that it is the manner in which the works is done that should always remain the focal point. Focus Point The agency legislation requires supervision, direction and control over the manner in which the services are provided, not control over what service are provided, when they are provided and where. 3.38 When the legislation was first consulted on, part of the government’s concern was that people were paid on a self-employed basis in industries and positions where there was little scope for self-employment, particularly in lower paid roles. The idea of this legislation is that a skilled worker who has mastered their craft and is genuinely self-employed will not need to be subject to any supervision, direction of control over how they work whereas a lower skilled worker will be. The case of Thoene v HMRC [2016] UKFTT 454 highlighted this point: ‘The nursing services he provides can be distinguished, say, from the work of a qualified freelance plumber called in when a pipe has burst. The plumber decides for himself how to mend the leak and is not subject to supervision, direction or control as to the manner of carrying out his work.’ 3.39 This is also supported in the case of Bhada v Ellam 1988 BTC 25, where the court referred to all posts in a hospital below a consultant level 80

Agency Workers 3.43 as being subordinate posts which were regarded as training grades which are subject to the right of supervision, direction and control. 3.40 The case of Philip John Wright v HMRC  [2011]  UKFTT  824 also drew a similar conclusion where the judge commented that it was improbable that they were not under day-to-day control as the individuals were unskilled labour. 3.41 That is not to say that all skilled workers will not be subject to supervision, direction or control when working through an agency or equally that all lower skilled workers will automatically be subject to supervision, direction or control, but it does provide a starting point and is in line with the government’s general intention when the legislation was introduced. Example of low skilled worker and control Barry is a low skilled labourer for a building company. His main role is to keep the building yard tidy and organised. This role doesn’t require a particular skill, but the assumption may be that because he doesn’t possess a particular skill, the building company retain the right to supervise, direct and control how he undertakes the work. HMRC open an enquiry into the business and both Barry and the management of the building company maintain that whilst Barry doesn’t provide a skill, the task is very simple and does not require any need for supervision, direction and control, nor does the company have any interest or time to watch Barry sweep the yard and tell him how to do it differently. Their only concern is that the yard is tidy and safe, and they do not care how Barry goes about doing this. 3.42 The cases in which there is no right to supervise, direct and control an unskilled worker may not be as common but it will be dependent on the facts of each individual case and it should not just be assumed that there is or isn’t control over the work, even if in most cases there will be control.

Health and safety 3.43 The last point on control over the manner in which the services are provided is that HMRC accept that supervision, direction and control for health and safety purposes will not trigger the legislation. If the opposite were true, then it would effectively mean that no one could be self-employed as there will always be health and safety rules and procedures in place that have some influence on how services are provided. This is referenced in HMRC’s Employment Status Manual ESM2037: ‘Where there are procedures, methods, and instructions which must be followed, it is likely there will be supervision, direction and control over the manner in which the services are provided. However, being required to comply with statutory requirements like health and safety procedures, is not determinative or a worker’s employment status, as all workers (employed or self-employed) must comply with these requirements.’ 81

3.44  Agency Workers

Right of control 3.44 It does not matter whether supervision, direction and control are exercised in practice or not. The legislation states that it is the right of supervision, direction and control that is key. 3.45 The easiest way of establishing there is no right of control is to address it in the contract between the parties. Provided such a statement is an accurate reflection of the parties’ intentions and what happens in practice, it will be given its due weight by the court. 3.46 In the case of Mal Scaffolding v HMRC [2006] SpC527, HMRC called a scaffolder as a witness and when asked whether Mal scaffolding could tell him how to do the work he became quite defensive and abrupt that ‘no one can tell me how to do the work’ because he was an experienced scaffolder. When an individual is actually offended at the suggestion that someone could tell him how to complete the work, it bodes well that they are not likely to accept supervision, direction or control even if a client tried to assert it.

Supervision, Direction and Control 3.47 These terms, ‘supervision, direction and control’ are not defined in the legislation and so they will take on their ordinary meaning, in line with the intention of the legislation at the time of drafting. To assist companies when considering these terms, HMRC have included what definitions they will use, which can be found in ESM2055: ‘Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do, and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge. Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance, or advice as to how the work must be done. Someone providing direction will often co-ordinate how the work is done, as it is being undertaken. Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.’ 3.48 These are helpful definitions to get an understanding of the legislation but are not set out in legislation or case law so are open to challenge. For example, HMRC’s definition of supervision includes ensuring someone is doing the work they are required to do, which the author does not believe is correct. Anyone who is paying another to undertake work will want to ensure they are doing the work they are required to do. That doesn’t mean they are supervised over how they actually do the work. Taking the Oziegbe case as an example, they were tasked with providing site security and if the construction company wanted to ensure they were actually on site doing the job they are 82

Agency Workers 3.53 paying for, it does not mean they were supervised, directed and controlled over how they worked. 3.49 In a similar vein, in the Thoene case the judge gave the example of a skilled plumber completing a job how they saw fit, but in most cases a customer would still check that the plumber completed the work they were paying them to do. 3.50 HMRC’s definition of control also includes having the power to move a person from one job to another but this needs to be considered in context as it may only dictate what work is being undertaken, rather than how. 3.51 Whether there is supervision, direction or control is a question of fact, not degree. When considering normal employment status, the test is whether there is a sufficient degree of control to create an employer/employee relationship. With the agency legislation, there is either the right of supervision, direction or control or there is not. Focus Point The meaning of supervision, direction and control is not set out in legislation and whilst HMRC manuals can be helpful, they are not the law and should be used with caution.

3.52 There is some debate as to whether only one of ‘supervision, direction or control’ have to be present or all three. HMRC’s view and the more common approach is that it only requires one of these for the legislation to apply. This was certainly the case with the previous version of the legislation where it stated that the legislation applied where there was supervision, direction or control. This was straight forward but when the legislation was amended it changed slightly and now it does not apply if the worker is not subject to supervision, direction or control. Flipping this the other way around and emphasising the ‘or’, if they are not subject to supervision, direction or control, the legislation does not apply. It would certainly be a point to argue with HMRC in any event if defending a case under this legislation.

Control by any person 3.53 The legislation states that supervision, direction and control can be by ‘any person’. This could therefore include anyone in the contractual chain such as the client or agency or it could include other people working for the client such as their employees or other independent contractors. That is assuming that the client has given those other individuals the power to supervise, direction or control how the worker does the work. A contractor on a power trip may believe they have superior knowledge and skills and therefore try to interfere with how the work is done but if they do not have the right to, such evidence should not carry a great deal of weight. 83

3.54  Agency Workers 3.54 When considering the legislation, don’t focus purely on whether one specific party can control the work. Instead look at whether anyone can.

Presumption of control 3.55 HMRC have confirmed that where work goes through an agency there will be a presumption of supervision, direction and control until it can be proven otherwise. HMRC will not consider it necessary to delve deep into the inner workings of the company to establish control. Instead they can simply open an enquiry and ask for evidence there is no control. 3.56 It is not clear what information HMRC would actually accept as evidence of a lack of control however, and proving that you do not do something, or have a right to, is exceptionally difficult other than via paperwork. In this legislation you are guilty, until proven innocent! ESM2037a: ‘HMRC isn’t prescriptive on what evidence HMRC or the Courts would find persuasive in considering whether this test is met, it will depend on individual arrangements. We don’t consider signed waivers and generic statements on the manner in which the worker personally provides the services as not subject to (or to a right of) SDC as satisfactory evidence.’ 3.57 HMRC have said they will not accept generic statements about control (such as declarations or contracts) as evidence of a lack of SDC. Contracts should always reflect the working relationship but in many cases an individual may work in similar terms to another person (for example 20 bricklayers engaged by one company all working in a similar way) and HMRC may try and argue that such contracts are generic rather than bespoke to each individual. Any such argument should be strongly rebutted because the contracts can still be accurate even if they apply to the way in which various people provide services to the company. 3.58 There is the possibility of seeking independent written advice to confirm the position and this will go some way to showing that there is a lack of control but HMRC will most likely still want to carry out their own factfinding exercise.

What constitutes employment income? 3.59 The ITEPA  2003, s  44(2)(b) states the agency legislation will also not apply where ‘remuneration receivable by the worker in consequence of providing the services constitutes employment income of the worker apart from this Chapter.’ In other words, if an individual is paid under PAYE, the legislation will not apply. This is not surprising because if all income is paid as employment income, HMRC have no need to challenge the relationship as there would be no tax loss. 84

Agency Workers 3.63 3.60 The agency legislation takes precedence over both the managed service company (discussed in Chapter 4) and the IR35 legislation, and the very use of a personal service company will fulfil the criteria of creating a client/agency/worker position essential for the agency legislation to apply. The ITEPA 2003, s 44(2)(b) provides the key however as to why personal service companies will not ordinarily need to be concerned with applying the agency legislation. This is addressed in ESM2051: ‘Any wage or salary paid to a worker by the PSC during a tax year is employment income. The PSC must operate PAYE on these payments and remit the appropriate income and NICs to HMRC at the appropriate time via RTI. Therefore this income will not come within the provisions of the agency legislation. A dividend received by the worker from the PSC will also not come within the agency legislation, as it does not arise from the provision of the worker’s services.’ Focus Point PSCs will not usually fall within the agency legislation because any wages will be employment income and dividends are the distribution of profits.

Liability and fraudulent documentation 3.61 The agency paying the worker will be the party responsible and liable for ensuring all remuneration is treated as employment earnings. Where there is more than one UK agency involved in the arrangements, ITEPA 2003, s 44 deems the worker to have an employment with the agency which directly contracts with the client and ITEPA  2003, s  688(1A) makes that agency the liable employer for operating PAYE. 3.62 If the individual works for a client in the UK but through an agency based outside the UK, then the client is treated as the employer responsible for deducting income tax (ITEPA 2003, s 689). 3.63 The government recognised that the agency being liable may produce unfair results where the client has provided false information about whether there is supervision, direction or control and the agency has acted in good faith. Where this is the case ITEPA 2003, s 44(4)–(6) applies meaning the worker will be treated as holding employment with the client and the client will be responsible for treating the income as employment income. Focus Point If fraudulent information is provided by the client about supervision, direction or control, the client will become liable under the agency legislation. 85

3.64  Agency Workers 3.64 In the case of fraudulent information being provided, if HMRC believe they will not be paid any outstanding liabilities within a reasonable time, will also seek to transfer the liability to the directors of the company that has provided the fraudulent information via a Personal Liability Notice. 3.65 These provisions initially made end clients very reluctant to provide information to the agency about whether there was SDC (and they still do, to some extent) as the client did not want to unwittingly be pulled into the scope of liability. Instead some end clients would insist that if the agency wanted to engage people on a self-employed basis, it would have to draw its own conclusions about SDC. The problem with this is that to operate the legislation correctly, an agency needs to have information from the client because they will be the main party who are able to confirm whether there’s a lack of control or not and the workers may have an incentive to say there is a lack of control because they wish to be self-employed. 3.66 It is safe for a client to provide an honest assessment, appraisal or genuine documents about the way in which the individuals undertake the work. This would not constitute fraudulent behaviour and it will only be considered fraudulent if the client knowingly provides or fabricates false information. Clients should ultimately not be scared to provide relevant information and be helpful.

Excluded services 3.67 The definition of services which are excluded from this legislation are set out in ITEPA 2003, s 47 and include: ‘(a) services as an actor, singer, musician, or other entertainer or as a fashion, photographic or artists model, or (b) services provided wholly – (i)

In the worker’s own home, or

(ii) at other premises which are neither controlled or managed by the client nor prescribed by the nature of the services.’ These are self-explanatory so do not require any further comment.

Anti-avoidance 3.68 When the agency legislation was amended in 2014 a number of Targeted Anti-Avoidance Rules (TAAR) also came into force. These are contained within ITEPA 2003, s 46A and apply where one of the main purposes of entering into an arrangement is to try and ensure the workers engagement does not fall within the scope of the agency legislation. If this is deemed to be the case, the third party between the client and the worker will be responsible for operating PAYE and National Insurance. HMRC have confirmed in 86

Agency Workers 3.72 ESM2041 that the TAAR will not usually apply to those who work through a personal service company but: ‘HMRC will use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up PSCs to avoid the agency legislation.’ 3.69 Agencies requiring all individuals to set up a PSC is less likely to be an issue in April 2021 when the IR35 legislation changes but it may still exist, given that it is generally easier to demonstrate someone is outside IR35 than it is to establish a lack of supervision, direction and control as per the agency legislation.

Reporting 3.70 Specified employment intermediaries are required under ITEPA 2003, s 71B to send quarterly reports to HMRC for anyone they have paid that has not been subject to PAYE. Focus Point Agencies and specified intermediaries have a requirement to submit quarterly reports to HMRC confirming who they have paid that was not on their payroll.

3.71 This reporting requirement followed on from the changes made to the agency legislation in 2014 but did not come into full effect until 2015 to give intermediaries the chance to adapt to the agency legislation changes. 3.72 HMRC’s guidance note ‘What this means for an intermediary’ (https:// www.gov.uk/government/publications/employment-intermediaries-reportingrequirements/what-this-means-for-an-intermediary) states that a person must submit a report if the following applies: •

You are an agency or intermediary that supplies the services of individuals to a client;

•

You have a contract with a client or clients;

•

You provide more than one worker’s services to one or more clients because of your contract with those clients;

•

You provide the worker’s services in the UK – or if provided overseas, that the person is resident in the UK;

•

You make one or more payments for the services (including payments to third parties).

The document goes on to state that these conditions can apply even if materials are supplied. 87

3.73  Agency Workers 3.73 Returns need to be completed and submitted by the end of the tax month following the end of the quarter using an HMRC approved method of electric communication. The reports detail, among other things, who has been paid, how much, and why tax and national insurance have not been accounted for. 3.74 If there are two or more employment intermediaries in the contractual chain, the one who has the contract with the client will be the party who will need to submit the report. 3.75 If a company fails to submit a report or it sends an inaccurate one, the company will be subject to the penalty regime set out in the Taxes Management Act 1970, s 98(1)(b). The initial penalty levied cannot exceed £3000. This will then be followed up by penalties of £600 per day if the failure continues. The penalty amount is determined by the number of failures in a 12-month period with the first penalty being £250, the second £500 followed by £1000 for any subsequent failures. 3.76

There is a right to appeal penalty notices.

3.77 Personal service companies will not normally be required to report under the agency legislation as they will not usually provide the services or more than one worker. At the point more than one individual provides service through the limited company however, the agency legislation and the associated reporting requirements should be considered. This may become more prevalent following on from the recent and proposed IR35 changes where some contractors may group together under one PSC in an attempt to show they are not caught by the IR35 rules.

Expion Silverstone case 3.78 To date, there has only been one notable case directly involving penalties for intermediary reporting. In the case of Expion Silverstone Ltd v HMRC [2018] UKFTT 460, the appellant appealed against penalties of £1750 for failing to file three quarterly returns on the basis of HMRC’s determinations being invalid. 3.79 The taxpayer argued that the TMA 1970, s 100(1) specifies an officer of the Board has to make a determination imposing a penalty and in Expion’s case, no such officer made the determination. The burden of proof was then on HMRC to demonstrate that the determination was valid and that it had been authorised by a real officer of HMRC and not a computer, nor HMRC as a body. 3.80 HMRC were not able to provide any evidence of the name of the officer of the board who issued the penalties or when such a determination was made. HMRC then confirmed that the penalties for intermediary reporting are raised automatically by HMRC’s computer system and this process was in line with HMRC’s policy in respect of late filing. 88

Agency Workers 3.87 3.81 In light of HMRC’s own evidence, the FTT had no option but to hold that the penalties were invalid as HMRC’s policy for issuing penalties did not follow the prescribed format of the TMA 1970. 3.82 It is easy to assume that HMRC would be well versed in following the correct procedure for issuing penalties, whether it is for intermediary reporting or otherwise, and that any penalties raised are therefore correct. This point alone is interesting because HMRC will regularly cite their policies and handbooks as authorities as to why things have been done in a certain way and what point they are arguing, but this case highlights how HMRC policy can be at odds with what the law says and so it is important not to take what HMRC say as absolute and always refer back to what the law says. 3.83 This will be a fly in the ointment for HMRC because it would be an administrative burden if every penalty issued has to be authorised by someone within HMRC rather than automatically generated. 3.84 The last point to note with the penalties is that the TMA 1970 holds that HMRC ‘may’ issue penalties and so it is at their discretion. It is unlikely HMRC will change their mind but if a company can show otherwise clean compliance and that it has adopted procedures to ensure the error does not happen again, it could in theory be possible for HMRC to use their discretion and cancel the penalties raised.

PERSONAL SERVICE COMPANIES (PSC) 3.85 The individual could instead provide their services through their own limited company. This has historically been very popular with agencies because there are no employee costs or rights and virtually no risk (at least until the 2017 and 2021 changes to IR35). 3.86 Whilst the individuals do not have the privilege of employment rights and benefits, they can pay themselves in a more tax efficient way via a nominal salary under PAYE and then dividends (provided IR35 does not apply). This route can therefore work well for everyone in the contractual chain which is why it is a very popular option, but there is only really a financial benefit for the worker operating in this way if the individual is a higher rate taxpayer. Focus Point PSCs were an attractive way for agencies to engage individuals as all the risk sat with the PSC and there were no employment rights or associated costs. 3.87 One associated disadvantage of this route is that it can work well for some but is ultimately not suitable for a considerable percentage of agency workers on medium to low wages, meaning most agencies will still have to look at other ways of the individuals working in addition to engaging PSCs. 89

3.88  Agency Workers 3.88 The other significant hurdle with people working through a personal service company is the application of the IR35 legislation.

IR35 3.89 The intermediaries legislation, more commonly known as IR35 is contained within ITEPA 2003, Chapter 8 and Chapter 10 and looks at whether an individual would have been deemed an employee of the client were it not for any intermediaries in the contractual chain (including the agency and the PSC itself). IR35 is considered in more detail later in this book but is summarised below in relation to its application for agency workers. 3.90 Until April 2017 the responsibility for determining and operating IR35 rested solely with the individual’s personal services company. If working and contractual relationship was more akin to an employment relationship, the PSC would be within the IR35 legislation and would have to operate the deemed payment calculation (as set out in ITEPA 2003, s 54). The result of which being that the individual would pay broadly the same level of tax and national insurance as other employees working directly for the client – apart from a 5% allowance in the deemed payment calculation which was included in recognition for the administration burden of operating the deemed payment. 3.91 If the individual considered the way in which they worked would not be classified as an employment relationship, they would not (in theory) fall within the remit of the IR35 legislation and would not have to pay themselves via the deemed payment calculation. This is of course unless HMRC disagree and challenge the position and the court agree with HMRC. 3.92 The government estimated in 2019 in the summary of responses from the private sector consultation that only 10% of those that are caught by IR35, declare themselves caught and pay themselves accordingly. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/752160/Off-payroll_working_in_the_private_sector_-_ summary_of_responses.pdf 3.93 It is not clear on what basis such a statement was made, especially in light of HMRC continually losing cases at the tax tribunals (which suggests that perhaps the figures are not overly accurate) but this apparent non-compliance has been estimated, in the same document, to cost the Exchequer £1.3bn by 2023–24 in the private sector. Focus Point The government believe non-compliance of IR35 will cost £1.3bn by 2023–24 in the private sector. 90

Agency Workers 3.99 3.94 HMRC can, and do, challenge many companies under IR35 but their resources are limited and insufficient for tackling the issue. IR35 is a complex area of law as well so enquiries can also last year’s where HMRC try to establish all the facts and then the application of the law is disputed. In addition to this PSC’s under enquiry would often have very little by way of assets or reserves and so even if HMRC did successfully challenge companies, they would usually not be able to recover much of the liability due unless they were able to demonstrate fraud or neglect over IR35 which is extremely difficult in a grey area of law.

IR35 – Public sector agency work 3.95 In 2017 new provisions were added to the Intermediaries legislation (ITEPA  2003, Ch  10) to shift the responsibility for determining IR35 to the public sector client, with the responsibility for operating PAYE moving to the fee payer instead of the PSC, ie, the agency or the end client (where there is no agency). 3.96 The apparent logic behind this change is that the end client is better placed to consider how it engages individuals and make the necessary assessment as to whether IR35 applies which would remove all the contractors that may be caught by the legislation but are happy to run the risk. The ‘fee payer’ would also be the agency or public sector body paying the limited company contractor and so it not only becomes easier for HMRC to open one enquiry into the fee payer rather than all the individual enquiries into the contractors, but they are more likely to have reserves and assets to pay any liability. 3.97 This move rocked the boat and led to the limited company route being less attractive in the public sector as there was a significant jump in the number of contracts being deemed within IR35. The government estimated that they raised an additional £550m in the first year of this change. 3.98 Agencies operating in the public sector will also need to consider the subsequent changes that are taking effect in April 2021 (see Chapter 9 for more detailed information). Most of the changes affect the client and the worker rather than the agency but the agency will still need to be aware of how IR35 will apply to their business.

IR35 – Private sector agency work 3.99 From April 2021 IR35 will be amended once again to bring medium and large private sector companies in line with the public sector changes. It is important to note that these changes do not apply if the client is deemed to be ‘small’ under the Companies Act 2006. Whether a client is ‘small’ is based upon the same criteria that dictates whether a company requires audited accounts and so most companies should quickly and easily know whether they 91

3.100  Agency Workers are medium and large. It may not be quite so easy for an agency to know whether their clients are small and although this may be obvious in many cases, it may also require some further investigation. 3.100 Where the client is considered medium or large, that organisation will be responsible for taking reasonable care in determining whether an engagement is within the IR35 legislation and passing on a Status Determination Statement to the next company down in the contractual chain. Each party will then have a responsibility to continue passing the information down the chain to ensure it reaches the worker. Focus Point Agencies will be obligated to pass any Status Determination Statements received from the client down to the next party in the supply chain to ensure the worker knows their position and why the decision was reached.

3.101 The entity paying the limited company contractor will be deemed to be the fee payer for the purposes of the legislation and be responsible and liable for ensuring it pays the company correctly. 3.102 If the worker disagrees with the Status Determination Statement they have a statutory right to appeal to the client and make representations as to why they are outside IR35. The client will then have 45 days from receipt of such an appeal to reconsider and confirm the position. 3.103 If the client is deemed to be small, the existing IR35 rules that came into force in 2000 will apply and the personal service company will be responsible for IR35. 3.104 The 2017 and 2021 amendments to IR35 have meant that contracting with limited companies has gone from minimum risk to quite high risk (unless the client is small). It is widely expected (as evidenced from the behaviour in 2020 before the IR35 changes were pushed back 12 months to 2021) that there will initially be quite a swing away from limited companies where clients and agencies are unfamiliar with the changes in the legislation and uncomfortable with the potential liabilities at stake and therefore insist a move back to PAYE/ umbrella companies. This will no doubt settle over the course of a few years and then balance back out again.

PAYE SELF-EMPLOYED HYBRID 3.105 When the agency legislation was introduced in 2014 it made it harder for agencies to pay people on a self-employed basis, especially for those with a lower skill set. Umbrella companies responded by offering a hybrid between PAYE and self-employed, sometimes called an Elective Deduction Model. 92

Agency Workers 3.110 3.106 The premise of the hybrid model is quite simple in that the individuals are deemed to be self-employed but unable to pass the SDC threshold for the agency legislation meaning PAYE must be operated (but they remain selfemployed for employment law purposes). 3.107 The same kind of logic can be seen in the Oziegbe case where HMRC advanced a similar argument whereby they accepted the individuals were selfemployed but still pursued the company under the agency legislation. In the hybrid/EDM the individuals are engaged on a self-employed basis so that holiday pay, pensions and employment rights do not need to be accounted for, but their pay is subject to PAYE and NICs so that there is no issue with HMRC or the agency legislation. 3.108 This has the advantage for umbrella companies that their minimum charge rate to the agency or client can be lowered because of the cost saving from not paying holiday pay and pensions. Agencies can then work with umbrella companies on a lower base rate and catch a whole group of individuals that would otherwise have to be direct PAYE with the agency. This can provide agencies with a distinct competitive advantage or increase their profits quite significantly on an otherwise tightly squeezed area. 3.109 This route is favoured by some because there is very little risk from HMRC as all money is treated as employment income. The problem with this ‘solution’ is that the individuals rarely understand what is happening. They are told they are self-employed for employment law purposes but effectively employees for tax purposes. Not only does this cause confusion to the workers but it is naturally very unpopular with trade unions who feel the workers are being exploited. It can also be confusing from an accountancy perspective because if they are self-employed, they should in theory register for selfassessment but all their payments are subject to tax and NIC anyway.

STATEMENT OF WORKS/CONTRACTING OUT 3.110 When IR35 changed in the public sector it did not catch those where the work had been ‘contracted out’.

Example of contracting out XYZ IT Solutions completes IT development programs for its clients some of which are in the public sector. The Ministry of Defence require a new software program to be written and are not just looking for an agency to provide the staff; they want to outsource the whole project in its entirety to another company. In this case, whilst the XYZ has a private sector client, the work has been completely contracted out and therefore the work would not be within the public sector. It would be IT consultancy work for XYZ IT Solutions. 93

3.111  Agency Workers 3.111 In theory, the same logic can be true of the agency legislation although HMRC may be less willing to accept such a position. Example with agency legislation EFG Construction are a main contractor with a site to build several blocks of apartments. They do not have the full skills internally and manpower to undertake all aspects of the work, so they use specialist contractors such as Local Scaffolding Ltd to erect the scaffolding. Local Scaffolding use a number of individuals on a self-employed basis to carry out the work. This is a fairly common scenario in the construction industry and EFG would have outsourced the scaffolding element of the work. There may not be the same ‘contracting out’ provision in the agency legislation but if Local Scaffolding are not merely supplying labour and the scaffolders would consider their client to be Local Scaffolding, not EFG, then the argument that the agency legislation does not apply to the scaffolding company should carry a great deal of weight. 3.112 There are some companies that fall within the definition of an agency within the agency legislation that try to reposition themselves as the client so that the legislation would not apply (in theory at least). This is done by altering the contractual and working relationship so that it appears that the work has been contracted out and the company is instead the ‘client’ rather than the agency. This route may stand up to scrutiny if there is a genuine shift in operations and responsibility, but where this is a sham and amendments are made that are just window dressing, it will not be difficult for HMRC or the courts to see through this. Given the anti-avoidance provisions in the agency legislation, it could end up being the directors personally who pick up any bill at the end. This contracting out/statement of works option is likely to increase with the changes to IR35 in April 2021.

94

Chapter 4

Umbrella Companies

SIGNPOSTS •

The term ‘umbrella company’ was originally used for a type of intermediary that engaged individuals as employees and operated full tax and National Insurance. Over the years the term umbrella company has been used on a wider basis and many individuals now consider an umbrella company to be any type of payroll intermediary.

•

Umbrella companies were originally used by agencies and workers because they enabled the workers to get tax relief on travel and subsistence expenses that they would otherwise not have been entitled to claim. This route was perfect for those who travelled a lot but were not paid a high enough rate for a limited company to be a worthwhile.

•

The significant and sustained growth of the umbrella industry led to a significant tax loss to HMRC from the tax-free expenses being paid out. This problem was further compounded by poor compliance within the umbrella industry where anyone could set up an umbrella company without any tax or accounting knowledge and individuals claiming expenses they hadn’t incurred. HMRC dealt with this issue by introducing new provisions for travel and subsistence expenses thereby significantly curbing the payments for expenses.

•

Intermediaries who pay individuals on a self-employed basis or pay limited company contractors can also be referred to as umbrella companies by some. The use of such businesses has grown since the changes to the expenses legislation and may increase further following the changes to the IR35 legislation.

BACKGROUND 4.01 The term umbrella company was originally used to describe a PAYE employment model enabling individuals to claim tax relief for travel and subsistence where they would otherwise not have been entitled to do so. 4.02 Today, the term is often used as a generic way of describing companies that provide intermediary services whether it be that the individual 95

4.03  Umbrella Companies is an employee of the company, a sole trader or has a limited company. These different business models are often offered within one company which is in part why some people refer to all these types of businesses as an umbrella company. 4.03 This chapter will first consider what a PAYE umbrella company is, along with how and why they operate, before considering the other ways in which individuals operate through intermediary businesses. 4.04 The use of umbrella companies emerged after the introduction of the IR35 legislation and became truly widespread once the Managed Service Company legislation (see Chapter 5) came into force in 2007. 4.05 Prior to April 2007, the most tax efficient and easiest way of contracting was by using what was generally referred to as a composite company. Composite companies are discussed in more detail in Chapter 5, but essentially a scheme provider would set up various limited companies that contractors would become shareholders in. The scheme provider would run and administer the composite company and the individuals would receive money in the form of dividends from the shareholding in the composite company. This was a highly attractive and fast-growing area as there was very little risk, very little paperwork but a significantly greater yield in take home pay compared to PAYE. 4.06 The Managed Service Company legislation (ITEPA  2003, s  61A) and associated debt transfer provisions (ITEPA 2003, s 688A) led to an almost complete cessation of the use of composite companies and so contractors, agencies and scheme providers looked for alternative options. 4.07 There followed four main routes in which agencies and companies could engage contractors, each with their own advantages and each with their own risks: •

The first route was employment with the company or agency. Once a company or agency identified a suitable candidate for a position, that individual would be employed by the company or agency and full PAYE and National Insurance operated. The individual would be an employee of the client or agency and be entitled to all associated rights and benefits. This was a straightforward and easy route in which to work.

•

The advantage of this route is that HMRC are happy because PAYE and NI is operated in full and the work undertaken may be very similar to that which other employees of the client or agency are doing and as such the individuals should be subject to broadly a similar level of taxation. The disadvantage of this is that it costs the companies and agencies a lot to take people on as employees as well as creating an employment rights’ burden and cost.

•

The individual could instead operate through their own limited company. This was a popular route with clients and agencies because there was very little risk to them. If the individual’s personal service company 96

Umbrella Companies 4.09 did not comply with the IR35 legislation, it was neither the agency nor the client that would be exposed to the risk of HMRC liabilities. As the limited company would be undertaking the work, there were no employment rights or costs attributable to paying employees. The individuals do not have the privilege of the associated employment rights and would be at risk of IR35 but could pay themselves in a more tax efficient way via dividends and so this was also popular with the individuals but only if they were on higher rates of pay (typically around £22 per hour or more). •

Another option would be for the individuals to be paid through an umbrella company. This was similar to being on PAYE as per the first route above but instead of it being direct with the client or agency the individual would have an overarching contract of employment covering their various assignments with an umbrella company. This is covered in more detailed below, but it would enable the individual to get tax relief on their expenses such as travel and subsistence which they would otherwise not be entitled to claim. This route was perfect for those who travelled a lot but did not earn enough for a limited company to be a worthwhile.

•

The last option would be for the individuals to be engaged on a selfemployed sole trader basis through an intermediary. This is a higher risk option for the agency and client as HMRC can challenge their employment status and raise assessments for the tax and National Insurance that should have otherwise been paid if the individuals were paid under PAYE. The advantage of this route is again that the agency or client do not have the employment costs and employee rights to consider.

HOW AND WHY DOES AN UMBRELLA COMPANY WORK? 4.08 Umbrella companies have been a feature of the contracting world for many years and have changed from being a solution opted for by contractors to something often imposed on contractors regardless of whether it is wanted or is suitable. 4.09 When an individual works through an agency they will not usually be entitled to claim tax relief on their expenses for travelling to and from their place of work because this will be deemed a permanent workplace and the travel will be ordinary commuting in line with ITEPA 2003, s 339(2): ‘In this Part, “permanent workplace”, in relation to an employment means a place which– (a)

the employee regularly attends in the performance of the duties of the employment, and

(b) is not a temporary workplace.’ This is not overly helpful in isolation because without knowing when a workplace is temporary it is not possible to establish whether it is, by default, 97

4.10  Umbrella Companies a permanent workplace. Whether a place of work is deemed temporary is set out in ITEPA 2003, s 339(3): ‘“Temporary Workplace”, in relation to an employment, means a place which the employee attends in the performance of the duties of the employment– (a)

for the purpose of performing a task of limited duration, or

(b) for some other temporary purpose.’ This definition would appear helpful fora typical agency worker because the nature of agency work means the individual will usually be performing a task for a limited duration or some other temporary purpose. The above definition is however subject to the following caveat which had historically stopped agency workers from claiming tax relief on travelling (ITEPA, s 339(5)): ‘A  place is not regarded as a temporary workplace if the employee’s attendance is – (a)

in the course of a period of continuous work at that place(i)

lasting more than 24 months, or

(ii) compromising all or almost all of the period for which the employee is likely to hold the employment.’ 4.10 If an agency worker knows a contract will extend beyond 24 months they would not be entitled to tax relief on their travel, but this does not impact many agency workers who are transient in nature and sign short term contracts with the end client. The second part was the real problem for agency workers claiming travel, because when they agree to an assignment or new contract with the client, they will be travelling to the same place of work for the duration of that assignment and each assignment would be treated as a new and separate employment therefore satisfying ITEPA 2003, s  339(5)(a)(ii). An agency worker’s travel to and from the client’s place of business would therefore fulfil the criteria of it being a permanent workplace. Example 1 – single contracts of employment with an agency Assignment 1

Assignment 2

Assignment 3

Agency

Agency

Agency

Contractor

Contractor

Contractor

Employment Contract 1

Employment Contract 2

Employment Contract 3

98

Umbrella Companies 4.12 4.11 Umbrella companies found a way to navigate through the expenses legislation so that they could satisfy the tests for the client’s place of business to be deemed temporary, thereby enabling the payment of expenses to the worker without the deduction of tax or National Insurance. This was achieved by the agency worker being given a contract of employment that overarched and covered all the various assignments the individuals would agree to (sometimes with different agencies) and so rather than each assignment being a separate, distinct and ringfenced contract of employment, the individual had an openended contract of employment with the umbrella companies that they would work under, irrespective of the assignments undertaken with the agencies. Focus Point Umbrella companies would have an ongoing contract of employment that overarches each separate assignment meaning each assignment is a temporary workplace (subject to the 24-month rule). 4.12 The result of this meant that provided the individual did not expect the work with one end client (at the same location) to continue beyond 24 months, when they did complete work, it would not compromise all of the period in which they are likely to hold employment with the umbrella company as they would go onto other assignments under the same overarching contract of employment. This enabled umbrella companies to pay expenses tax free to the individuals where it would otherwise not have been possible. Example 2 – overarching contract with umbrella Umbrella Contract of employment Contractor

Assignment 1

Assignment 4

Assignment 2

Assignment 3

99

4.13  Umbrella Companies 4.13 In this example, each of the assignments would become a temporary workplace, whereas if the contract was not deemed to be overarching, each assignment would be a separate and distinct engagement and a permanent workplace. 4.14 It is all well and good being eligible to be paid expenses tax free by structuring the working relationship in this way, but there is of course, no magic pot of money for the agency to be able to pay out expenses on top of the rate it has agreed to pay the individual, as the agency will already have rates with their clients and will have not made allowances for potential expense claims on top. 4.15 The only way in which the umbrella route could work was to pay the individual the expenses from the money the individual receives from the agency. This would not alter the gross amount chargeable by the agency to the client for the services provided and so it becomes a workable solution. 4.16 At that point it may appear that the individual is no better off because the top line payable by the agency is the same regardless of whether an umbrella company is used or not, so why bother? 4.17 In an umbrella company the individual would agree to sacrifice part of their pay (which would otherwise have been subject to full tax and National Insurance) in order to be reimbursed their expenses which were now not subject to tax or National Insurance and so whilst the gross pay may not change, the amount subject to tax and NI is reduced meaning the individual can take home more money. 4.18 If the above route was adopted, there would be no cost saving or incentive to the agency for contracting with an umbrella company other than the workers being a little happier with their take home pay. It would therefore be a hard sell for an umbrella company, trying to convince agencies to contract with umbrella companies when they received very little benefit and likewise it would have been time consuming and expensive for the umbrella company to market directly to the individual agency workers. 4.19 The answer to this problem was for umbrella companies not to charge the agencies the employer’s National Insurance and holiday pay so that the agency was only charged the base rate it had agreed to pay the individual. At this point the individual would in theory lose out because employer’s National Insurance and holiday pay are coming out of the pot that would have otherwise been paid to them, but, if they travel a lot to get to their assignment (plus spend money on subsistence each day) they can still claim part of their pay tax free thereby reducing the total tax and NIC paid and in many cases this would offset the loss from the employer’s National Insurance and holiday being taken off the rate paid by the agency and they may still earn more. The individual’s gross pay would therefore be reduced but their net pay could be higher depending on expenses. 4.20 This was highly attractive to agencies because they no longer had to be concerned with the additional costs of employer’s National Insurance or 100

Umbrella Companies 4.24 holiday pay and so could either increase their margins significantly, offer lower rates to their clients to increase their competitiveness or offer a higher gross rate to the individual to attract more workers. 4.21 The selling point for this service was that the agency increases its profit margin/competitiveness, the umbrella retains a company margin for the service and the individual may be better off depending on their level of expenses incurred. The PAYE umbrella model was therefore a good solution – in the right circumstances.

Where did it start to go wrong? 4.22 Everywhere. For agencies, using an umbrella company was so simple and easy as the agency would no longer need to be concerned about operating payroll, employment rights or the bureaucracy of employing people. Agencies therefore started insisting that individuals either set up their own personal service company or go through an umbrella so that it removed that whole level of payroll, resource and aggravation from the business. 4.23 Setting up a limited company was only worthwhile for individuals on higher rates of pay, so in many cases going through an umbrella was the only viable option. This resulted in individuals being paid through an umbrella company when it was not suitable, either because of their rate of pay was not high enough or because they did not incur many expenses in the performance of their duties. They were then subject to the additional costs of going through an umbrella company such as the umbrella company’s retained margin and employer’s National Insurance but without any corresponding benefit. This naturally caused a great deal of resentment and hostility towards umbrella companies in general. 4.24 On top of this there was often a lack of clarity over the individual’s pay from all sides which caused a huge amount of confusion as the agency would tell the worker they would be receiving one rate but this was in fact the amount paid to the umbrella company which then had to account for employer’s National Insurance, holiday pay and its own costs. This led to the individual’s pay-slips showing significantly lower gross hourly rates than they thought they would be getting, and many individuals felt cheated. Example of an umbrella worker’s confusion over pay Ben has just agreed to a new assignment with ABC Staffing and has been told the rate of pay is £15 per hour and he must work through an umbrella company to receive his pay. The rate of £15 is however the money the umbrella invoices the agency for the work and the umbrella still has to account for employer’s National Insurance, holiday pay, the umbrella fee (as well as pension contributions now). These company costs reduce the ‘gross pay’ that is available for Ben. Ben sees his payslip and was expecting a gross pay of £525 (35 hours × £15) but because of the above, his payslip shows a gross of just £400. 101

4.25  Umbrella Companies 4.25 In addition to the above factors, the umbrella market became highly lucrative and therefore competitive which brought about its own issues. There are very few barriers of entry to setting up an umbrella company as it is not a regulated industry and so anyone could set one up overnight. This led to some individuals setting up umbrella companies with very little knowledge or understanding of how and why an umbrella operates from a technical perspective and so they were not run correctly. 4.26 As the umbrella market grew so did unscrupulous behaviour and it would be an extremely resource consuming process for HMRC to challenge what expenses were paid (to the sometimes thousands of individuals the umbrella paid in each company), whether they were genuine, whether the payments were calculated correctly and whether they were allowable under ITEPA  2003, ss  336–340. In some cases, umbrella companies were paying national minimum wage to the contractors and then everything else as an ‘expense’ irrespective of what was actually incurred. 4.27 In order to gain a competitive advantage and bring in more workers, some umbrella companies began offering financial incentives to the agencies in return for the umbrella company paying the individuals. This led to an increase (sometimes a substantial increase) in the amounts the umbrella company would retain from the individual as their own fee in order to pay a hefty referral fees back to the agency.

Focus Point Umbrella companies were getting pushed to workers where it was not suitable, the individuals would get hit with all the associated costs of an umbrella company but without any benefits and would be given little information or notification in advance that their gross rate would be different to that agreed with the agency. There was also an increase in noncompliant behaviour by umbrella companies and increasing fees which all led to government action to tackle the problem.

4.28 For an umbrella company to operate in a compliant manner there is a minimum rate of pay the agency must pay an umbrella company in order for the umbrella company to be able to meet its legal obligations such as paying national minimum wage, holiday pay and employer’s National Insurance. There were many instances of umbrella companies operating outside of those perameters in order to catch the vast number of individuals on lower pay rates that compliant umbrella companies would not pay. 4.29 The umbrella market boomed and HMRC did not have the resources or intricate knowledge of how umbrella companies operated to tackle the issue of non-compliance effectively. This caused an ever-growing void in the Treasury’s pocket and so the government had no choice but to intervene and take action to address some of the problems that had developed in this sector. 102

Umbrella Companies 4.33

2016 – CHANGE TO EXPENSES FOR INTERMEDIARIES 4.30 The expenses rules were never originally intended to allow agency workers to be able to claim expenses in the first place, which alone created a concern for the government, but this was exacerbated by all the above factors. In July 2015 the government consulted on how it could effectively restrict travel and subsistence expenses that are paid by umbrella companies and similar intermediaries without it having unintended consequences on everyone else. 4.31 The result was that from April 2016 new provisions were added to ITEPA 2003 relating to expenses where an intermediary was in the contractual chain. This was set out in the ITEPA 2003, s 339A: ‘(1) This section applies where an individual (“the worker”)— (a)

personally provides services (which are not excluded services) to another person (“the client”), and

(b) the services are provided not under a contract directly between the client or a person connected with the client and the worker but under arrangements involving an employment intermediary. This is subject to the following provisions of this section. (2) Where this section applies, each engagement is for the purposes of sections 338 and 339 to be regarded as a separate employment. (3) This section does not apply if it is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person.’ The NICs disregard for travelling expenses at paras 3, 3ZA and 3ZB of Part 8 of Sch 3 to the Social Security (Contributions) Regulations 2001, SI 2001/1004, would also no longer apply, effectively bringing the tax and NIC provisions together for these purposes. 4.32 This legislation was clearly targeted at the umbrella model as it broke the ‘overarching contract’ used by all umbrella companies by ensuring that each and every engagement would be treated as a separate contract of employment for tax purposes. 4.33 If every engagement is a separate contract of employment the result is that the travel to and from the main place of work will no longer meet the criteria for being temporary as it will comprise all or almost all of the period in which the employee is likely to hold that specific contract of employment. The individual would then be subject to the same expenses rules as though they worked directly for the client. Focus Point Under the 2015 Expenses for Intermediary provisions, each engagement is treated as a separate employment and will therefore not meet the conditions for the workplace being temporary. 103

4.34  Umbrella Companies 4.34 The exception to this is where the entity paying the expenses tax free can demonstrate that there is no right of supervision, direction or control over the manner in which the services are provided. If this can be shown the umbrella company can pay out expenses without tax and NIC deduction. 4.35 It is difficult to establish a lack of supervision, direction and control at the best of times but because umbrella companies are often geared toward middle to lower paid workers, it will always be more difficult to establish a lack of control. If it can be established that there is a lack of supervision, direction and control it would, in any event, mean the individual could also be paid on a self-employed sole trader basis under ITEPA 2003, s 44 which would not attract employer’s National Insurance, holiday pay and pension contributions. With these factors in mind, it has meant that in most instances, umbrella companies will no longer pay out any travel and subsistence expenses tax free. 4.36 If the umbrella company or intermediary can demonstrate a lack of SDC or pay out other travel that does not constitute ordinary commuting to a permanent workplace ITEPA 2003, s 289A will still apply which limits how an umbrella company can reimburse the expenses claimed. The consequence of this section is that an umbrella company should subject any expenses to income tax and NIC and the individual claiming the expense should claim tax relief through the P87 process or by filing a tax return. It should be noted that s 289A does not apply to mileage payments however and so umbrella companies can continue to pay mileage expenses without deduction as part of the individual’s salary sacrifice. 4.37 Umbrella companies were not the only entities that paid out expenses to temporary workers and in some instances, agencies would try to provide the workers with overarching contracts so that expenses could be paid without deduction. An example of an agency trying to follow this route and failing can be seen in the case of Reed Employment plc & Ors v Revenue & Customs [2012] UKFTT 28 (TC) whereby the contracts were not deemed to be overarching and Reed Employment plc were left with a liability in excess of £158m. 4.38 The additional provisions in the legislation applied to any employment intermediary which HMRC interpret as anyone who carries on a business of supplying labour. According to ESM5550 this logically includes agencies, employment businesses, umbrella companies and personal service companies.

EXPENSES FOR PSCS 4.39 The travel and subsistence rules for PSCs also changed with the 2015 legislation and whilst it may not, in actual fact, effect many PSCs in the end, the legislation must still be considered to ensure the PSCs can still pay expenses without deduction. 4.40 In most instances, HMRC  view PSCs as intermediaries, as their business will be to supply people. This means that as well as umbrella 104

Umbrella Companies 4.45 companies and agencies, the revised provisions will also apply to PSCs in principle. 4.41

This is however subject to a couple of important exemptions:

•

The first of these applies to all intermediaries and is set out in s 339A(3) which holds that s 339A does not apply if it can be shown that there is no right of supervision, direction or control over the manner in which the services are provided.

•

The second and more relevant one for PSC’s is set out in s  339A(5) (a) which effectively says that if IR35 does not apply, neither do these provisions.

4.42 These two provisions are fundamental for any PSC claiming travel and subsistence expenses and although many readers may feel that the second of these two exemptions means that they do not really need to consider these provisions as the contracts are outside IR35, it just amplifies the need to ensure contracts are outside IR35, especially given there are now transfer of debt provisions within this legislation. 4.43 The first exemption relating to SDC is somewhat pointless for limited companies because if they are outside IR35 this will not matter and if they are not subject to SDC, IR35 will not apply in any event and so either way the IR35 exemption will be in point. Focus Point PSCs will not be subject to the change in expenses for intermediaries if they can demonstrate there is no supervision, direction or control over how they work or if they can show that IR35 does not apply.

4.44 PSCs agreeing to new contracts with their clients should bear these provisions in mind (as well as IR35) and ensure that where there is a lack of SDC, the contract establishes this. Not just that there is one provision alluding to this but that there are no other provisions in the contract that could pose a problem for this area. There are many template contracts out there that agencies use that will contain a clause stating that there is no supervision, direction or control over the manner in which the services are provided, only for another clause in the contract to specify that the PSC will comply with the client’s instructions, policies and procedures which clearly contradicts the SDC clause.

TRANSFER OF LIABILITIES 4.45 If s  339A is not complied with correctly by the employment intermediary and the liable party fails or defaults in making the necessary payment to HMRC, it is possible for HMRC to seek to transfer the liabilities to the directors and office holders personally. This may seem like a draconian 105

4.46  Umbrella Companies move, but it was deemed necessary by the Treasury to ensure compliance with the legislation especially in an industry where companies had a tendency to pop up and disappear frequently with little by way of assets. 4.46 If HMRC do wish to issue a personal liability notice they must do so under the Income Tax (Pay as You Earn) Regulations 2003, SI 2003/2682, Part 4, Chapter 3B, regs 97ZL and 97ZM, and the Taxes Management Act 1970, Part 6 and any amount due will require payment within 30 days of the date the notice is served. 4.47 It is unlikely HMRC will use these provisions for PSCs but it is possible, so it reiterates how important it is for PSCs to have their paperwork and arguments in order for claiming expenses.

FRAUDULENT INFORMATION 4.48 When the 2015 expenses legislation was introduced, special provisions were included relating to the provision of fraudulent documents as well as transfer of debt provisions. The ITEPA 2003, s 339A(7) stipulates: ‘(a) the client or a relevant person provides the employment intermediary (whether before or after the work begins to provide the services) with a fraudulent document which is intended to constitute evidence that, by virtue of subsection (3), this section does not or will not apply in relation to services.’ 4.49 In other words, if a client knowingly provides an intermediary with a document stating that there is no supervision, direction or control over the manner in which the work is provided, even though they know there is control, it will be deemed to be fraudulent if the purpose of the document was to enable the intermediary to pay out expenses. In that case, provided the employment intermediary acted in good faith and was not aware the document was fraudulent; they will not be accountable for any tax and NI liability, and the party providing the fraudulent information will be liable.

106

Chapter 5

Managed Service Companies

SIGNPOSTS •

The Managed Service Companies (MSC) legislation as set out in the Income Tax (Earnings and Pensions) Act 2003, s 61 was implemented in 2007 to stop the rise of composite company structures which were geared towards providing individuals with the tax benefits of a limited company without the associated paperwork, hassle or IR35 risk.

•

The legislation was effective, and the use of composite companies virtually stopped overnight due to the extensive debt transfer provisions introduced the same year in ITEPA  2003, s  688A. The debt transfer rules enable HMRC to cast its liability recovery net far and wide including transferring the debt as far as a director who has directly or indirectly encouraged or been actively involved in the provision by the MSC of the services of the individual.

•

The legislation led to nearly all scheme providers moving away from composite company structures and on to the provision of PAYE umbrella services (see Chapter 4) with some providers also opting for setting up personal service/single person companies for individuals.

•

The perception of HMRC’s relative inaction over the MSC legislation resulted in sustained growth of the personal service company ‘solution’.

•

In 2019 the Court of Appeal upheld the decision in the case of Christianuyi Limited & Others v HMRC [2019] EWCA Civ 474 that Costelloe Business Services Ltd was a managed service company provider. This was the first and only case to go before the courts on the MSC legislation in the 13 years since the legislation was introduced.

• The Christianuyi case provides some clear workable examples of when a scheme provider will fall foul of the MSC legislation but there are still many question marks over aspects of the legislation and at what point a company crosses the line of becoming an MSC provider. HMRC now have a successful challenge under their belt so may seek to challenge others working in a broadly similar way to test the boundaries of the legislation.

107

5.01  Managed Service Companies

BACKGROUND 5.01 The Managed Service Companies (MSC) legislation was implemented in April 2007 and inserted into Chapter 9 of the Income Tax (Earnings and Pensions) Act 2003 to follow on from other provisions relating to intermediary companies in ITEPA 2003, Chapter 8. The MSC legislation also takes priority over ITEPA 2003, Chapter 8 should HMRC open an enquiry and was introduced to assist the government in addressing disguised employment. 5.02 The government had previously taken steps to tackle disguised employment in 2000 with the introduction of the Intermediaries’ legislation (see Chapter 6). The target of the IR35 legislation was those individuals operating via a personal service company even though, for all intents and purposes, they were employees of the client and should have been taxed as such. As IR35 was primarily trying to address a different issue, the legislation fell far short of being able to stop scheme providers from taking advantage of gaps in tax system in relation to the way in which individuals are engaged and paid. 5.03 When the MSC legislation was first mentioned in 2006, there was generally less stigma and media interest about a person finding ways of reducing their tax liability. Composite companies had therefore become commonplace in many industries as they were viewed as a risk-free way in which individuals could restructure their income to be paid in the most tax efficient way. 5.04 The composite structure worked by a scheme provider setting up companies that typically had between six and thirty non-director shareholders who then worked via agencies or direct to end clients. The number of shareholders was restricted so profits did not go beyond the threshold for the small companies’ rate of corporation tax. The individuals undertaking the work would each have a different class of share so that the funds could be apportioned by the scheme provider, to the individual, in accordance with the income each individual specifically generated. The scheme provider would set up the composite company, carry out all the administration, complete all the company returns and make all payments meaning the individual had to do very little other than provide their personal details for payment. According to HMRC’s white paper on MSC’s in 2006 the composite business would be marketed on the basis that ‘it will carry out all the administration and payroll so that you can enjoy all the benefits of being an employee and a shareholder of your own limited company, without the hassle.’

108

Managed Service Companies 5.06

Client

Client

Scheme Provider

Provider sets up and runs composite

Provision of services

Composite Co Flow of money Shares: A

B

C

D

E

F

5.05 By working through the composite company, the individual would usually be offered a higher gross rate of pay from the agency or client compared to if the individual were under PAYE. This is a result of the client or agency not needing to account for employer’s National Insurance, holiday pay and other statutory benefits if the worker was not on their own payroll. When this is coupled with dividends being a more tax efficient route for individuals to receive their money and the high level of expenses that were being processed without tax or NIC deduction by many composite companies, it becomes quickly apparent why this was such an attractive model for individuals and a significant risk to the Treasury. 5.06 In the government’s campaign to ensure that those who work like employees pay broadly the same amount of tax as employees, they announced a consultation plan in December 2006 for ‘Tackling Managed Service Companies’ which included outlining what the legislation would try and achieve: ‘The government is taking action to tackle Managed Service Company (MSC) schemes which are used to avoid paying employed levels of tax and NICs. Income received by workers in MSCs in relation to services provided through the MSC will be subject to employed levels of tax and NICs, with the MSC obliged to operate Pay As You Earn (PAYE) and deduct tax and Class 1 NICs on that income – and the rules for tax relief for travel expenses 109

5.07  Managed Service Companies will be the same as for other employed workers. The government will also address the problem of MSCs escaping payment of tax and NICs due by allowing the recovery of these debts from appropriate third parties.’ 5.07 The last sentence was fundamental to tackling this issue as the government recognised that these MSC scheme providers had very little by way of assets and cash in the bank and so if challenged could simply close shop and open the next day under a new name. It was therefore deemed essential that any legislation allowed for transferring any outstanding liabilities to other parties in the contractual chain including piercing the corporate veil and making directors personally liable. The consultation believed ‘this will protect the Exchequer and ensure a level playing field for compliant businesses and workers.’ Focus Point The MSC legislation was introduced to stop composite companies from operating which enabled individuals to have the financial benefits of a limited company without any of the burdens. 5.08 According to the government, there was also the other concern that individuals were signing up to these schemes (whether it be voluntarily or by having it forced upon them) not fully appreciating they would be sacrificing employment rights and protections. Being cynical, it is questionable whether the government were truly concerned about an individual’s loss of employment rights given the injustice caused by IR35 when an individual can be deemed an employee for tax purposes but not entitled to any corresponding employment rights. 5.09 The White Paper circulated in 2006 on managed service companies sought to define a managed service company according to its distinguishable features but it was ultimately concluded that this would result in avoidance attempts to circumvent the legislation. The legislation that came into force in 2007 changed significantly from the 2006 proposals and focused instead on the services being provided by the MSC provider.

HOW THE MSC RULES WORK 5.10 The Managed Service Companies (MSC) legislation came into force in April 2007 and defined what the government considered a ‘Managed Service Company’ to be, as well as defining the term ‘Managed Service Company Provider’. If caught by the legislation, payments would become deemed employment payments in accordance with ITEPA 2003, s 61E meaning that any dividends the MSC had distributed to the individual would be treated as employment income and the company, as the employer, would be liable for secondary Class 1 National Insurance Contributions. The individual would also not be entitled to tax relief on travel from home to a place of work. 110

Managed Service Companies 5.12 5.11 For the legislation to apply it was necessary for there to be a managed service company, an MSC provider and that the MSC provider was ‘involved’ with the company as set out in the legislation and detailed below. The legislation was written with the composite structure in mind but drafted widely enough to ensure that variations to this model would still fall within the definitions. 5.12 When the government consulted on the MSC rules in 2006 it confirmed that personal service companies would not be within the scope of the measures. This was because at that time personal service companies were not the intended recipient of the legislation and the legislation was being implemented to combat composite structures whereas HMRC could pursue personal service companies via the IR35 legislation. The way in which the government carved personal service companies out of MSC legislation was by including a provision stipulating there must be an MSC provider and a typical personal service company would not have another body fulfilling that role (in theory). The way in which the legislation was worded however, quite rightly left a foot in the door for HMRC so that if companies started to venture into the realms of becoming MSC providers for personal service companies, HMRC had the tools at their disposal to challenge the companies. Focus Point The MSC rules were not intended to catch personal service companies but were drafted widely enough that a PSC could fall within the remit of the legislation if another party acts as an MSC provider. The starting point when considering the MSC rules is to assess the legislation to see whether a company fulfils the criteria of being a ‘managed service company’: ITEPA 2003, s 61B Meaning of a ‘managed service company’ (1) A Company is a ‘Managed Service Company’ if– (a)

Its business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons,

(b)

Payments are made (directly or indirectly) to the individual (or associates of the individual) of an amount equal to the greater part or all of the consideration for the provision of the services,

(c) The way in which payments are made would result in the individual (or associates) receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual. Subsections (1)(a)–(c) focus purely on whether a company is a managed service company and these tests are quite straightforward and easy to understand and apply. 111

5.13  Managed Service Companies

ITEPA 2003, s 61B(1)(a) 5.13 This considers whether the company’s business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons. When applied to the composite company structure, it is quite apparent that the composite’s modus operandi was to provide the services of an individual to other persons. This would be true of any company or intermediary engaged to provide the services of an individual, including personal service companies, umbrella companies and agencies. 5.14 A  company that employees its own direct workforce would not usually fall foul of this section because they are not supplying the services of individuals to other persons. The individuals instead work directly for that company and there is no third party involved in the contractual chain that is capable of being a managed service company.

ITEPA 2003, s 61B(1)(b) 5.15 This subsection will be satisfied where payments are made either directly or indirectly to the individual, of an amount equal to the greater part or all of the consideration for the provision of the services. This is essentially saying that if an individual undertakes work and receives most of the money they have generated, they will meet this criterion. When applied to the working world this would again apply equally to composite companies, personal service companies, umbrella companies and agencies as the individual will invariably receive the vast bulk of the money they have generated in the provision of the services apart from potentially the costs or fees the other parties may each earn out of it, such as agency percentage fees. 5.16 In theory some employers could hit this threshold depending on what they pay their workers, although in many cases the employer will not pay the individuals employed to do the work the majority of the fees generated, because the employer will retain money to cover its overheads and retain a profit.

ITEPA 2003, s 61B(1)(c) 5.17 In addition to the above, to be an MSC, the way in which payments are made must result in the individual (or associates) receiving payments of an amount (net of tax and National Insurance) exceeding that which would be received (net of tax and National Insurance) if every payment in respect of the services were employment income of the individual. A simplified overview is that, if an individual is paid everything under PAYE this test will not be met but if they are paid in such a way that they take home more pay than under PAYE, this section will apply. 5.18 Looking again at composite companies and personal service companies, the individuals will receive their money as dividends from the shares they hold in the business (unless they operate the deemed payment 112

Managed Service Companies 5.20 operation because IR35 applies). As dividends are taxed at a lower rate than if all the money was processed under PAYE, they will take home more pay and this subsection will be satisfied. 5.19 Companies that supply individuals on a self-employed basis could also meet this test because a self-employed individual will also receive slightly more take home pay than an employee because of lower National Insurance rates. As far as the author is aware, HMRC have not challenged any companies because of payments to self-employed individuals but this is still theoretically possible. 5.20 It is worth noting at this point that a PAYE umbrella company operating correctly will not fall within the MSC legislation because of ITEPA  2003, s  61B(1)(c), as the payment from the umbrella company will all be subject to PAYE and National Insurance in full. There is an argument that a PAYE umbrella company not operating correctly could satisfy this condition, if for example, their formula to calculate the pay were incorrect or if they were paying tax free expenses when they shouldn’t. However, it is highly unlikely HMRC would challenge an umbrella under the MSC rules in these circumstances and it is generally safe to say that where an umbrella is operating PAYE, there will be no issue regarding the MSC rules. Focus Point PAYE umbrella companies will not usually fall within the MSC legislation as the payments are subject to employed earners’ tax and NIC deductions.

CASE STUDY – PERSONAL SERVICE COMPANIES AND THE MSC LEGISLATION John is offered a job by an agency to provide IT consultancy to a client, XYZ Limited. The agency does not offer PAYE as an option and so John must either set up his own limited company to work through or approach an umbrella company. Having done some calculations John decides if he sets up a limited company (JS Computer Support Ltd) he can pay himself a small salary and receive the rest by dividends therefore meaning he can take home more money than under a PAYE umbrella. He has heard a contractor friend talking about the MSC legislation however and needs to make sure it doesn’t apply. Applying the legislation •

JS  Computer Support Ltd’s business will be wholly or mainly providing the services of an individual (whether that be John or any others he may engage along the way).

•

John will be paid the majority of the money that he generates for the company. 113

5.21  Managed Service Companies •

The way in which John will be getting paid results in him receiving more (net of tax and National Insurance) than if he were paid through PAYE.

JS Computer Support Ltd therefore satisfies all three conditions to make it an MSC and he must therefore ensure there is not an ‘MSC provider’ as set out in the legislation otherwise he will face some potentially large liabilities which could be transferred to him personally.

MANAGED SERVICE COMPANY PROVIDER 5.21

ITEPA 2003, s 61B(1)(d) defines an MSC provider as:

‘A person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (“an MSC provider”) is involved with the company.’ There are two distinct parts of subsection (1)(d). The first is that a person carries on a business of promoting or facilitating the use of companies to provide the services of individuals which is what the legislation deems to be an MSC Provider.

Carrying on a business of promoting or facilitating 5.22 The purpose of the business must be that of promoting or facilitating the managed service company. This is clearly evident when considering the composite model because the entire reason for the existence of the service provider company was to facilitate the use of the managed service company which provides the services of the individuals. 5.23 If a by-product of the main services being provided by a company is that another business is promoted or facilitated, it will not fall within this subsection. The legislation is clearly worded and states that to be an MSC provider it must be ‘carrying on the business of’. This in theory, rules out most recruitment agencies as they will be carrying out the business of supplying individuals to clients rather than carrying on a business of promoting or facilitating the use of companies. 5.24 This approach was seen in the case of Christianuyi Limited v HMRC [2019] EWCA Civ 474 where Lady Justice Rose held: ‘In order for a company to be an MSC provider, its business must be the business of promoting or facilitating the use of companies to provide the services of the individual. A Company formation agent which sets up and sells companies to customers who will use them in all sorts of market sectors will not be caught even if some of those companies go on to be used as PSCs. That is because its business is not the business of promoting companies to be used as PSCs.’ 114

Managed Service Companies 5.26 To further reiterate this point Lady Justice Rose went on to say the following: ‘An accountant or other support service will not be caught even if some of its customers are PSCs because although in the broad sense it might be regarded as facilitating those PSCs in the running of their business, that assistance is merely a consequence of the services it provides, it is not in the business of doing that.’ There is no clear dividing line as to when a company will reach the threshold of carrying out the business of promoting or facilitating compared to it being ancillary to what they do and as such HMRC and the courts will have to look at this on a case by case basis. Focus Point To be an MSC provider, the MSC provider must be in the business of promoting and facilitating the use of companies. 5.25 In the Christianuyi case, reference was made to the services being a standardised service on generic terms and forms and that only one junior accountant with two years’ post-qualification experience worked within the scheme provider’s business. It therefore becomes harder to advance an argument in that case that they are an accountancy practice and facilitating the use of the companies was not what they were in the business of. 5.26 The MSC and the MSC provider must also be separate legal entities. One company cannot fulfil the role of both.

Example 1 – Contracting/payroll company 123 Construction Recruitment are an agency that supply temporary staff to main contractors in the construction industry. The individuals supplied are typically high-skilled tradesman who like to work on a self-employed, sole trader basis. The agency is not comfortable with the employment status risks of engaging the individuals directly and so uses the services of Goodpay Ltd, a contracting/payroll company that will consider the working relationship and pay the individuals on a self-employed basis where appropriate. Goodpay meets the criteria of being an MSC but to be caught by the MSC legislation, there must also be an MSC provider which must be a separate legal entity to Goodpay. Goodpay cannot be deemed to be the MSC provider. HMRC would have to demonstrate that there are other businesses in the contractual chain such as 123 Construction Recruitment that are in the business of promoting and facilitating the use of Goodpay. As the agency’s business is that of providing the services of individuals, it would be difficult for HMRC to advance any argument under the MSC rules. 115

5.27  Managed Service Companies Example 2 – Limited Company contractor Eric Smith is an IT consultant and has been offered a contract by a recruitment company. He has decided to join the contracting world and provide his services via his own personal service company. The agency has recommended a few companies that can assist, one of which is Swiftco Services Ltd who can help with company formations, contracting with the agencies, receiving payments from the agencies, completing the payroll and accountancy functions as well as providing advice about maximising Eric’s take home pay. In this scenario, Eric’s limited company will satisfy the conditions (ITEPA 2003, s 61B(1)(a)–(c)) of being an MSC. Swiftco also carries on the business of facilitating the use of companies to provide the services of individuals courtesy of the range of services it provides to Eric’s company. Swiftco therefore satisfies the first part of the MSC provider test as set out in (ITEPA 2003, s 61B(1)(d)) and it becomes essential to consider whether the second part of the test applies as to whether it is involved with Eric’s business or whether it can rely on any of the exemptions in the legislation (addressed in more detail below at paras 5.27–5.40).

Involved with the MSC 5.27 The second element of ITEPA  2003, s  61B(1)(d) is that the MSC provider must be ‘involved with the company’. What constitutes being involved is set out in ITEPA 2003, s 61B(2) and it is important to note that only one of these, need apply: ‘(2) An MSC provider is ‘involved with the company’ if the MSC provider or an associate of the MSC provider– (a) Benefits financially on an ongoing basis from the provision of the services of the individual, (b) Influences or controls the provision of those services, (c) Influences or controls the way in which payments to the individual (or associates of the individual) are made, (d) Influences or controls the company’s finances or any of its activities, or (e)

Gives or promotes an undertaking to make good any tax loss.’

These are straightforward in principle and any dispute about this area is more likely to turn on the facts of a case and the extent to which a company may satisfy these rather than their interpretation. 5.28 The Christianuyi case provides a more detailed insight into each of these and that case is considered in detail later in this chapter (see para 5.49). For the time being, looking at the composite company structure as a reference point: 116

Managed Service Companies 5.30 (a) The service provider would have charged a fee every time a payment was made to the individual and as such it would benefit financially on an ongoing basis from the provision of the services of the individuals. This is unless the fees charged were a fixed amount regardless of whether the individual had undertaken services for the client. That was not typically the case with composite companies but if it were, the fees would not be linked to the services the individual provides to its clients. (b) It is unlikely the service provider would be able to influence control of the provision of the services as it would be too far down the contractual chain to be able to exert any such influence. There may have been some limited scope for this where there was no agency in the chain and the service provider contracted directly with an end client but even then, it would be a difficult argument for HMRC to pursue. (c) The service provider would have always influenced and controlled the way in which payments were made to individuals. They would set the individuals up with the share structure and pay out to the different classes of shares to ensure the individual received the money they had earned. (d) The service provider would also retain full control over the composite company’s finances and so this would be easily met. An important part to note is that it also includes influencing or controlling ‘any of its activities’ which is very broad and is almost a catch all. The legislation is effectively saying that one business should have no direct influence or control over another company’s activities. (e)

The last section is quite specific and will only apply where one party has given the other an undertaking about making good a tax loss. This would not usually be the case with composite companies.

EXEMPTIONS Accountancy and legal 5.29 An accountancy company does carry on a business that facilitates the use of companies to provide the services of individuals and would usually satisfy some of the conditions necessary for them to be deemed ‘involved with’ that company. One example of this is providing advice to the director about the best way to structure their pay to ensure they are paid in a tax efficient way. 5.30 As previously mentioned however, to be an MSC provider, a company must be carrying on a business of ‘promoting’ and facilitating the use of companies. This should provide some relief for those concerned about being unintentionally pulled into the remit of this legislation but to ensure the intention of the legislation was not lost in translation, the government included ITEPA 2003, s 61B(3)–(5) which specifically identified accountancy and legal services along with those operating as a recruitment business as being exempt from this section (subject to certain stipulations): ‘(3) A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity. 117

5.31  Managed Service Companies (4) A person does not fall within subsection (1)(d) merely by virtue of carrying on a business consisting only of placing individuals with persons who wish to obtain their services (including by contracting with companies which provide their services). (5) Subsection (4) does not apply if the person or an associate of the person (a)

Does anything within subsection (2)(c) or (e), or

(b) Does anything within subsection (2)(d) other than influencing the company’s finances or activities by doing anything in subsection (2)(b).’ 5.31 ITEPA 2003, s 61B(3) carves accountancy and legal services out of the scope of the legislation but on the proviso that the accountancy/legal firm are ‘merely’ providing accountancy and legal services and nothing more. It is therefore critical that these businesses are only providing services that would naturally fall within their particular profession. If, for example, an accountancy practice were deemed to be going further in their support of its client and being too involved in the business than one would expect of an accountant, HMRC could challenge the company and argue they are no longer merely providing accountancy services. 5.32 In the Christianuyi case, the Court of Appeal considered the work being undertaken by accountants and confirmed that in order for a company to be an MSC provider, its business must be the business of promoting or facilitating the use of companies to provide the services of the individual. For an accountant, its assistance is merely a consequence of the services it provides, it is not in the business of doing that. 5.33 The author is aware of standard accountancy practices that have been questioned by HMRC over the MSC rules and although the enquiries have been subsequently closed down without amounting to anything, it highlights that the MSC rules are in the forefront of the HMRC officers’ minds when looking at the services accountants provide. 5.34 The line at which point being ‘merely’ an accountant or legal adviser is drawn is unclear, and with the rapid development of technology and automation the line gets even more blurred as firms look at how they can provide their clients with additional services to have a competitive edge. Only time will tell as to when an accountant or legal adviser will be deemed to have breached this threshold. In the meantime, there is no need to fret if an accountant is just doing their job, but it is always worth considering the application of the MSC rules for any new services that will be offered to clients. Focus Point A company that merely provides accountancy or legal services will not be deemed a managed service company provider. 118

Managed Service Companies 5.41 5.35 There are many companies providing ‘limited company solutions’ to contractors en masse who should pay very close attention to the MSC legislation and know precisely why they would not fall within its scope. It is difficult to foresee how some of these companies can rely on the accountancy exemption and so they will have to demonstrate the other broad provisions in the legislation to not apply. No doubt we will see more cases before the tribunals concerning the MSC rules, even if it takes some time due to the complex nature of the legislation and the way in which businesses operate.

Agencies 5.36 ITEPA  2003, s  61B(4) and (5) are not quite so straightforward and require a little cross referencing for them to make sense. It starts off quite simple and stipulates that a company will not come within the remit of the legislation if the business merely places individuals with another business. 5.37 The same principles apply to agencies with regard to being ‘merely’ an agency as highlighted above in the accountancy section. There are however a few additional points as set out in ITEPA  2003, s  61B(5) for agencies to consider and these are that the agency will not be able to rely on the exemption if it influences or controls the way in which payments are made to the individual or promotes an undertaking to make good a tax loss. This is understandable because unlike an accountant, an agency has no good reason to be involved in the way in which payments are made to the individual. 5.38 There may now be some conflict over the above point with the way in which the government are planning on changing the IR35 legislation. As a result of the changes to IR35, an agency may decide the way in which the payments are made to the individual such as whether or not the payment will be subject to the deemed payment calculation under IR35. One would hope common sense would prevail in this scenario and if not, one argument against this would be that if PAYE were operated, the MSC rules would not apply in the first instance and if PAYE were not operated it is arguable that the agency is not influencing or controlling the way in which payments are made to the individual. 5.39 In addition to the above, the agency cannot rely on the exemption if it also influences or controls the company’s finances or activities, apart from where it is influencing or controlling the services being provided. 5.40 Ultimately, provided an agency, accountant or legal adviser are carrying out their profession and not more involved in another’s the business, they will be able to rely on the exemptions.

TRANSFER OF DEBT 5.41 It is all well and good having legislation to target companies that have set up tax avoidance schemes, such as composite company structures, but 119

5.42  Managed Service Companies unless there is a strong deterrent to stop supply and demand, HMRC would be fighting an ever-losing battle. 5.42 The Managed Service Company legislation would have been woefully ineffective if scheme providers could have simply closed the company and started a new business the following week under a new name. It was for this reason that the government introduced provisions to coincide with the MSC rules that enabled HMRC to transfer any outstanding liabilities to various parties in the supply chain. 5.43 ITEPA 2003, s 688A sets out how HMRC can recover liabilities from other persons under the MSC rules: (1) PAYE regulations may make provision authorising the recovery from a person within subsection (2) of any amount that an officer of Revenue and Customs considers should have been deducted by a managed service company (‘the MSC’) from a payment of, or on account of, PAYE income of an individual. (2) The persons are– (a)

A director or other office-holder, or an associate of the MSC,

(b) An MSC provider, (c) A person who (directly or indirectly) has encouraged or been actively involved in the provision by the MSC of the services of the individual, and (d) A  director or other office-holder, or an associate, of a person (other than an individual) who is within paragraph (b) or (c). Any outstanding liabilities that the managed service company has not been able to satisfy will be pursued by HMRC in the order in which they appear in s 668A(2). 5.44 The managed service company will be liable first and foremost and if they are unable to pay HMRC all liabilities, penalties and interest arising from this legislation within a reasonable timeframe, HMRC will look to transfer the legislation to the director of the managed service company personally as set out in s 668A(2)(a) above. Only once that route has been exhausted will HMRC go after the MSC provider, followed by any other party that has directly or indirectly encouraged or been actively involved in the provision of the services of the individual. If there are still liabilities outstanding after the above, HMRC can then seek to recover the debt from directors of the MSC provider and again those actively involved in the provision of the services of the individual. Focus Point HMRC can pursue outstanding liabilities under the MSC rules with the directors of the MSC, directors or the MSC provider or directors of anyone who has encouraged and been actively involved in the MSC services. 120

Managed Service Companies 5.48 5.45 The order in which the liabilities are transferred was logical when the legislation was enacted because of the way in which composite structures worked. With the subsequent shift away from the use of composite structures however and the growth and evolution of companies providing potential ‘MSC services’ to personal service companies the order does, in the authors opinion, seem somewhat unjust. Example A  company (Copaysol Ltd) sets individuals up with their own personal service companies. It essentially runs the personal service companies on behalf of the individual, so they have the tax benefits of contracting in this way but without the paperwork and hassle. An individual (Steve) has been offered an IT contract by an agency and told that he must use Copaysol to set up a limited company as they will not pay him directly. Steve is not a tax expert, he is an IT specialist. He contacts Copaysol who set up his company and make it very simple for him to get paid via his new limited company. Steve doesn’t think anything of this as it all seems pretty standard, above board and the agency is a reputable agency so he has no reason to question their referral to Copaysol. HMRC subsequently start an MSC enquiry and demonstrate that Copaysol are an MSC provider (for the purposes of this example). Steve’s limited company will have to pay the liability and if it is not able, Steve will be personally liable. Despite the fact that Steve had no idea of this legislation and acted in good faith throughout, he has found himself on the end of a nasty bill. Copaysol however were aware of this legislation and chose to operate their business in such a way that it triggered the MSC legislation (even if not intentionally) and yet they will not be in the frame for liability until Steve has personally paid HMRC everything he can.

PRACTICAL ISSUES 5.46 The MSC legislation provides the important framework for companies when assessing whether they fall within the MSC rules but inevitably there will be questions raised over the interpretation and extent to which the rules apply. 5.47 Despite the legislation coming into force in 2007, to date, there has only been one case before the courts on the MSC legislation. This was the well-publicised case of Christianuyi Limited v HMRC  [2019]  EWCA  Civ 474, in which the Court of Appeal agreed with HMRC and held that Costelloe Business Services is ‘undoubtedly an MSC provider and the Appellants are undoubtedly MSCs’. 5.48 HMRC described the result as an ‘emphatic win’ in its 32nd Spotlight publication dated 1 May 2019 (https://www.gov.uk/government/publications/ spotlight-32-managed-service-company-legislation-tax-avoidance-scheme121

5.49  Managed Service Companies involving-unpaid-paye-and-class-1-national-insurance-contributions/ spotlight-32-managed-service-company-legislation-tax-avoidance-schemeinvolving-unpaid-paye-and-class-1-national-insurance-contributions), as well as confirming that HMRC will continue to open enquiries into users of similar arrangements in many different industry sectors, including road haulage, healthcare and education.

FACTS OF THE COSTELLOE CASE 5.49 The i4 group operated a composite company offering, prior to the implementation of the MSC rules. As a result of the legislation i4 devised a new product called the Gold Business Service which it believed would not be caught by the changes. 5.50 The premise was that instead of having a composite company with multiple shareholders, i4 would offer individuals a personal company solution. i4 would incorporate a company for the individual, offer a registered office, deal with the invoicing to the client, pay the individual a salary, deal with tax and National Insurance, draw up and file company accounts and arrange for the company’s tax return to be completed and filed and for the payment of corporation tax. 5.51 In addition to these services i4 could set them up with a company bank account via its banking partner, CredEcard, withdraw its fees from the monies received and withdraw funds into its own account for paying the companies’ corporation taxes when they became due. The judgment noted that Costelloe (as it subsequently became) withdrew the tax money a long time before it was due and accrued a substantial amount of interest from doing this, to the value of over £126k. 5.52 Essentially i4 would run the company on behalf of the individual and they would have to do very little other than withdraw their net pay from the bank (this was exactly the issue HMRC had with the use of composite companies). 5.53 Following legal advice, i4 set up a new business to run this service through called Costelloe Business Services. 5.54 When moving clients over from the composite model, clients were given the option of the Gold Business Service for personal service companies or going PAYE umbrella but were advised that the umbrella route means full tax and National Insurance would be deducted whereas the PSC route would mean the individual’s net income would be very similar to their current composite company. Needless to say, the court held that this was written with the intent to persuade the clients into the PSC route rather than the unattractive umbrella option. 5.55 Costelloe initially charged a 5% fee for its service which later changed to a fixed fee that would only be charged when the individuals were paid. 122

Managed Service Companies 5.62 At a later date Costelloe stated that their fee structure moved to a fixed fee regardless of whether the individual worked or not, but the court found this not to be the case. 5.56 All but five of Costelloe’s clients (around 1000) used the Gold Business Service which was deemed to be a standardised product with standardised forms. Costelloe did not provide any bespoke advice or services to its clients and there was only one person working within the organisation with an accountancy background and he was a junior accountant with two years’ post-qualification experience.

First and Upper-tier Tribunal for the Christianuyi case 5.57 The case was initially heard at the First-tier Tax Tribunal, then appealed to the Upper-tier before making its way before the Court of Appeal. To get a full understanding of the way in which the legislation applies, it is important to look at the matters discussed in the First and Upper-tier judgments as well as the Court of Appeal judgment as they will provide a useful backdrop and not all findings were appealed. 5.58 In the First-tier Tax Tribunal, the Appellants conceded that they met the definition for being Managed Service Companies and that Costelloe was a managed service company provider. Equally they conceded that Costelloe did not fall within the scope of the accountancy exclusion in ITEPA  2003, s 61B(3). When the case was subsequently appealed, one of the grounds under appeal was on the basis that Costelloe was not in fact an MSC Provider. 5.59 It was surprising that this argument was initially conceded in the First-tier Tribunal and because it had been conceded, the Upper-tier Tribunal had to consider whether to allow such an appeal. With full credit to HMRC in this case, after initially opposing permission for this ground of appeal, HMRC urged the the Upper-tier Tribunal to hear this aspect of the appeal on the basis that it was important and better to have the point determined. 5.60 The Appellants put forward the argument that the wording as to when a company becomes an MSC provider was ambiguous as it could relate to promoting and facilitating either the companies, or the services provided by the companies. 5.61 The Upper-tier Tribunal concluded however that ITEPA  2003, s  61B(1)(d) was a perfectly straightforward two stage test. First, does the putative MSC provider promote or facilitate the use of a company. Secondly, if so, does that company provide the services of individuals. In this case Costelloe clearly fell within this definition and was an MSP provider. 5.62 The question then turns to whether Costelloe were ‘involved’ in the companies for the purposes of ITEPA  2003, s  61B(2). This matter was considered in both the First-tier Tribunal and the Upper-tier Tribunal. 123

5.63  Managed Service Companies 5.63 HMRC accepted in the First-tier Tribunal that Costelloe did not influence or control the provision of the services nor give an undertaking to make good a tax loss. This narrowed the initial appeal down to whether Costelloe benefitted financially on an ongoing basis from the provision of the services, influenced or controlled the way in which payments were made to the individual or whether they influenced or controlled the companies’ finances or any of their activities. 5.64 The tribunal held that once it is established that there is an MSC provider, it is clear that Parliament intended the provisions of ITEPA  2003, s  61B(2)(a)–(e) which define involvement, to be construed widely. This emphasises how important it is for a company not to be deemed an MSC provider in the first place. 5.65 With regard to the elements of being involved with the MSCs, the tribunals found that CBS benefited financially on an ongoing basis from the services provided by the individuals. There was a financial benefit directly related to the provision of the services by the individual and this was the case regardless of whether the fee was a percentage or fixed fee when the individuals undertook the work. The tribunals also held that the money received in interest was benefiting on an ongoing basis because Costelloe had told clients it would distribute interest to them which it did not. 5.66 The First-tier Tribunal referenced explanatory notes which accompanied the Finance Bill 2007 on this point and noted that there is a difference between the person who receives a fee irrespective of the company’s income (for example an accountant charged a specific amount for completing the company accounts), and the person who, by virtue of their specific relationship with the company and the individual, receives payment linked to the individual’s provision of their services through the company, as was the case with Costelloe. 5.67 In relation to influencing or controlling the way in which payments were made, 99% of Costelloe’s clients were on its standard minimum wage model (even where this option hadn’t been ticked). The individuals didn’t seem to know much about the dividends and were just told what was available to withdraw and Costelloe determined the amount of dividends despite having no authority to do so. 5.68 Finally, both tribunals held that Costelloe influenced and controlled the company’s finances and other activities. Costelloe offered to set up a bank account for its clients and if they didn’t take up the offer, they would pay a 5% surcharge which the tribunal held would have been enough to have influenced the company’s finances. In addition to this Costelloe influenced the way in which the companies paid their taxes as well as withdrawing money from the company accounts. Costelloe requested confirmation from CredEcard that it did not control the bank accounts and CredEcard wrote back to Costelloe refusing to provide the confirmation because it was of the view that Costelloe retained a certain amount of access to the accounts. 124

Managed Service Companies 5.73 5.69 An interesting side note in the Upper-tier Tribunal judgment is whether a payroll company would be classed an MSC provider by virtue of the services provided. The judges declined to provide any assistance on this matter (which could be taken to suggest that there is scope for this to be the case, but the facts of any such case would need to be considered in full rather than a generic opinion being issued): ‘As it is, it remains an open question – on which we say nothing – as to whether a company providing solely payroll services to a company meeting the requirements of section 61B(1)(a) to (c) to a company meeting the requirements of section 61B(1)(a) to (c) would fall to be considered a MSC provider.’

The Christianuyi case in the Court of Appeal 5.70 Only one ground of appeal was pursued in the Court of Appeal and this related to the wording and interpretation of ITEPA 2003, s 61B(2)(d). The Court of Appeal held that subsection (2)(d) sets out a perfectly straightforward, two stage test for determining whether a company is or is not an MSC provider: (a) First, does the putative MSC provider promote or facilitate the use of a company? (b) Secondly, if so, does that company provide the services of individuals? Costelloe’s business was to set up promote a service whereby the individuals provide their services through a company. Costelloe therefore promotes the use of companies to provide those services and the Court of Appeal concluded the hearing by stating that Costelloe is undoubtedly an MSC provider and the Appellants are undoubtedly MSC’s.

HMRC ACTIVITY 5.71 The Christianuyi case has been a long time coming as HMRC opened the enquiries into the operations of Costelloe more than 10 years before the final decision in the Court of Appeal. It would have been laborious for HMRC to obtain factual information about the way in which Costelloe operated, not least because the tribunal found the directors and owners of Costelloe to be obstructive, evasive and unreliable, amongst other things. 5.72 Now the Court of Appeal have agreed with HMRC that the legislation applies HMRC will no doubt believe it was worth the wait to ensure the right test case went before the courts. 5.73 With a judgment in hand it will be easier for the taxpayer and HMRC to consider and apply the MSC rules even if there are still some unanswered 125

5.73  Managed Service Companies questions over wording. HMRC will have no doubt gained more desire and confidence in pursuing companies under the MSC legislation, this can be seen by the language in their 32nd Spotlight publication in May 2019 which examined the Court of Appeal case and confirmed that HMRC will be ruthless in closing down avoidance schemes, and users of such services should settle their outstanding enquiries now.

126

Chapter 6

IR35: Personal Service Companies

SIGNPOSTS •

IR35 was introduced in 2000 to stop employers and employees from rearranging their working relationship, whereby an employee would set up their own limited company to work through, rather than be employed. Operating in this way enabled the individuals to be paid in a more tax efficient way and meant the employer’s costs associated with employment would be reduced.

•

The IR35 legislation meant the courts could ignore the limited company and any other intermediaries in the supply chain (like an agency) and look directly at the relationship between the worker and the client. If this relationship was akin to an employment relationship, IR35 would apply and the limited company should operate the deemed payment calculation which would ensure the government receives broadly the same amount of tax and National Insurance contribution as they would have done if they were directly employed.

•

The sheer volume of limited company contractors compared to HMRC’s resources meant very few contractors were subject to an IR35 challenge. This led to considerable non-compliance in the eyes of the government with contractors not declaring themselves caught by the legislation, which was compounded further by HMRC’s poor win-ratio at the tax tribunals. The result of these factors meant the legislation was ineffective and need of an overhaul, so in 2017 the government added new legislation for public sector work which will be amended again in April 2021 for medium and large organisations, whereby the client or fee payer would be liable for IR35 rather than the contractor.

•

The method to determine whether a working relationship is an employment relationship and therefore caught by IR35 naturally followed the established case law principles of employment status.

•

This case law approach involved going back to the principles set out in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2  QB  497 of personal service, sufficient degree of control, mutuality of obligations and any other factors inconsistence with an employment relationship. 127

6.01  IR35: Personal Service Companies

BACKGROUND AND SCOPE 6.01 Take a journey back to Budget Day on 9 March 1999 and you will discover the origin of the IR35 legislation. It was on this day that HMRC (or the Inland Revenue as they were then) published their press release ‘IR 35’ which set out their plans to tackle the growing abuse of personal service companies being set up in order to reduce a taxpayer’s tax and National Insurance liability: ‘The Chancellor announced today that changes are to be introduced to counter avoidance in the area of personal service provision. This move underlines the Government’s commitment to achieving a tax system under which everyone pays their fair share. There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged ‘consultant’ paying substantially reduced tax and national insurance. The Government is going to bring forward legislation to tackle this sort of avoidance. The Inland Revenue will be discussing the practical application of new legislation with interested parties and will work with representative bodies on the production of guidance. The new rules will take effect from April 2000.’ 6.02 Following this announcement, legislation was consulted on and ultimately brought into effect from April 2000. The premise of the legislation was simple. If an individual looks like an employee and works like an employee, they should be subject to the same tax and National Insurance as an employee. Individuals and companies should not be able to simply manoeuvre around this fact by the incorporation of a company through which the individual can work. 6.03 The purpose of the implemented legislation was also considered in detail when the Professional Contractors Group (now IPSE) challenged the legislation under human rights and community law in the case of R (Professional Contractors Group) v IRC [2001] EWCA Civ 1945. The court held the aim of the legislation was: ‘to ensure that the individuals who ought to pay tax and NIC as employees cannot by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom’s system of personal taxation.’

Focus Point IR35 was introduced so that employees could not simply set up a limited company through which to work in order to be paid in a more tax efficient way. 128

IR35: Personal Service Companies 6.08 6.04 There are many examples of companies from years gone by, adopting similar approaches to try and lower their employment costs, such as the case of BSM 1257 Ltd v Secretary of State for Social Services [1978] ICR 894 where the British School of Motoring terminated the agreements with the drivers and set up a number of different operating companies which then re-engaged the drivers on a self-employed basis. This was to avoid VAT, reduce their overheads and ensure fewer employment rights existed. Whilst this didn’t involve the use of personal service companies, the intention behind the move was broadly the same. 6.05 To this end, the courts have long said that companies cannot alter a relationship merely by changing the label they put on it, as was most notably evident in Massey v Crown Life Insurance Co [1978] 2 All ER 576 when Lord Denning confirmed: ‘The law, as I see it, is this: if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it. If they should put a different label on it, and use it as a dishonest device to deceive the Inland Revenue, I should have thought it was illegal and could not be enforced.’ In the BSM case mentioned above, HMRC still had the scope to challenge the position because each of the operating companies set up was still part of the BSM group and as such, any challenge could be made on those operating companies. Where individuals were also moved from employment to self-employment, HMRC could also challenge the position under normal employment status rules. 6.06 HMRC did not however have the scope to challenge this once a personal service company was established, ie a single person providing services through their own company. At that point, the individual was employed by the personal service company under a contract of service receiving a nominal salary (typically) with the remainder being dividends. HMRC could not challenge the client under standard employment status rules because they were paying a limited company who would ultimately be responsible for its own tax and National Insurance. Equally, HMRC could not challenge the personal service company because the individual was an employee of that company and so there was nothing to actually challenge, hence the need for legislation. 6.07 The legislation was written to enable HMRC to look at the employment relationship irrespective of whether an individual had their own personal service company. To achieve this, the legislation allowed HMRC to ignore the limited company (or any other intermediary in the contractual chain) and look at purely the relationship between the individual carrying out the work and the client. If that relationship was like an employment relationship, the legislation would apply and HMRC could recover any tax and National Insurance contributions due. 6.08 The original proposal for IR35 sought to place the burden for considering whether the relationship was an employment one with the end client. This was not a popular move however, and the proposed legislation 129

6.09  IR35: Personal Service Companies attracted a lot of negative press and backlash from businesses. To alleviate this problem, when the legislation was introduced the liability was switched so that the personal service company (PSC) would be the entity who would be responsible for considering IR35 and applying it accordingly. 6.09 If the legislation had stayed in its original planned form, (which incidentally is the direction the legislation ended up moving to following the 2017 and planned 2021 changes) and the end client had been responsible for determining IR35, there would be many occasions when the wrong decision would have been reached because the client simply would not have had information about the contractor’s business. Example: the problem with an end client determining IR35 Jas is an IT contractor with her own limited company. She has agreed to complete a project with a large transport business. If the client were responsible for deciding Jas’ IR35 status, they would be in a good position to consider factors such as whether there is a sufficient degree of control, whether personal service is required and whether there is mutuality of obligation. These may not however determine the issue, because if they were all present, Jas may still be deemed to be outside the scope of the legislation because of the number of factors that are otherwise inconsistent with an employment relationship. For example, she could work for multiple clients at the same time, she could have her own equipment, she could have various financial risks associated with the work, she could market her business by having her own website, own marketing material and she could have other people working within her business on other projects. These factors would all strongly support Jas not being caught by IR35, but the end client would not necessarily know any of this and simply assume that because control, personal service and mutuality of obligation are present, IR35 has to apply. 6.10 The above is not a problem where the responsibility and liability sits with the PSC because the worker would be fully aware of all those factors and so could arguably make a better value judgment about IR35 than a client. 6.11 So, with the legislation drafted and the personal service company being the liable party, HMRC were ready to embark on their IR35 crusade. For the first few years the legislation was effective, in part because people did not wish to end up on the wrong side of HMRC and the legislation was new and untested. This continued as HMRC won the first couple of reported IR35 cases at the tax tribunals (or Special Commissioners as they were known at the time). 6.12 All was looking good for HMRC but as the taxpayers’ nerves settled and HMRC started to lose subsequent cases at the tax tribunals on a more frequent basis the number of PSCs being incorporated grew steadily. HMRC were severely limited in terms of resources, as an IR35 enquiry takes a lot of time and requires a lot of information from various parties. Very few enquiries 130

IR35: Personal Service Companies 6.16 were being opened (despite specialist units being established to tackle this issue) and ultimately fewer and fewer people were concerned about IR35 both in respect of the chances of being subject to an enquiry and the chances of then losing. Even where a company lost a challenge to HMRC, the liability sat with the company rather than the director and owing to the grey nature of employment status, it would be problematic for HMRC to prove fraud or neglect as was necessary to transfer the liabilities from the company to the director personally. This means that even when HMRC would win a case it could be bittersweet as it didn’t necessarily mean the liabilities would be met.

PUBLIC SECTOR CHANGES 6.13 The Treasury grew increasing concerned about non-compliance with IR35 and decided that further action was required to ensure HMRC could tackle this problem more effectively so that companies would become more compliant with the legislation. 6.14 The first step in this process was introduced in 2017 when the IR35 legislation was amended in respect of any work being provided in the public sector. The public sector was a good starting point for the government for a few reasons. Firstly there was a lot of media coverage at the time about the BBC and how it engaged its presenters through personal service companies. As the BBC are a publicly funded broadcaster the government took the view that they should set an example in respect of IR35. In the author’s opinion, the more likely reason for targeting the public sector first was because public sector entities cannot complain about such a change and the need for tighter compliance when they are publicly funded. Targeting the public sector was therefore an easy way in. They could change the legislation without resistance and iron out any problems and objections for when it was eventually and inevitably rolled-out to the private sector (again limiting the groans and moans because the legislation would have been tried and tested by that point). 6.15 The change in legislation led to the liabilities moving up the contractual chain which would in turn not only mean that HMRC have less businesses to enquire into, as they could look at a whole group of personal service companies within one enquiry rather than opening individual enquiries, but it also meant those entities had more to lose and so would more likely be compliant with the legislation and if they weren’t, HMRC would have more chance of securing the debt. 6.16 An interesting but not overly surprising part of the legislation was that it was the ‘fee payer’, ie, the entity paying the PSC, who would be liable to HMRC even though it was the public sector body who would determine whether or not IR35 applied. This would mean that where agencies were involved in the contractual chain and the work was for a public sector client, the agency would ultimately be liable for IR35. After all, it would seem somewhat counterproductive to raise money for the Treasury by taking it off a publicly funded organisation which will then need the money back. Structuring the legislation 131

6.17  IR35: Personal Service Companies in this way meant that in most cases it would be a private company that would have to pay HMRC if the wrong conclusion over IR35 were reached. 6.17 An alternative option to the public sector changes could have been to include personal liability for the PSC directors so that they would have more incentive to ensure their IR35 status was correct but this would not have been well received and would lose the government a considerable number of voters. It would also be unjust given how complicated IR35 can be and still involve HMRC opening individual cases. 6.18 When the 2017 changes were implemented in the public sector, panic set in and there was a significant shift away from PSCs and a surge in people being paid via umbrella companies. This result was a big win for HMRC as tax receipts increased significantly.

2021 – CHANGES IN THE PRIVATE SECTOR 6.19 The changes in the public sector were deemed to be a great success by the government, in fact, the government estimated that the change to IR35 in 2017 led to an additional £550m in tax and NI during the first 12 months alone (https://www.gov.uk/government/publications/rules-for-off-payroll-workingfrom-april-2020). It was therefore only a matter of time before changes were introduced in the private sector and so following another consultation in 2018, similar measures were going to be introduced in the private sector from April 2020 which was subsequently pushed back until April 2021 because of the devasting effect of the Corona Virus. In a bid to curb uproar over the private sector provisions, the revised legislation encapsulating private sector companies only applies to medium and large organisations because of the burden the change in law would have on smaller businesses. 6.20 There has not as yet been any announcement about if, or when, small companies will also be included within the revised changes to IR35, but it does seem inevitable within the next few years. There is no good reason why the government would not remove the small companies’ exemption once the dust settles so that the rules apply equally to all. By introducing it a bit at a time, the government reduce the mass blow-back and any issues can be ironed out before the new legislation will apply across the board. The public sector were effectively the guinea pigs for the change in legislation and the government could then introduce it into the private sector once it had addressed any legitimate concerns arising from the implementation in the public sector. Focus Point It can only be a question of when, rather than if, small companies will be brought into the scope of the new legislative framework. 6.21 The author would expect one revised uniform piece of IR35 legislation to cover everyone within the next two or three years at the very most, at which 132

IR35: Personal Service Companies 6.27 point it will not matter whether you are large, small, public or private – the reformed legislation will apply and the client/fee payer will be responsible for determining IR35. IR35 will have then undergone its complete transformation from a piece of metal to a sledgehammer, the question remains as to whether HMRC will need to (and be able to) swing that sledgehammer.

THE IR35 LEGISLATION 6.22 The legislation for IR35 can be found in Chapter 8 and Chapter 10 of ITEPA 2003. The legislation in Chapter 8 of ITEPA 2003 relates to where services are provided to a small organisation whereas Chapter 10 addresses services provided to public sector bodies (along with medium and large private sector organisations from 2021).

COLLECTION OF TAXES 6.23 If the client is small and the contract is within the IR35 legislation, the PSC should apply the deemed payment calculation. This process of calculating the earnings for tax purposes is set out in ITEPA  2003, ss  54 and 55, and involves an eight-step process. Regulation 7 of the Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727 contains similar provisions in respect of National Insurance. 6.24 Where the client is a public authority or will be a medium/large after April 2021, the position will be slightly different. The deemed payment is set out in ITEPA 2003, s 61Q. Chapter 7 and Chapter 8 consider the respective deemed payment calculations in more detail. 6.25 With the changes to IR35 in the public sector in April 2017 it has become commonplace that where a contract is deemed by a client or agency to be within the legislation, rather than the deemed payment calculation being applied, the individual is instead put on the agency’s PAYE scheme or is instead advised to work through an umbrella company. Prior to the delay in the 2021 changes to IR35, it was already evident that this will also be the case for the private sector for those working for medium or large clients. 6.26 If the relevant person does not operate the deemed payment and HMRC are of the opinion that IR35 applies, the Income Tax (Pay as you Earn) Regulations 2003, SI 2003/2682, reg 80 entitles HMRC to determine, to the best of their judgment, the amount of any income tax which an employer has failed to pay and Section 8 Notices under the Social Security Contributions (Transfer or Functions, Etc.) Act 1999 achieve the same purpose for National Insurance contributions. The taxpayer will then have to pay these liabilities within 30 days or appeal the Regulation 80 Decision and Notices. 6.27 The burden of proof rests with the taxpayer and so if the case were to end up at a tax tribunal, the taxpayer would have to be able to demonstrate that the legislation does not apply. 133

6.28  IR35: Personal Service Companies

CASE LAW OVERVIEW 6.28 The most contentious part of the legislation turns on whether an individual will be deemed an employee of the client, and so IR35 goes back to the question of when a contract is one of service and when it is for services. This has long been considered by the courts before the introduction of IR35 and as such, employment status cases play a pivotal part on when IR35 does or does not apply. 6.29 A  full analysis of employment status and its case law is set out in Chapter 2 along with a detailed look at the IR35 specific case law in Chapter 10. The two are intrinsically linked and although one may not necessarily refer to IR35 cases in a standard employment status argument involving soletraders, it would not be possible to mount a successful IR35 defence without a comprehensive knowledge of employment status cases as well as the key IR35 ones. 6.30 The IR35 cases that have gone before the tribunals tend to focus on three main approaches that have been established from the employment status cases. The first is the definition of a contract of service as per Ready Mixed Concrete (Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497). The second is whether an individual is in business on their own account as mentioned in Market Investigations Ltd v Minister of Pensions and Social Security [1969] 2 QB 173. The last approach regularly applied by the tribunals was set out in Hall v Lorimer [1993] 1 WLR 939 where the court concluded that one must ‘stand back and look at the overall picture’ in order to draw a conclusion. 6.31 The tax tribunals will often apply all three approaches before reaching a decision, meaning there is not only a lot to consider but plenty of scope for an individual to be deemed to be outside of IR35 – but that will of course depend on the facts of any given case. 6.32 The first, and most notable, case of Ready Mixed Concrete has been regarded at as the starting point (Montgomery v Johnson Underwood Ltd [2001] IRLR 269) for determining employment status and the courts should always refer to this case first and foremost. The judge in Ready Mixed Concrete, MacKenna J held: ‘A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.’ 6.33 The development of this definition is discussed in much greater detail in Chapter 2 and Chapter 10 but essentially it has resulted in three core principles that must be present in an employment relationship. These are 134

IR35: Personal Service Companies 6.37 whether personal service is required, whether there is a sufficient degree of control over the individual to create an employer/employee relationship and whether there is mutuality of obligation. Focus Point The trinity of personal service, mutuality of obligation and control as set out in Ready Mixed Concrete must be considered before anything else when determining employment status.

6.34 The requirement of personal service was emphasised in the case of Express and Echo Publications v Tanton [1999]  IRLR  367 whereby a right to use substitutes to carry out the work was deemed to break the need for personal service. As a result of this case, substitution clauses are commonplace in contracts for services and provided they are genuine and the right is not overly restricted, they will show the contract is not one of service and therefore not caught by the IR35 legislation. 6.35 Control is an essential feature of an employment relationship and can relate to control over what work is provided, when, where and how it is done. In every contractual relationship there will always be elements of control and this is recognised by the courts. As such the amount of control, or even the right of control, must be a ‘sufficient degree of control’ to create an employer/ employee relationship. Incidental elements of control that are dictated by the nature of the work will not impact the IR35 outcome nor will factors that are appliable to employees and non-employees alike such as health and safety regulations. 6.36 Mutuality of obligation is also one of the key features that must exist in an employment relationship as per Ready Mixed Concrete. This is the most complicated of the three and the courts have adopted different stances on the importance of mutuality of obligation and its meaning. The overall consensus from case law is that mutuality of obligation is an obligation to provide the individual with work andpay them, and a similar obligation on the employee to continue providing services to the employer (although this last element relating to the employee’s obligation is not always conclusive of the type of contract being undertaken). 6.37 Once these factors have been taken into account the court is directed by Ready Mixed Concrete to consider any other factors which are inconsistent with an employment relationship. In Weightwatchers v HMRC [2011] UKUT 433 (TCC) the Upper-tier Tribunal held that this test is not approached from a neutral standpoint and if the three core factors are present, it will be a contract of employment unless there are other factors that preclude this from being the case. This test can be particularly useful where the client engages other employees who work alongside the contractor in question as it is easy to draw comparisons and find differences in how a contractor is engaged compared to direct PAYE staff (that is assuming there are differences). Examples of this 135

6.38  IR35: Personal Service Companies can be that the contractor does not have the same benefits, gym membership, company car, access rights and the list goes on. 6.38 The next approach the courts will consider is whether an individual is in business on their own account according to the Market Investigations case. This is similar to finding anything inconsistent with an employment relationship, as per Ready Mixed Concrete, and there is likely to be a lot of crossover between the two. The business on your own account test is arguably a slightly more restrictive approach which focuses on aspects such as: whether there is an opportunity to profit from the work or to make a loss and whether any expensive equipment or materials are provided in the same way that an independent business would be responsible for providing these, rather than just for turning up and doing the work you are given. Focus Point The business on your own account test will consider factors like whether there is a risk of loss, ability of profit and the provision of expensive equipment or materials.

6.39 Whether an individual is in business on their own account can provide an interesting insight into the work and in some circumstances can make it quite clear that an individual cannot sensibly be classed as an employee. 6.40 There are a couple of problems with this test. The first is that an individual may be in business on their own account generally, but for the engagement they are working under, an employee. This is a slightly obscure approach and not one that would sit well in most cases but in Synaptek Ltd v Young [2003] EWCH 645 (Ch) the High Court considered an appeal whereby the General Commissioners had concluded that an individual was in business on their own account, yet IR35 applied. The High Court held that such a conclusion was not so unreasonable that no other court would have reached that opinion and so the General Commissioners stance was upheld. 6.41 Synaptek should be regarded as fairly unique in this respect, as most cases in which an individual is clearly in business on their own account will result in IR35 not applying. There are a considerable number of cases to support this, such as: Lime IT v Justin (2002) Spc 342; First Word Software v HMRC [2007] Spc 652 and Marlen Ltd v HMRC [2011] UKFTT 411 (TC). As the Synaptek decision was upheld in the High Court it does however cast a shadow of doubt when relying on this employment status test. 6.42 The other problem with this test was addressed in Hall v Lorimer whereby Nolan J  made the point that individuals can still be self-employed when all they provide is their own labour and skill set. In the professional field such as IT, there is rarely the need or opportunity to provide expensive equipment to carry out the work and little chance of making a profit or loss form the management of the work, that does not mean an individual cannot be 136

IR35: Personal Service Companies 6.44 self-employed. This led Nolan J to conclude that a more appropriate test can be to stand back and look at the overall picture. 6.43 Standing back and making a subjective decision enables the court to look beyond the small details and reach a decision based on what they feel is right. This is a very helpful backstop to have with employment status, but it would result in a very unpredictable and ambiguous area if this were the fundamental and only test to be applied. 6.44 If the court considers all the above and is still unsure as to the position, they can take into consideration, the intention of the parties. This will not usually determine employment status, but it can do so where it is a borderline case.

137

Chapter 7

IR35 for Work at Small, Private Organisations

SIGNPOSTS •

The IR35 legislation has not changed, nor is it due to change for work being undertaken at small private sector organisations where the personal service companies will remain responsible for determining their own IR35 status.

•

Whether a client is small will follow the Companies Act 2006 definition whereby they must not satisfy two of the following: annual turnover more than £10.2m, balance sheet total not more than £5.1m and no more than 50 employees (there is a simplified version where the organisation is not a company or partnership).

•

It may not be immediately obvious whether a client is ‘small’ and information on public record may be out of date so contractors will need to do some due diligence to establish where the liability lies if they are unsure.

•

If IR35 does apply, the personal service company (‘PSC’) must operate the deemed payment calculation in accordance with ITEPA 2003, s 54.

SCOPE OF THE LEGISLATION 7.01 The principles for determining whether IR35 applies, ie  whether a contract is one of employment or for services, did not change with either the 2017 public sector changes or the 2020 changes to incorporate medium and large private sector organisations. Focus Point The fundamental question regarding IR35 of whether a hypothetical contract between the worker and the client would have been a contract of service applies irrespective of whether the client is small, medium, large, public or a private sector organisation. 138

IR35 for Work at Small, Private Organisations 7.06 7.02 What has changed and will change again in 2021 is which party will be responsible for considering IR35 and passing that information on and who is liable for the appropriate tax and NIC where IR35 does apply. 7.03 This chapter considers the rules when services are provided to a small organisation. Whilst the original legislation has been tweaked to ensure it relates only to small organisations, the main detail and purpose of the legislation remains the same as when it was first introduced in 2000 and the responsibility and liability for IR35 remains with the PSC where the client is a small organisation. 7.04 From April 2021 Chapter 8 of ITEPA 2003 will be titled ‘Workers’ services provided through intermediaries to small clients’. This title and the one before it never really rolled off the tongue and so it was no surprise the legislation was coined as ‘IR35’ when it was very first introduced following the Inland Revenue publication number 35 which announced the government’s plans.

The main parts of the legislation 7.05 The IR35 legislation for work at private organisations is currently in ITEPA 2003, Ch 8 from s 48 and this shall remain the case from April 2021 where the client is deemed a small organisation. Where the client is medium or large, ITEPA 2003, Ch 10 will apply from April 2021 which is addressed in more detail in Chapter 9 of this book. As different versions of the IR35 legislation now exist depending on the circumstances, it is worth setting out some of the main provisions and how these will apply from April 2021 (please note that not all sections and subsections have been reproduced). ITEPA 2003, s 48: Scope of this Chapter (1) This Chapter has effect with respect to the provision of services through an intermediary, in a case where the services are provided to a person who – (a)

Is not a public authority, and

(b) qualifies as small for the tax year (2) Nothing in this Chapter— (a)

affects the operation of Chapter 7 of this Part,

(aa) applies to services provided by a managed service company (within the meaning of Chapter 9 of this Part), or (b) applies to payments or transfers to which section 966(3) or (4) of ITA  2007 applies (visiting performers: duty to deduct and account for sums representing income tax). 7.06 This is all pretty basic preliminary information which confirms this legislation applies to intermediaries that are not in the public sector and are deemed small. It goes on to confirm that this legislation will not impact Chapter 139

7.07  IR35 for Work at Small, Private Organisations 7 of ITEPA 2003 (which contains the agency legislation), nor will it interfere with Chapter 9 (the Managed Service Companies legislative provisions). 7.07 It is not overly surprising that the Managed Service Companies (‘MSC’) legislation takes priority where it applies as the MSC legislation was designed to tackle a more aggressive form of tax avoidance and it also provides scope for HMRC to transfer any outstanding liabilities to other parties. The MSC legislation therefore has a wider reach than the IR35 rules in terms of securing any debts. ITEPA 2003, s 49: Engagements to which this Chapter applies (1) This Chapter applies where— (a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”), (aa) the client is not a public authority, (b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and (c)

the circumstances are such that— (i)

if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or

(ii) the worker is an office-holder who holds that office under the client and the services relate to the office. …* (4) The circumstances referred to in subsection (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided. * For the purposes of this book, subsections (2) and (3) have not been reproduced. 7.08 Section 49 is the key to applying IR35. The first part of the legislation remains the same as it has for many years in that where an individual personally performs or is under an obligation to personally perform services for a client, the legislation will apply. It is worth noting at this stage that the right of substitution does not impact this part of the legislation because it can be met where the services are personally performed and so at the point an individual does some of the work, this provision bites, irrespective of whether they could organise for someone else to carry out elements of the work. 7.09 The second point again makes it clear that Chapter 8 does not apply to public authorities, meaning that regardless of the size of the public sector client, Chapter 10 will apply, and they will not enjoy a small company exemption. 140

IR35 for Work at Small, Private Organisations 7.14 7.10 Section 49(1)(b) sets out the background behind this, ie, that it applies where there is another entity in the supply chain rather than it being a direct engagement between a worker and the client. 7.11 Section 49(1)(c) is where the true bone of contention starts, and this has always been the part of the legislation disputed in the tribunals. To apply this subsection, one must consider whether the worker would be regarded as an employee of the client if there were no intermediaries in the contractual chain and this is where all the case law kicks in. 7.12 One additional point here that is often overlooked is that officeholders that work through an intermediary are automatically pulled within the IR35 legislation and it involves no analysis of the working relationship. IR35 will automatically apply. This is considered in more detail in Chapter 10. 7.13 It should also be noted that whilst the IR35 legislation will typically be applied in relation to personal service companies, the legislation can also technically apply to partnerships and individuals. HMRC do not routinely challenge individuals or partnerships under the IR35 legislation because it would be a difficult argument to advance in a true partnership agreement, but the scope is wide enough to ensure individuals did not look at moving their services to a partnership just to avoid IR35. ITEPA 2003, s 50: Worker treated as receiving earnings from employment (1) If, in the case of an engagement to which this Chapter applies, in any tax year (za) the client qualifies as small — (a) the conditions specified in section 51, 52 or 53 are met in relation to the intermediary, and (b) the worker, or an associate of the worker— (i)

receives from the intermediary, directly or indirectly, a payment or benefit that is not employment income, or

(ii) has rights which entitle, or which in any circumstances would entitle, the worker or associate to receive from the intermediary, directly or indirectly, any such payment or benefit, the intermediary is treated as making to the worker, and the worker is treated as receiving, in that year a payment which is to be treated as earnings from an employment (“the deemed employment payment”). 7.14 A  lot of companies that pay self-employed sole traders are of the opinion that IR35 is the governing law over the employment relationship. This is not the case however and their relationship will fall under normal employment status rules as set out in Chapter 2. Section 50 makes it clear that the legislation applies where a payment or benefit received is not employment income. A payment to a sole trader will however be employment income and so they cannot fall under the IR35 legislation. 141

7.15  IR35 for Work at Small, Private Organisations 7.15 An individual working through their own PSC is different however because they hold shares in their PSC which would entitle them to a payment, ie a dividend, if there were profits in the business. In most cases, the individuals will also receive their money as a mixture of salary and dividends. The salary element would be employment income for the purposes of s 50 but again the dividends would not constitute employment income meaning this section applies.

Is the organisation a public authority? 7.16 The first part of the legislation also requires one to consider whether the person receiving the services is a public authority. This will be obvious in most cases but if not, what is considered a public authority is set out in the Freedom of Information Act 2002 and considered in more detail in Chapter 8. This broadly covers government departments, companies owned or controlled by the public sector, schools and universities, local authorities and most part of the NHS. 7.17 If the client is a public authority, ITEPA 2003, Ch 8 will not apply and instead the taxpayer will need to redirect themselves and consider ITEPA 2003, Ch 10 in respect of IR35. It is important to note that the reference as to whether an organisation is small has no impact on the public authority provision. If the client is a public authority, this section will not apply irrespective of their size and again, they must look at ITEPA 2003, Ch 10. 7.18 The public sector provisions in ITEPA  2003, Ch  10 also contain a provision whereby if the work has been contracted out of the public sector, it will not be deemed to be public sector work. This is on the basis that the actual ‘client’ will no longer be in the public sector and the client will be the entity that has taken on the whole of the project. 7.19 The case of Tilbury Consulting Ltd v Gittins (2003) SpC 390 can help provide an example of this type of contracting out as HMRC challenged the work Mr Tilbury was undertaking at Ford but it was evident during the appeal that Ford had actually outsourced whole IT projects to Compuware who were in turn entirely responsible for the deliverables, outcomes and costs. Ford had nothing to do with the management of those projects. In that case, Ford clearly contracted out the work and whilst Ford are not a public authority, the principle remains the same.

Is the organisation ‘small’? 7.20 The parts of the legislation identified above form the key components of the IR35 legislation until April 2021 when it will also become necessary to establish whether a client is deemed small to ensure the correct legislation is applied. 142

IR35 for Work at Small, Private Organisations 7.29 7.21 Whether a client organisation is small or in the public sector should be the first factors to consider when looking at IR35 as we get closer to April 2021 before getting to whether the relationship is one of employment. 7.22 The same definition as the Companies Act 2006 is adopted to determine whether a client is a small organisation. This legislation stipulates that a company is small if it does not satisfy two or more of the following: •

Annual Turnover not more than £10.2m;

•

Balance Sheet Total not more than £5.1m;

•

Number of employees not more than 50.

7.23 There is also a simplified test that will only consider whether there is an annual turnover in excess of £10.2m but this simplified test does not apply to companies, limited liability partnerships, unregistered companies and overseas companies. 7.24 In most cases, the Companies Act definition will resolve the issue and it will not be necessary to consider this in any greater detail. There will of course be occasions however when the position is not so clear, for example, if a company changes from being small to medium at what point would the medium to large IR35 provisions kick in? 7.25 ITEPA  2003, ss  60A–60G will provide further clarity over small companies and at what specific point they will be deemed small, medium or large.

When a company qualifies as small for a tax year 7.26 Section 60A will look at when a company is small in terms of tax years. Whilst it is unlikely in most cases that a company would reach the heights of meeting the criteria for being deemed medium or small in its first financial year, these provisions state that a company will always be small for its first financial year. 7.27 The turnover, balance sheet and employee number tests are then applied to two consecutive financial years and if those limits are breached for two consecutive years the new provisions in ITEPA 2003, Ch 10 will apply. This is the same criteria used for determining whether a company requires its accounts to be audited. 7.28 The point at which the new IR35 rules will apply from will be the start of the tax year following the filing date for the second financial year. 7.29 There is no HMRC guidance on how contractors or their PSC will know whether an organisation is small so contractors may just have to either ask the question of the end client/agency (it would be advisable to do this in writing) or try and obtain the necessary details from Companies House. It was 143

7.30  IR35 for Work at Small, Private Organisations rumoured that the final version of the legislation would contain a provision requiring clients to confirm their size, if asked by a party in the supply chain. 7.30 Obtaining information from Companies House would be quick and easy but the information may be out of date. This information from Companies House should perhaps then only be used as a guide and further examination would be advisable not only in relation to size but to ensure the company being looked up is not just a subsidiary. Companies House will only detail companies, LLPs and joint ventures and so it may also be that the client’s business is not on Companies House at all.

Joint ventures and subsidiaries 7.31 It would be a little farcical if a large organisation could skirt round the new legislation simply by setting up a ‘small’ intermediary or joint venture. Sections 60B and 60C address this potential loophole by stipulating that the legislation will apply to the whole of a group in a group structure. This means the aggregate criteria will be considered rather than on a company by company basis for any connected parties. Smaller subsidiaries will also take on the size status of their parent companies, ie, if a parent company is large but the subsidiary is small, the subsidiary will still be deemed large for IR35 purposes. This again means it could be very difficult for a contractor to know whether a client is medium or large because they may not have the necessary information about any group structure.

Difference in National Insurance legislation 7.32 The corresponding National Insurance (‘NIC’) legislation is set out in the Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727, reg 6. The legislation is broadly the same but there is one notable difference that needs citing. Regulation 6(1)(c) differs from the tax legislation and reads as follows: (c)

The circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the workers would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner’s employment by the client.

7.33 As can be seen, the tax and NIC legislation are broadly the same. The only notable difference is that the tax legislation refers to the ‘circumstances’ between the worker, the intermediary and the client when considering the hypothetical contract whereas the NIC legislation relates to the ‘arrangements’. 7.34 It is worth considering why the NIC legislation is worded slightly different to the tax legislation before moving on to the main provisions. 144

IR35 for Work at Small, Private Organisations 7.38 7.35 In most cases, this difference of wording is seen as immaterial and the courts will apply the legislation in the same way. This was first evidenced in the case of Usetech Ltd v Young [2004] TC 811 when the judge believed the difference in wording could not lead to a case being decided one way for NICs and another way for income tax and corporation tax. This approach has been followed in most cases since and it will be rare for there to be a dispute between the appellant and respondent regarding any significance in the difference of wording. 7.36 There is however still a difference, and this was considered in detail in the case of Dragonfly Consulting v HMRC [2007] SpC 655. Special Commissioner Charles Hellier held that NIC reference to arrangements meant that potentially, there was no requirement to consider whether anything else would have been included in the national contract and only look at what was actually agreed. The tax legislation was drafted with a wider remit however and he considered that in that case it was necessary to consider what the terms of the contract would have been and what would have been agreed. 7.37 The Dragonfly case was subsequently appealed, and this point was also considered in the High Court (Dragonfly Consulting Limited v HMRC  [2008]  EWHC  2113 (Ch)). Mr Justice Henderson referenced the Special Commissioners thorough analysis of the legislation and commented that in nine times out of 10, perhaps even 99 out of 100, the difference in the wording will lead to the same conclusion. It is not worth dwelling on this point too long as it may seem like just semantics and almost irrelevant but it is a point to bear in mind in case the reader ends up with the 1 in 100 case where there is a difference.

IR35 flow diagram post-April 2021 7.38

Is the end client a public authority? Is the end client a public authority?

Yes

Chapter 10

No

Are they a Small Co?

Yes

No

Chapter 8

Chapter 10

145

7.39  IR35 for Work at Small, Private Organisations

Calculation and accounting for the deemed payment 7.39 When a company is caught by IR35 the deemed payment calculation should be applied to all payments made to the individual. This section currently applies to all private sector work but from April 2021 will apply only to small companies in the private sector and not to engagements in the public sector or where the client is deemed medium or large. The process of accounting for payments in those sectors is different and considered in more detail in Chapter 8 and Chapter 9. 7.40 The process of calculating the deemed payment is set out in ITEPA 2003, s 54 and involves an eight-step process. As this is a mechanical exercise of working through the process it is set out below for ease of reference with analysis under each step: ITEPA 2003, s 54 Calculation of deemed employment payment (1) The amount of the deemed employment payment for a tax year (“the year”) is the amount resulting from the following steps—

Step one 7.41 Find (applying s  55) the total amount of all payments and benefits received by the intermediary in the year in respect of the relevant engagements, and reduce that amount by 5%. The process starts by adding the total income received for ‘off-payroll’ work that is caught by the IR35 legislation (net of VAT). Note that it does not necessarily include all money received by the company and only relates to engagements that are within IR35. 7.42 Deduct a flat 5% from the total. This was originally added in the legislation to provide some allowance for the cost of companies complying with IR35 and covers general expenses which do not need to be accounted for.

Step two 7.43 Add (applying s 55) the amount of any payments and benefits received by the worker in the year in respect of the relevant engagements, otherwise than from the intermediary, that— (a)

are not chargeable to income tax as employment income, and

(b) would be so chargeable if the worker were employed by the client. ITEPA 2003, s 55 considers a payment and benefit to mean anything that, if received by an employee for performing the duties of an employment, would be earnings from the employment. 7.44 Add the amount from Step one to any other payments of benefits paid directly to the worker by the client (if there were any). Any payments made to 146

IR35 for Work at Small, Private Organisations 7.50 the intermediary will not count, it is only direct payments to the individual that were not subject to tax and National Insurance.

Step three 7.45 Deduct (applying Chapters 1–5 of Part 5) the amount of any expenses met in the year by the intermediary that would have been deductible from the taxable earnings from the employment if— (a)

the worker had been employed by the client, and

(b) the expenses had been met by the worker out of those earnings. If the result at this or any later point is nil or a negative amount, there is no deemed employment payment. 7.46 Once you have the figure from Steps one and two you can deduct any expenses paid by the intermediary that relate to that engagement. This is on top of the 5% that has already been taken off. This will include any expenses that would normally be allowable if the worker had been a direct employee of the client including any expenses met by the workers that were reimbursed by the intermediary. 7.47 It is important to note with this that if the IR35 legislation applies, each engagement will be regarded as a separate engagement for travel and subsistence (following changes to expenses for intermediaries in 2016) and there will be no overarching contract so expenses will not be capable of being claimed for ordinary commuting from home to a workplace.

Step four 7.48 Deduct the amount of any capital allowances in respect of expenditure incurred by the intermediary that could have been deducted from employment income under Capital Allowances Act 2001, s 262 (employments and offices) if the worker had been employed by the client and had incurred the expenditure. 7.49 After the expenses have been dealt with you deduct any capital allowances that were necessary for the work required. These must have been essential for the work undertaken rather than being out of choice.

Step five 7.50 Deduct any contributions made in the year for the benefit of the worker by the intermediary to a [F1 registered pension scheme] that if made by an employer for the benefit of an employee would not be chargeable to income tax as income of the employee. This does not apply to excess contributions made and later repaid. Deduct any contributions to approved pension providers that were made by the intermediary. 147

7.51  IR35 for Work at Small, Private Organisations

Step six 7.51 Deduct the amount of any employer’s National Insurance contributions paid by the intermediary for the year in respect of the worker. Deduct any Class 1 and Class 1a National Insurance Contributions paid to HMRC by the intermediary.

Step seven 7.52 Deduct the amount of any payments and benefits received in the year by the worker from the intermediary— (a)

in respect of which the worker is chargeable to income tax as employment income, and

(b) which do not represent items in respect of which a deduction was made under Step three. 7.53 Deduct any salary and benefits that have been paid to the worker that have already been subject to tax and National Insurance. If at this point, the figure reached is nil or a negative number, there is no deemed payment due and no further taxes to pay. If there is a figure, there is one last step to follow.

Step eight 7.54 Assume that the result of Step seven represents an amount together with employer’s National Insurance contributions on it, and deduct what (on that assumption) would be the amount of those contributions. The result is the deemed employment payment. 7.55 Deduct any employer National Insurance contributions on the deemed payment. Once the above steps have all been done the intermediary will need to pay and report the tax and NIC due on the deemed payment under RTI.

Construction Industry Scheme deductions and the deemed payment 7.56

ITEPA 2003, s 54(2) states as follows:

‘If [section 61 of the Finance Act 2004] applies (sub-contractors in the construction industry: payments to be made under deduction), the intermediary is treated for the purposes of step 1 of subsection (1) as receiving the amount that would have been received had no deduction been made under that section.’ 148

IR35 for Work at Small, Private Organisations 7.60 7.57 The IR35 rules apply across all industries and so there will be cases whereby the PSC is working in the construction industry and under the Construction Industry Scheme and may have had CIS tax stopped before receiving the payment. This will be at a standard rate of 20% unless the PSC is unknown or has not registered for CIS with HMRC. They may have also opted to be paid gross, in which case no CIS is deducted from payments due. 7.58 The result of this section of the deemed payment is that if the work is carried on in the construction industry and CIS is deducted at source from the payments, for the purposes of calculating the deemed payment, you use the gross figure rather than the new amount received after CIS.

APPLYING THE CALCULATION IN PRACTICE 7.59 The principle of the deemed payment calculation is to ensure that individuals working in a similar way to an employee, pay broadly the same amount of tax and National Insurance. 7.60 The calculation is designed to provide an amount that will be deemed to be income of the worker once deductions and employer’s National Insurance contributions have been removed.

149

Chapter 8

Public Sector Work

SIGNPOSTS •

HMRC have not enjoyed a great deal of success in challenging companies under the IR35 legislation at the tax tribunals. This may be linked to why the government believe there has been a continued increase of non-compliance with the legislation. These factors were the catalyst for the IR35 legislation being amended in 2017.

•

The legislation changes in 2017 only related to work carried out for a public authority. Work that was deemed to have been ‘contracted-out’ by a public authority would not fall within the revised legislation.

•

The principles of whether IR35 applied did not change in 2017 and so this still reverted back to considering mutuality of obligation, personal service, control and any other factors inconsistent with an employment relationship.

•

What did change was where the liability for determining IR35 sat. This moved up the contractual chain and the public sector body was responsible for determining whether IR35 applied and the fee payer responsible for paying the personal service company accordingly.

•

There have been numerous ongoing concerns and issues with the 2017 legislation and the government are trying to resolve some of those with the 2021 changes to the legislation which will override the 2017 provisions.

BACKGROUND 8.01 HMRC’s success rate at challenging companies under the IR35 legislation over the last decade has been very poor. This can be attributed to many factors but one way or another, it does not produce the yield the government require nor the deterrent. The government continually state that there is widespread non-compliance within IR35 and that only around 10% of those that are within IR35 operate the deemed payment calculation. It is unclear where these figures are derived from, but they are certainly questionable, given that HMRC lose most of the cases they take to the tribunal. Especially as HMRC should only pursue the cases to a tribunal where they feel there is a reasonable chance of success. 150

Public Sector Work 8.07 8.02 HMRC did enjoy some notable victories during the early years of IR35 notching up key victories in cases such as Synaptek, Usetech, Dragonfly but if that period is taken out of the equation the overwhelming picture is either that IR35 applies far, far less than HMRC and the government perceive, or that HMRC are inadequate in presenting their case. There are however some very good technical advocates who represent HMRC, so one would draw the inference that it can only be the former. 8.03 Instead of accepting there are now a huge number of individuals that do not work in the same way as employees, the government changed the tax rules and moved the goalposts in a bid to try and muster up some more money for the Treasury. No such change was made to employment law, only the tax legislation and so the result is that contractors may now look like employees and be taxed like employees, but they will not have the same rights as employees. 8.04 The start of this process was published in May 2016 with a consultation on IR35. The principle idea being that the responsibility and liability for IR35 will move up the contractual chain, but only for public sector work. This was a way of sneaking the legislation in through the back door as the government were probably all too aware that if this change were implemented across all industries there would be been uproar. Instead public sector bodies cannot really come out and state that such a proposal would not be fair, given they are state funded and that the alleged non-compliance should continue. 8.05 This was the perfect starting place for HMRC and the government as the legislation could pass through parliament without as much resistance and then as part of the master plan, any issues could be ironed out and resolved before the government announced their plans to open it up to the private sector. There would at this point be less grounds for the private sector to object, as the problems arising from the public sector change would be dealt with (in theory) and it would only be right to have a level playing field. Again, the government were clever with this change by removing small companies from the proposed changes in the private sector to reduce any further resistance. In a few years when the small company exemption is removed (assuming of course, that will be the end result), the ‘new’ IR35 path will be well trodden and so, other than perhaps including some tweaks to pacify the masses, there should be very few objections that the government will consider are legitimate or prohibit the final IR35 legislation applying to all.

WHAT IS A PUBLIC AUTHORITY? 8.06 In April 2017 HMRC amended the IR35 legislation and included new provisions, ss 61K–61X in Part 2, Chapter 10 of ITEPA 2003, setting out how IR35 would apply for public sector engagements. 8.07 The starting point for applying this in practice is to establish when work is being undertaken for a public authority. In most cases this will be obvious and will not require any further thought. The revised IR35 legislation adopted 151

8.08  Public Sector Work the same definition of a Public Authority as the Freedom of Information Act 2002 (as well as Freedom of Information (Scotland) Act 2002) and includes: •

Government departments;

•

Companies owned and controlled by the public sector;

•

Schools and universities;

•

Local Authorities;

•

Parts of the NHS.

When the legislation changed in 2017, taxpayers were generally quick to know whether they worked for a public authority because of the knee-jerk reaction by many to implement blanket policies for IR35 or simply insist that PSCs could no longer be used. Transport for London was just one example of a public authority rumoured to have adopted a blanket decision that everyone was caught by IR35 – why take the risk after all?

THE 2017 LEGISLATION 8.08 The legislation was inserted in ITEPA 2003 under Part 2, Chapter 10, ss 61K–61X and is due to be amended in 2021 which will also bring medium and large private organisations under the same provisions. 8.09 The core sections and subsections of the revised IR35 legislation have the same purpose and application as the old provisions, irrespective of whether the work is public sector or not. This is set out in s 61M(1)(d)(i) and states: ‘if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client’ This still involves the construction of a hypothetical contract (discussed in Chapter 10) and an analysis of whether such a contract would be one of employment.

The fee payer 8.10 Section 61N of the legislation prescribes that the highest person in the contractual chain is the client and the lowest person in the payment chain is the intermediary, ie the personal service company (‘PSC’). Any payments in between these would be considered as chain payments and the person in the chain above the lowest would be considered the ‘fee payer’. 8.11 The fee payer is then the entity who is treated as making a payment which would be treated as employment. Where a public sector body engaged a PSC directly, the public sector body will also be the fee payer. If an agency or other intermediary makes the payments to the PSC, they will take on the title of fee payer and the burdens that go with it. 152

Public Sector Work 8.13 8.12 It is worth pausing to consider this area in more detail as it shifts the financial responsibility down from the client to the fee payer (where there is one), ie, the agency or any other intermediary paying the PSC. It would seem such a move was designed to ensure the government would not be taking money back off the public sector bodies and instead could go after other private sector parties in the supply chain.

Calculating the deemed payment 8.13 If the public sector body deems that IR35 applies, the public sector body, or the fee payer if there is one, must calculate the individual’s pay in accordance with ITEPA  2003, s  61Q in order to pay the necessary PAYE. This is similar to the deemed payment that was set out in the original IR35 legislation but is a little easier to understand and involves fewer steps: ‘Section 61Q Calculation of deemed direct payment (1) The amount of the deemed direct payment is the amount resulting from the following steps— •

Step 1 Identify the amount or value of the chain payment made by the person who is treated as making the deemed direct payment, and deduct from that amount so much of it (if any) as is in respect of value added tax.

•

Step 2 Deduct, from the amount resulting from Step 1, so much of that amount as represents the direct cost to the intermediary of materials used, or to be used, in the performance of the services.

•

Step 3 Deduct, at the option of the person treated as making the deemed direct payment, from the amount resulting from Step 2, so much of that amount as represents expenses met by the intermediary that would have been deductible from the taxable earnings from the employment if— (a)

the worker had been employed by the client, and

(b) the expenses had been met by the worker out of those earnings. •

(2)

Step 4 If the amount resulting from the preceding Steps is nil or negative, there is no deemed direct payment. Otherwise, that amount is the amount of the deemed direct payment.

For the purposes of Step 1 of subsection (1), any part of the amount or value of the chain payment which is employment income of the worker by virtue of section 863G(4) of ITTOIA 2005 (salaried members of limited liability partnerships: anti-avoidance) is to be ignored.

(3) In subsection (1), the reference to the amount or value of the chain payment means the amount or value of that payment before the deduction (if any) permitted under section 61S. 153

8.14  Public Sector Work (4) If the actual amount or value of the chain payment mentioned in Step 1 of subsection (1) is such that its recipient bears the cost of amounts due under  PAYE  regulations or contributions regulations in respect of the deemed direct payment, that Step applies as if the amount or value of that chain payment were what it would be if the burden of that cost were not being passed on through the setting of the level of the payment. (5) In Step 3 of subsection (1), the reference to expenses met by the intermediary includes— (a)

expenses met by the worker and reimbursed by the intermediary, and

(b) where the intermediary is a partnership and the worker is a member of the partnership, expenses met by the worker for and on behalf of the partnership. (6)

In subsection (4) “contributions regulations” means regulations under the Contributions and Benefits Act providing for primary Class 1 contributions to be paid in a similar manner to income tax in relation to which PAYE regulations have effect (see, in particular, paragraph 6(1) of Schedule 1 to the Act); and here “primary Class 1 contribution” means a primary Class 1 contribution within the meaning of Part 1 of the Contributions and Benefits Act.’

With the previous deemed payment calculation for IR35, there was a flat 5% allowance for expenses, this was included in 2000 to encourage people to apply the deemed payment and to acknowledge the costs of operating within IR35. This has however been removed in Chapter 10 for public sector work as the government have said that as the client or fee payer is now responsible, there is no cost burden to the individual. Focus Point The 5% allowance for expenses for the old IR35 rules was removed in the new provisions. 8.14 Once the deemed payment has been calculated, s  61R(1) stipulates that the Income Tax Acts apply to that payment as if the worker were employed by the person treated as making the deemed direct payment, and the services were performed, or to be performed, by the worker in the course of performing the duties of that employment, ie, they are subject to tax and National Insurance in the same way as an employee would be. 8.15 The end result is that the public sector body or fee payer should calculate the relevant tax and National Insurance and pay them to HMRC, pay the individual their net pay plus any VAT due and any non-taxable payments such as business expenses. This doesn’t sound too bad but does overlook the fact that the public authority or fee payer is paying a limited company not an individual and so it cannot be quite so simple. 154

Public Sector Work 8.19

Problems with processing PAYE for a company 8.16 Information on the payment process for PSCs caught by IR35 is almost absent. When the legislation first changed in 2017, HMRC more or less said it was for the accounting and software industry to figure out how to process payments and comply with RTI without there being double taxation. Section 61W did contain the following provisions regarding double taxation: ‘(2) For income tax purposes, the paying intermediary and the payee may treat the amount of the end-of-line remuneration as reduced (but not below nil) by any one or more of the following— (a)

the amount (see section 61Q) of the deemed payment;

(b) the amount of any capital allowances in respect of expenditure incurred by the paying intermediary that could have been deducted from employment income under section 262 of  CAA  2001 if the payee had been employed by the public authority and had incurred the expenditure; (c)

the amount of any contributions made, in the same tax year as the end-of-line remuneration, for the benefit of the payee by the paying intermediary to a registered pension scheme that if made by an employer for the benefit of an employee would not be chargeable to income tax as income of the employee.’

Whilst this is great to know it does not actually assist from an accounting and software perspective. 8.17 The initial problem encountered is that you cannot set up a limited company as an employee on payroll software packages and so the individual’s details have to be entered instead, despite the fact it is the limited company and not the individual in the contractual and financial chain. 8.18 The next issue is that the deemed payment is calculated and put through the PAYE scheme, sothe amount paid to the limited company will be a net amount. The individual still needs to get the money from the limited company however without there being double taxation. 8.19 HMRC have since suggested this is achieved via a non-declared, nontaxable dividend. Provided this dividend is voted in the same accounting period it would reduce the profits accordingly meaning no corporation tax would be due on the net income received and no dividend tax would apply. This does in theory work but seems overly cumbersome and messy. These payments would be reported as tax free payments in the Full Payment Submission fields (up to the income limit that has already been subject to tax and National Insurance from the public sector authority or fee payer. Focus Point Where an individual is paid a net amount into their company after the deemed payment, they can vote a non-taxable dividend to receive the funds without double taxation. 155

8.20  Public Sector Work 8.20 As it is still the limited company that has been engaged instead of the individual and nothing changes in respect of employment rights, the individual would not be automatically enrolled into the client’s pensions scheme nor would they be entitled to employment rights or holiday pay. Instead they just get the worst of both worlds; taxed like an employee but not treated like one. 8.21 VAT is outside the scope of this book but HMRC have said that where a PSC is VAT registered, the deemed payment under IR35 should have no impact on VAT due and so it continues to be invoiced in the same way and the client can make a separate payment for the VAT. 8.22 The 2021 changes introduce a new client-led disagreement process whereby an individual can dispute the client’s decision over IR35. When these changes are implemented, the client has 45 days to reconsider the position and issue a revised Status Determination Statement which sets out their decision over IR35 and the reasons behind the decision. If they uphold their previous decision that IR35 applies, there is little more the PSC can do about it. If the client changes their opinion because of the additional representations, HMRC have confirmed that the payments made under the deemed payment will need to be amended and any top up paid to the individual. This can be done on most payroll software packages but leaves a trail of mess and confusion in the process. 8.23 As the changes in 2021 prescribe that the client takes reasonable care in completing a status determination, from April 2021, any worker subject to IR35 would have a very good claim that they are also an employee or worker for employment rights’ purposes and it would be harder for the client to counter this because they have already confirmed the individual works like an employee by stating that IR35 applies. 8.24 As this process is overly convoluted, in practice many agencies and public sector bodies already opt for the simpler solution of just engaging the individuals either directly as employees or pushing them through PAYE umbrella companies. This will inevitably increase with the further changes coming into force in 2021.

Flow of information 8.25 Section 61T sets out the requirements for clients to provide information down the supply chain about whether an engagement is caught by IR35. The relevant legislation includes the following: ‘(1) If the conditions in section 61M(1)(a) to (c) are met in any case, and a person as part of the arrangements mentioned in section 61M(1) (c) enters into a contract with the client, the client must inform that person (in the contract or otherwise) of which one of the following is applicable— (a)

the client has concluded that the condition in section 61M(1)(d) is met in the case; 156

Public Sector Work 8.31 (b)

the client has concluded that the condition in section 61M(1)(d) is not met in the case.’

8.26 This provision means that when the PSC enters into a contract with a public sector body, the public sector client must confirm whether the engagement is caught by IR35 or not. If the public body fails to provide this information, they will be deemed the fee payer for the purposes of the legislation. 8.27 Section 61T(4) and (5) goes on to confirm that if the position regarding IR35 is contested by the workers, the client will have to provide a written response to any concerns including the reason for reaching the conclusion within 45 days of receiving such a request. Note that the 2017 legislation did not provide any right of appeal and all the worker was entitled to, was a reason as to why IR35 was being applied. The client-led appeal process will apply when the legislation changes in 2021. Focus Point From April 2021 the worker or fee payer will be able to contest the decision reached by the client and the client will then have 45 days to reconsider the position and provide a new Status Determination Statement.

8.28 Section 61T(6) will hold that if the public sector body does not confirm the position regarding IR35 at the start of the contract or does not provide a response to the worker about the reasoning of the decision if contested, or does not take reasonable care in reaching their opinion, the client will become the fee payer for the purposes of the legislation until such time as it complies with its obligations. 8.29 These provisions were included because of the concern by agencies that they would be responsible for administering IR35 and yet not have the best knowledge of the working relationship, nor have any right to find out from the client what their understanding of the working relationship was. The notion being that public sector bodies would have an important stake in ensuring IR35 was applied correctly. 8.30 One criticism of the 2017 rules that the government are trying to address in the 2021 legislation is that there is no obligation to pass the information down from the end client to the PSC. The public sector body has duties to the agency (or next entity in the contractual chain) but the information flow may stop at that point, leaving the PSC in the dark, especially if there is another intermediary in the contractual chain as well as an agency. 8.31 The government had concerns that some PSCs would provide false information about their businesses and the way in which they work in order to try and avoid being deemed to be within IR35. With this in mind, s 61V was included in the legislation to tackle the problem of fraudulent information, as it 157

8.32  Public Sector Work clearly would not be just for a party to be liable when they have acted in good faith upon information that has been provided to them. Section 61V(4) and (5) of the same section state: ‘(4) The fraudulent documentation condition” is that a relevant person provided any person with a fraudulent document intended to constitute evidence— (a)

that the case is not an engagement to which this Chapter applies, or

(b)

that none of conditions A to C in section 61N is met in the case.

(5) A “relevant person” is— (a)

the services-provider;

(b) a person connected with the services-provider; (c)

if the intermediary in the case is a company, an office-holder in that company.’

8.32 It is unlikely this provision will be called upon much by HMRC as proving that someone has acted fraudulently is no easy feat and with the nature of IR35 it could simply be that an individual’s understanding of how they work is different to what the client believes, and that does not make the information fraudulent. HMRC may also have less incentive to demonstrate fraudulent information has been provided because it will be easier to get money from the large client or fee payer rather than a small PSC. The provisions however are there for when needed and designed to stop people saying anything necessary in order to have their contract outside the legislation.

Check Employment Status for Tax (CEST) 8.33 There was doubt (or maybe just wishful thinking) over whether the legislation would be implemented or delayed and so when it came into effect in April 2017 it caught many off-guard and they were often underprepared. The same also appears to have been true for the changes planned for 2020, but perhaps organisations will all be well prepared now the 2020 legislation has been pushed back a year. . The 2017 legislation was however made worse by the fact that HMRC’s guidance was not only late in being published but it was very poor. 8.34 HMRC had also promised a new online tool to assist public sector bodies in determining whether IR35 applied but due to a number of problems this was not made publicly available until a few months after the legislation actually came into effect. Very helpful indeed! 8.35 There was a rumour that part of the reason for the delay was because the IT contractors working on the online tool for HMRC were public sector workers, they moved to the private sector because of the change in legislation and so HMRC did not have the resources to finish it on time. This may seem too ironic to be true, but it is also perfectly believable with HMRC. 158

Public Sector Work 8.41 8.36 The CEST is designed to enable all parties to be able to use the tool whether it be the worker, an intermediary or a client and the idea is that if the questions are answered honestly, the taxpayer will be able to reply upon the answer generated by the tool. This sounds great in principle and should, and can, provide some much-needed clarity in a grey area. The first problem with this however is that the questions can be interpreted differently and so it would be easy to provide what was deemed to be an ‘honest’ answer even though it was an incorrect answer. Focus Point The CEST can be used by clients to determine whether IR35 applies but this will not provide the most accurate answer to IR35 and should be used with caution. 8.37 It is also very difficult to take into account all circumstances just by asking yes or no questions that still have to be made simple enough to have a broad application and for people to understand and apply. This means that whilst the tool at best may be suitable in general, it will never, and can never be good as a detailed look at the circumstances of the engagement. 8.38 A more detailed analysis of CEST is set out in Chapter 11 but suffice to say that it has come under a great deal of scrutiny and has been deemed to be unfit for purpose by many. It does not, for example, address the concept of mutuality of obligation at all or adequately deal with personal service.

NEW PROVISIONS FOR PUBLIC SECTOR BODIES FROM 2021 8.39 It was inevitable that when the IR35 legislation was changed in 2017 for public sector bodies, similar changes would follow for the private sector. 8.40 The revised legislation was not perfect and resulted in some predictable issues arising such as blanket assessment for IR35. In order to pass similar legislation in the private sector some of these concerns needed to be addressed before its roll out and as such the 2021 changes will not only bring the private sector (medium and large organisations) within its remit but will try and address some of the problems with the 2017 legislation.

Reasonable care in assessments 8.41 The most notable change is that from April 2021, the client will have a duty to take reasonable care when carrying out a status determination. ITEPA 2003, s 61N confirms a Status Determination Statement will only be valid if it includes the client’s status determination for that engagement as well as the reasons for reaching that decision. 159

8.42  Public Sector Work 8.42 If they do not take reasonable care, they will be liable under IR35. This is clearly designed to try and stop blanket assessments being carried out which unfairly penalise those who do genuinely fall outside of the IR35 legislation. Focus Point The client will have an obligation to take reasonable care in determining IR35 status from April 2021 and should not simply adopt blanket decisions. If they do not take reasonable care, they will be liable. 8.43 Section 61N will be amended so that the client would have fee payer responsibilities, until such time that they pass on a Status Determination Statement to the worker or the party they contract with. 8.44 The government have said they had no evidence in the first instance that blanket assessments were being made but it was quite apparent this was happening. Even the NHS were rumoured to have adopted a blanket approach until they were threatened with judicial review. 8.45 Public sector bodies will still be able to carry out group (as opposed to blanket) assessments for workers that operate in a very similar way and they will not have to necessarily consider every single case on its own, but they will need to show a duty of care in reaching their conclusion. This ‘should’ have been the case since 2017 but from 2021 it will be a requirement. 8.46 To discharge their duty to comply with this, the organisation will need to either rely on the CEST tool which may not produce the correct outcome, train their staff about IR35 (which will have to be an ongoing process to take into account any developments in case law), or engage third parties to fulfil this role for them. 8.47 When a status determination is made, it can last for the duration of the engagement. There is no need to redo the assessments unless the way in which the individual works changes. If it is a particularly long engagement, it may be good practice to have an up to date assessment (every year for example) so that if questioned by HMRC about the working relationship, it can be shown that it is regularly reviewed and current.

Information flow 8.48 One of the reported flaws of the 2017 legislation was that although the public sector body would have to communicate to the agency whether IR35 applied there was no obligation on any party to pass this down to the worker. This left workers unsure of where they stood in relation to IR35 and having no entitlement as to the reasons why the decision was reached. 160

Public Sector Work 8.53 8.49 The 2021 changes look to address this by placing obligations on all parties in the supply chain to pass down the status determination to the worker. Part of the status determination will include the reasons as to why the decision was reached.

Client led right of appeal 8.50 It is all well and good being told whether IR35 applies but the 2017 legislation also failed to provide any form of recourse of challenge over that decision. The 2021 legislation remedies this by including a new client-led disagreement process whereby the individual can challenge the findings of the determination and the end client will have an obligation to reassess the worker. 8.51 This again will help stop blanket assessments but will hopefully provide an important appeal process for those that are outside IR35 even if it is not obvious to the client. For example, if the individual is evidently in business on their own account but the client is not aware of this and only considers personal service, control and mutuality, they may initially deem the PSC within IR35 but change their stance when more information is presented to them about additional factors. 8.52 Where a worker disputes the opinion of the client, the client will have 45 days from receipt of the disagreement to consider the position and provide confirmation of whether IR35 applies and if so, why. In the meantime, the fee payer must continue to operate PAYE. If the client concludes that IR35 does not apply following the worker’s representations, they must issue a revised Status Determination Statement. 8.53 Forty-five days seems like a long time, especially in the world of contracting and where PAYE will be operated in the meantime and mortgages must be paid on a lower take-home pay. If a client changes their mind, there are no express provisions to claim back the costs of the deemed payment where it had been applied, which will be more of an issue where the costs of employer’s National Insurance have also been pushed down and met by the PSC, for example if they use an umbrella company. The fee payers should however be able to roll back the PAYE operated and pay the Personal Service as though they are outside IR35. Failure by the client to comply with this section will result in the client being deemed the fee payer. That is unless the representations by the worker are fraudulent.

161

Chapter 9

Private Sector Medium and Large Organisations

SIGNPOSTS •

IR35 will be amended in April 2021 so that medium and large organisations in the private sector became responsible for determining whether IR35 applied to limited company contractors. This shift was to bring the private sector rules in line with the public sector legislation which changed in 2017.

•

The legislation will introduce new provisions such as the requirement to take reasonable care in reaching decisions, a duty to pass the decisions down the supply chain, as well as the right for the worker to challenge the decision.

•

Transfer of debt provisions will also be included in the legislation with a focus on ensuring compliance in supply chains is robust and that fraudulent activity will not take place.

•

There are many possible ways to reduce or remove the risk of an IR35 challenge. These will each have their own commercial disadvantages and so clients and agencies must establish what will work out best for their business and what processes should be put in place.

BACKGROUND 9.01 HMRC have lost more than 80% of the IR35 cases they have taken to the tribunal over the last decade. This is quite a remarkable loss ratio and if the cases HMRC won in 2019 are taken out of this equation, the picture is quite frankly diabolical from HMRC’s perspective. 9.02 In the Autumn Budget 2017, when the dust had barely settled from the public sector changes, the government announced plans to consult on how to tackle non-compliance with IR35 in the private sector, as it was deemed to be widespread. A 12-week consultation followed in May 2018 and by the Autumn Budget 2018, the government confirmed it would be proceeding with implementing changes to the private sector for medium and large-sized 162

Private Sector Medium and Large Organisations 9.08 organisations. This change was due to take effect from April 2020 but was postponed in March 2020 until April 2021 because of the catastrophic impact of the Coronavirus. 9.03 It is interesting that the government perceive non-compliance to be widespread and yet from the cases that have gone before the tax tribunals (which are usually the more finely balanced ones to start with) the overwhelming conclusion is that IR35 does not apply in most cases. If non-compliance is so widespread, one would expect to not only see more cases at the tax tribunals but decisions by the courts that support that position. There is of course the possibility that HMRC win many cases without them ever reaching a tribunal but if this were true and it was that easy for HMRC to show non-compliance, it is unlikely there would be a need to change the legislation. 9.04 From the author’s experience of reviewing cases and representing clients under enquiry, most contractors have good arguments as to why they are outside IR35 and although there may be cases where the position is weaker, that does not mean they are definitely, 100% caught by IR35 and so it is difficult to establish at what point a contractor becomes non-compliant with IR35 and how the government could put a percentage figure (10% apparently) on this non-compliance when the law is very unclear, and judges have even struggled to reach their conclusions. The contractor also has to make a value judgment based on the information available (which may be limited) and they would probably take offence at being labelled ‘non-compliant’. 9.05 Regardless of whether it is correct, the perception was of noncompliance and with billions of pounds up for grabs it was only logical for the government to target the private sector, especially after such monetary success in the public sector. 9.06 Predicting upset from small companies who may not have the resources to adapt to these changes and learn about IR35 in time, the proposed legislation in the private sector only applied to medium and large companies. Many companies may assume they are not medium or large but the threshold for this is lower than one may expect and so it is essential for business to consider this, even if they do not necessarily consider their business to be medium or large. 9.07 The question over whether IR35 applies does not change with the new legislation, but the responsibility for determining whether it applies did. Historically, since the IR35 legislation was first introduced in 2000, it has been the limited company contractor who has been responsible for considering IR35 and paying themselves accordingly. The 2017 changes in the public sector and the 2021 changes in the private sector for medium and large companies shift this responsibility onto the client or any other fee payer that makes the payments to the personal service company (‘PSC’). 9.08 The public sector changes acted as a bit of a guinea pig so when the government announced another consultation, which took place between 163

9.09  Private Sector Medium and Large Organisations 5 March and 28 May 2019, it could try and resolve some of the concerns raised with the 2017 legislation: •

One such issue that was addressed was to place a responsibility on the client to take reasonable care in deciding whether IR35 applies. This was to try and stop blanket decisions being made over IR35 because of fear of liabilities being levied.

•

The client will have a duty to pass down a Status Determination Statement to the next person in the supply chain who will in turn have a reciprocal duty to pass it down, until it reaches the PSC. This must include the decision and reasons as to why so that there is clarity over IR35 in the supply chain. This information must be provided before the worker starts the work.

•

An additional and linked point the government have tried to address in the revised legislation is to ensure the workers have a right to challenge the decision of the client. The worker cannot ultimately force the client to change its mind, but it can put forward representations as to why IR35 does not apply and the client must consider these and issue a new Status Determination Statement either way.

9.09 There is likely to be a mixture of ways in which medium and large organisations tackle the changes to IR35. Unfortunately, there will be many that simply say they will no longer use contractors anymore and will instead insist that individuals are either taken on, under PAYE or get paid through an umbrella company. The reason that this is unfortunate, is because in many cases this will be completely unnecessary and is almost an extreme reaction to the legislation. It is understandable that there will now be a financial risk for engaging PSCs but that risk can be mitigated and potentially removed just by putting the correct procedures in place. 9.10 In other cases, clients will consider the IR35 position for the contractors and this may be via the HMRC CEST tool, training and upskilling workers with regard to IR35 or using external companies to produce the Status Determination Statements. 9.11 It may also be that there is a shift away from using recruitment agencies who simply supply labour, to engaging specialist providers who will take on the whole of a project themselves and be responsible for its deliverables. That service provider will then be the client to the worker and so IR35 is no longer a problem for the end client engaging the service provider. 9.12 The last and worst option would be for clients to cease engaging people via PSCs and instead opt for paying the either directly or indirectly on a sole trader basis. If they engage people directly on a self-employed basis, they will be exposed to the same tax risk under normal employment status rules as they are under IR35. 9.13 Agencies may in turn choose to engage sole traders on a selfemployment basis where they believe the client has been too cautious with 164

Private Sector Medium and Large Organisations 9.16 IR35. This is an understandable route to consider but it does need careful consideration because in theory if an engagement is caught by IR35, the agency will not be able to demonstrate a lack of supervision, direction or control as required under the agency legislation (see Chapter 3).

WHO IS THE CLIENT? 9.14 One of the first considerations in the contractual chain is to establish who is the client for IR35 purposes. This is not defined in the legislation and there will be many occasions where it is unclear or where different parties all consider themselves as the client with a subsequent duty to consider IR35. Supply chains can be multi-tiered and complex, meaning it may be difficult to know how far up the chain IR35 reaches. Example of multi-tiered supply chain The government want to build a new hospital and so they acquire an appropriate site and instruct a major construction company to undertake the work. The work is highly complex and so the major construction company needs to subcontract this out to four other large companies to ensure the contract can be fulfilled. Those subcontractors in turn have their own suppliers they use to fulfil certain functions, for example the civil engineering. The civil engineering company tenders for and agrees to complete certain parts of the overall project but because of the size of the project, they need to obtain additional resource. The civil engineering company therefore uses a recruitment company to supply it with personnel. The recruitment company then finds an engineer who has his own limited company who they pay via an umbrella company. 9.15 It is clear in the above example that the individual undertaking the work is the worker for the purposes of IR35 and that his limited company is the intermediary. The umbrella company would not be deemed to be the client and would be the fee payer for the purposes of the legislation and the agency would also not fulfil the criteria for being a client. Once you go above the agency however, it may become more problematic to establish who is the client for IR35 purposes. Would it be the civil engineering company, the subcontractor above them, the major construction company or the government who sit at the very top? 9.16 If we assume all those suppliers in the contractual chain meet the definition of a medium to large company, they may all feel they have an obligation to consider whether IR35 applies even though there can only be one client under the legislation. Equally if the civil engineering company is deemed small, but the party above them is large, do the new IR35 provisions kick in or will it fall under the old rules because if the civil engineering company is ‘the client’ and they are small, the old rules apply but if they are small but one of the parties above them are deemed to be the client, the new rules will apply. 165

9.17  Private Sector Medium and Large Organisations 9.17 There is no clear answer to this question but in the author’s opinion, the civil engineering company would be the client in this scenario (rather than the other companies higher up in the supply chain) as they are undertaking the civil engineering work, they are the ones the worker would consider that they work for, the civil engineering company would control that element of the project and the work being undertaken by the worker and they would supply the materials and equipment to complete the work as well as being accountable for the civil engineering being carried out by their firm. In this case, it would be necessary to consider whether the Civil Engineering company was medium or large to determine whether ITEPA 2003, Part 2, Chapter 8 or Chapter 10 applies.

WHEN IS A COMPANY MEDIUM OR LARGE? 9.18 The starting point with the 2021 IR35 legislation is to establish whether it applies to a business in the first place. The legislation, can be found in ITEPA 2003, Part 2, Chapter 10 and relates to public sector bodies and any private sector bodies that are medium or large. The Companies Act 2006 sets out when a company is considered small and this will be if two or more of the following tests are met: •

Annual turnover not more than £10.2m;

•

Balance sheet total not more than £5.1m;

•

Number of employees not more than 50.

9.19 This is the same principle test to determine whether a company needs its accounts auditing and so it should be familiar to any company near or above that size. 9.20 If the organisation is not a company, limited liability partnership, unregistered company or an overseas company it can use a simplified test which is determined solely on the turnover of the company which is also set at £10.2m. 9.21 ITEPA 2003, ss 60A–60G provides more detail, as to when a company will trigger the medium and large criteria which will be relevant for those that breach the above for the first time, fluctuate around those figures or drop below the threshold. 9.22 Among the provisions, ss  60A–60G confirm that if an organisation meets the conditions of the Companies Act 2006 for two consecutive years, the date in which they will no longer be considered to be small will be the start of the tax year following the end of the filing period for the second financial year when the conditions are met. 9.23 To ensure anti-avoidance does not occur, the provisions also stipulate that subsidiaries of medium or large parent companies will also be deemed to be medium or large even if the subsidiary itself does satisfy the small company criteria. 166

Private Sector Medium and Large Organisations 9.28 Focus Point Subsidiaries of medium and large organisations will also be deemed medium or large irrespective of whether that subsidiary meets the criteria. 9.24 In most instances, it will be clear whether a company is medium or large but there will be many companies on the fringe of these conditions or ones which look like they ought to be but actually are not. Example of small company appearing large AAA Brickwork is large brickwork contractor with about 500 bricklayers engaged to provide services. It would be assumed by most that they are a medium-large company because their turnover breaches the £10.2m and they have a considerable number of people working for them even though their balance sheet total is below the threshold. The workforce are however all engaged on a self-employed basis and the company only has a dozen office-based employees plus the directors. Despite its appearance, the brickwork company only satisfies the turnover test and is therefore deemed a small company. 9.25 Neither the legislation nor HMRC have given any assistance as to how a worker or an agency can establish whether an organisation is medium or large. There was talk of a requirement for clients to confirm their size when asked by a worker or other party in the supply chain but to date this has not materialised. It is therefore currently assumed that they will simply communicate with one another in this respect and whilst that is likely to be the case, it is inevitable that some may slip through the net and leave a taxpayer unaware. 9.26 Companies House has information about company accounts and this would in theory shed light on this position, but that information could be out of date and so may not provide the definitive answer. In short, the only way to be 100% sure is for agencies and contractors to ask the client. Failing that, the PSC could assume that if it has not been provided with a Status Determination Statement, they will be liable for IR35 as a medium and large client will be liable if this is not passed on. The downside of this approach is the PSC incurring unnecessary time and expense considering whether IR35 applies when perhaps it is not needed. 9.27 If an organisation no longer qualifies as small, they have to notify the worker of this from the start of the next tax year. If an organisation fails to notify the worker, they will continue to be deemed a medium/large company.

OUTLINE OF THE NEW RULES 9.28 The new IR35 provisions for medium and large organisations can be found in ITEPA  2003, Part 2, Chapter 10, ss  61K–61X and Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727. 167

9.29  Private Sector Medium and Large Organisations 9.29 The guiding principles of when IR35 applies have remained the same since the inception of IR35. ie, whether an individual would have been an employee of a client had they contracted directly with them without an intermediary in between. This involves a two-stage exercise as set out in the case of Tilbury Consulting Ltd v Gittins [2004] SPC 3020: ‘The first is to find the facts as they existed during the period covered by the decision. The facts to be found are those that serve to identify the ‘arrangements’ involving the intermediary and the circumstances in which those arrangements existed and the nature of the services performed by the ‘worker’. The second is to assume that the worker…was contracted to perform services to the client…and to determine whether in the light of the facts as found, the worker would be regarded as the client’s employee.’ 9.30 The process of deciding whether a contract is one of service follows the case law principles as set out in Chapter 2 and Chapter 10 of this book with the main focus being on whether there is mutuality of obligation, personal service and a sufficient degree of control. If these elements are present in the relationship, attention then turns to any other factors inconsistent with an employment relationship and then standing back and looking at the overall picture. 9.31 The changes to IR35 will not be retrospective and HMRC have confirmed they will not start targeted campaigns where an individual is put on PAYE when they were previously of the opinion that they were outside IR35. That is not to say they will not challenge this, just that they will not specifically target companies on this basis.

Fee payer 9.32 Where the legislation has changed since 2000 is that new obligations and responsibilities have been introduced. The most striking change is that the legislation now dictates that the party paying the worker’s PSC will become ‘the fee payer’ and will be treated as the employer for the purposes of Income Tax and National Insurance Contributions (‘NIC’). This is a significant shift from the old legislation and now means the liability for IR35 will rest with the fee payer rather than the PSC. Focus Point The fee payer shall be treated as the employer for tax and NIC purposes.

9.33 Section 61N of the ITEPA  2003 says the highest person in the contractual chain will be the client and the lowest person in the payment chain is the intermediary, ie  the PSC. Any payments in between these would be considered as chain payments and the person in the chain above the lowest would be considered the ‘fee payer’. 168

Private Sector Medium and Large Organisations 9.39 9.34 It is important to note that the fee payer must be independent of the worker and so it cannot be controlled by the worker nor can the worker have a material interest in the fee payer business. This is to ensure that the PSC cannot be deemed the fee payer. The fee payer must also be resident in the UK. 9.35 In many cases, this will result in a recruitment agency or umbrella company taking on the role of being a fee payer unless the private sector client engages the PSC directly, at which point there will be no other intermediaries and they will fulfil the requirement for being a fee payer. Whichever way the supply chain is organised, if the work is for a medium or large company, the liability for IR35 will no longer rest with the PSC.

Reasonable care in reaching decision 9.36 As of April 2021, the client will have an obligation to take reasonable care when deciding the IR35 position. This provision was included to alleviate concerns about clients doing blanket assessments about IR35 which would unfairly penalise those who are genuinely outside. Focus Point The client will have to take reasonable care in assessing whether an individual is caught by IR35. If they do not take reasonable care, the client will be liable. 9.37 The legislation does not specify what constitutes ‘reasonable care’ in this context but provided the client can show they have given the IR35 position some thought or tailored their approach to each contractor or group of similar working contractors, it should be fairly straightforward to show reasonable care has been taken. The client may reach a different opinion to the worker because of the nature of IR35 being based on case law but reaching a different reasonable opinion, does not mean they have not taken reasonable care. 9.38 As part of deciding the IR35 status of a contractor, the client will have to issue a status determination statement which includes the reasons as to why IR35 does or does not apply. This is set out in s 61N and is designed to provide clarity to the worker so that can raise any objections to inaccurate information.

Information about decisions 9.39 In addition to moving the liability, the legislation includes provisions to ensure all parties are given the relevant information in order to pay the PSC correctly. Each party in the supply chain has a duty to provide the next party with confirmation over the IR35 position. This is only logical and fair as it would be an injustice for the fee payer to be liable if no one was willing to communicate information about the way in which the individual works and whether IR35 applies. 169

9.40  Private Sector Medium and Large Organisations 9.40 Any IR35 determination must be passed on to the PSC on the date, or before the date, the contract is entered into. If the work starts later than the date the contract is entered into it must be provided before the work starts. The principle being that individuals should know their position before they start undertaking work. 9.41 Section 61T is the relevant section which stipulates that the client must provide information about whether an engagement is caught by IR35. If the client fails to provide this information, they will take on the role of being the fee payer. The fee payer can also pay the PSC without deduction until they are provided with a status determination statement and the importance of this must not be underestimated, especially for agencies and other intermediaries in the chain as they will be liable if they fail to pass on the relevant information. 9.42 To ensure false information is not provided to parties to alter the IR35 position, a provision was included in the legislation under s 61V that enables HMRC to move the liability to any party who provides fraudulent information concerning IR35.

Worker’s right of appeal 9.43 ITEPA  2003, s  61T(4) and (5) provide the worker with the right to contest the decision over IR35. Where this is the case, the client will have to reconsider the position and confirm within 45 days whether the position has changed and the reasons as to why it has or has not. 9.44 This could in theory be an important right for the workers because if they have a number of factors which go strongly against the relationship being an employment one, this would be the opportunity to raise it when it may not have been apparent, for example if they carry out extensive work for other companies. 9.45 If a worker contests the decision reached by a client, the fee payer must follow the original outcome reached until a new determination is issued or the 45 days have expired, whichever is first. If the client does not issue a new status determination statement within 45 days, the fee payer can pay the PSC as though they are outside IR35 until such time as the client does issue one and the client will be liable for IR35 during this period. 9.46 HMRC have said that if the client’s decision is reversed during this appeal process the fee payer should recalculate any payments that were previously made.

Summary of who will be liable and when? 9.47 •

To summarise the position of liability: The client will be liable if they are the entity paying the PSC and they apply IR35 incorrectly. 170

Private Sector Medium and Large Organisations 9.49 •

The client has an obligation to take reasonable care in deciding whether IR35 applies. If they fail to take reasonable care, they will be liable.

•

The client must then provide a status determination statement confirming whether IR35 applies and why, on or before the date the individual starts working. If this information is not provided, the client will be liable until they do provide the information.

•

If the client does not provide the relevant information about IR35, the fee payer can pay the PSC without deduction and the client, rather than the fee payer, will be liable.

•

If the worker objects to the conclusion reached, the client will have 45 days to consider the appeal and issue a new status determination statement and failure to do so will result in the client being liable.

•

For the fee payer (that is not the client) they will be primarily liable for IR35 and must ensure they maintain records as to why IR35 does not apply.

•

The fee payer will also have an obligation to pass on any information to the PSC (or any other intermediary in the chain) as to whether IR35 applies. Failure to pass this on to any intermediary in the supply chain shall mean they remain the fee payer.

•

The PSC will not be liable for IR35 unless it provides fraudulent information about the way in which it works. This may happen where they appeal a decision and fabricate information to look as though IR35 will not apply.

DEEMED PAYMENT 9.48 If an individual is deemed to be within IR35 any payments made by the fee payer to the PSC must be subject to the deemed payment calculation. The deemed payment process for public sector and medium and large sector bodies is much simpler than that which applies to small companies. It is a fourstep process that essentially takes off VAT, the cost of materials, any expenses incurred and then it is processed through payroll. 9.49 One of the key differences here is that under the small companies’ calculation there is a 5% flat allowance which is deducted to account for the costs of administering the deemed payment. This allowance was removed however in ITEPA 2003, Part 2, Chapter 10 and so, if the work is in the public sector or for a medium or large company, the individual no longer enjoys this small benefit.

Focus Point Under the deemed payment rules for medium and large clients, there is no 5% allowance for expenses. 171

9.50  Private Sector Medium and Large Organisations 9.50 HMRC guidance makes it clear that the fee-payer must pay the employer’s NIC and not deduct those charges from the contractor’s fee. It remains to be seen whether this will be the case however because this has effectively been happening for years with umbrella companies even though it would be an unlawful deduction to deduct employer’s NIC from the worker. The reason this has not been an issue in the past for umbrella companies is because it receives the money from the agencies, accounts for its costs, such as its own margin and employer’s NIC’s, before processing the rest through payroll. The amount paid to the umbrella by the agency is not the worker’s money at that point and is the umbrella company’s income meaning it isn’t an unlawful deduction. The Key Information Document that agencies now have to provide to agency workers under the Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2019, SI  2019/725, reg 13A, should hopefully make payments more transparent going forward. 9.51 There is also the same problem with the deemed payment that was encountered in the public sector. This is that the individual has to be included on the company’s payroll (as opposed to the limited company – as a company cannot be paid under PAYE). The net amount is transferred to the limited company and the shareholder can then pay themselves via a tax-free dividend so that it does not attract double taxation. This is a cumbersome process and results in individuals being set up under PAYE like an employee, paying tax and NIC like an employee but not being entitled to any employment rights or benefits. This has always been the main injustice of IR35 however and the government do not seem to have any great incentive to address this, because they are getting more tax and NIC’s. 9.52 Another issue would be if the PSC paid other people for work in the business. Whilst this type of scenario would usually mean they are outside IR35, if the client has not considered this, the entire payment would be processed through payroll and the individual’s tax code even though some of the payment will then be paid to others. 9.53 It is quite likely that in many cases, rather than operating the deemed payment calculation, many individuals will be pushed to umbrella companies or taken on as permanent employees. If the engagement is likely to last for some time, many contractors may also opt for this rather than receiving the money through their company because otherwise they have the cost and paperwork associated with running the company and keeping it open, without any reason or benefit. It is almost like the opposite of a managed service company, no benefit – just hassle and expense.

TRANSFER OF DEBT PROVISIONS 9.54 At the time of writing, the government are consulting on introducing secondary legislation that will enable HMRC to recover liabilities from a third party where a deemed employer has failed to make the necessary deductions under IR35 and there is no realistic prospect of recovering outstanding sums. The wording of the legislation is currently unknown and as the legislation 172

Private Sector Medium and Large Organisations 9.58 has been pushed back to April 2021, the government may take more time to consider this approach and any legislative wording. 9.55 It is clear that the intention of this secondary legislation will be to ensure that supply chains are financially robust and that clients will not be tempted to use suppliers that can shelter them from liabilities and then simply close down if challenged.

SOLUTIONS AND WAY FORWARD 9.56 The government accept that the change in legislation will place a significant burden on companies. The HMRC publication ‘Rules for off payroll working from 2020’ (https://www.gov.uk/government/publications/rules-for-offpayroll-working-from-april-2020) estimates that the change in legislation will impact 170,000 individuals working through personal service companies, up to 60,000 engager organisations outside the public sector and 20,000 agencies. 9.57 The document states that those who are complying with the existing rules should feel little impact as the measure is targeted at individuals who are not compliant with the current rules. This is either a fantasy or a significant misjudgment because it will no longer be in the individual’s hands to determine this and it is inevitable that many contractors that would genuinely be outside the scope of IR35 will be forced into umbrella companies or direct payroll. Equally, many clients will take a risk averse approach and only pay contractors outside IR35 if they are beyond any doubt whatsoever. This will most likely mean that any contractors who are outside, but the position is not 100% clear, will be put on PAYE. 9.58 HMRC did publish a document (https://www.gov.uk/guidance/ prepare-for-changes-to-the-off-payroll-working-rules-ir35) to help companies prepare for the changes. This was barely a page long, lacked any detail that would be of great assistance and set out four simple points: 1.

Look at current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.

2.

Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s CEST service for this.

3.

Start talking to your contractors about whether the off-payroll rules apply to their role.

4.

Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.

So, according to this HMRC document, all that has to be done is to locate the contractors, complete the CEST on them, tell them the result and nominate someone in your organisation to deal with this going forward. 173

9.59  Private Sector Medium and Large Organisations 9.59 There is of course much more to consider than the above and it will never be as simple as that. Firstly, if a company wants an accurate and true picture of whether IR35 applies, the CEST tool is not the best option available (see Chapter 11). There are also other obligations on the client in terms of feeding this information down the supply chain, there may be objections by the contractors in which case there are time limits for considering their appeal and there is of course the commercial side of the business to consider in terms of getting compliance right and minimising risk but also retaining skilled workers and attracting new ones. This may be more difficult if a zero risk approach is taken to contracting.

PAYE and umbrella 9.60 It is commendable that the government have tried to stop blanket decisions over IR35 by ensuring reasonable care has to be taken when making the assessments, but all a client has to do is decide they won’t engage contractors anymore and they will have no duty to complete the IR35 assessments in the first place as the legislation will not apply. This is no different to a blanket approach but avoids the issue of reasonable care. 9.61 Instead they can engage people on a PAYE basis either directly or indirectly. This has the significant appeal that it keeps HMRC happy as they are collecting the maximum tax and NICs and so have no need to challenge the client. The very noticeable disadvantages however are the costs associated with engaging contractors on a PAYE basis and the inflexibility to adapt to fluctuations in workloads with staff numbers. 9.62 Contractors working through a PSC will usually be highly skilled workers who command a high level of remuneration. If they are no longer engaged via their PSC and employed directly there will be the additional cost of employer’s National Insurance, the cost of holiday pay, pensions and other employment rights. This could have a substantial impact on the company’s bottom line if a lot of contractors are employed. 9.63 For the individual, most of them will be working through a PSC because they choose to, as it suits their needs and lifestyle. They will also typically take home more money than under PAYE and they may even have spouses with shares in the company so that their taxable pay is even further reduced. If they go from this to PAYE, it will have a substantial impact on their take-home pay and they may look elsewhere for work. 9.64 If there is no option and the individuals work in the same way as an employee, it is naturally only right they pay the same level of tax (as well as get employment rights) but where they do work outside the scope of IR35, it is costly for all parties to opt for PAYE when it doesn’t benefit anyone and there is no need.

174

Private Sector Medium and Large Organisations 9.71

Sole trader 9.65 There have been whispers by some, that instead of engaging contractors via their personal service companies, they should do so on a sole trader basis. This can however create bigger problems than it solves. 9.66 If an end client engages people as sole traders, they will still have the task of establishing the individuals are not employees of the client. This may not be under the IR35 legislation, but it is still an issue under the standard employment status rules set out in Chapter 2. 9.67 The issue will be exactly the same as IR35 and so will the liabilities, and so there very little, if anything, to be gained from going down this route for end clients. 9.68 If the individuals are not engaged directly by the client as a sole trader but instead via an intermediary such an agency or a payroll company this will become an ever-harder proposition to defend than IR35 and it is far more likely the client will end up with a liability than they would have otherwise. This is because at the point an intermediary engages someone on a self-employed basis, they must be able to demonstrate that no one has the right to supervise, direct or control (SDC) the manner in which the individual provides the services. Focus Point Engaging individuals on a sole trader basis rather than through PSC’s will be even harder to defend where an intermediary pays them.

9.69 The agency legislation and supervision, direction and control (SDC) are discussed in more detail in Chapter 3 but a few key points are worth covering. The first is that one must ‘show’ that there is no right of SDC meaning HMRC will approach the case on the presumption of there being control unless and until it can be proven otherwise. This is somewhat different to IR35, where HMRC should approach the case from a neutral perspective. 9.70 The next obstacle to overcome with this is that SDC is the only argument you can rely on to demonstrate they can be self-employed when working through an agency. Under IR35 there are a whole host of arguments, such as personal service, a sufficient degree of control (rather than ‘any’ SDC), mutuality of obligation and any other factors that support the IR35 position. 9.71 If individuals are engaged on a self-employed basis, through an agency, it is primarily the agency who will be responsible for showing the lack of SDC and so the client may still view this as a safer option because the agency will be liable rather than the client. This is true of the IR35 provisions however, as it is the ‘fee payer’ under IR35 that is responsible and so in principle it is no different. Where it is different however is that because the agency will need 175

9.72  Private Sector Medium and Large Organisations to ‘show’ a lack of SDC, they may well ask for confirmation from the client about a lack of SDC as well as writing a term to this effect into their contract. If HMRC can show that a client has been fraudulent in confirming a lack of SDC, the client will become the liable party under the agency legislation. 9.72 All in all, engaging people on a self-employed, sole trader basis, is at best, no better than engaging PSCs. Where an intermediary engages them, the whole supply chain is exposed to a higher risk than the IR35 legislation and so it is hard to see how and why this would be deemed a solution unless the client has said they will not deal with contractors at all and so this is the only option other than PAYE.

Contracting out 9.73 There is the possibility of contracting out the work completely to a specialist firm. This will change who the client is for the purposes of IR35, as the client to the PSC will be the specialist firm or company undertaking the project. An example of this can be seen in the Tilbury case whereby Ford outsourced a significant IT project to another firm and it was evident during the hearing that Ford had nothing to do with how the project was run and resourced and were merely concerned with the outcome. 9.74 The benefit of adopting such a route is that it moves the focus and responsibility away from the end client and could potentially mean the ‘new’ client does not meet the criteria for being medium or large and so the old IR35 rules would apply. 9.75 If this route is to be followed, it must be done with careful consideration if it is to achieve its purpose and there must be a genuine shift over who the client is and what work is being contracted out. HMRC will quickly be able to see through false structures designed to circumvent the IR35 legislation and can always look at bringing in targeted anti-avoidance measures where they feel this is being exploited.

AGENCIES BECOMING CONSULTANCIES/STATEMENT OF WORKS 9.76 This has the same outcome as the above but it is a shift from what the agency currently does for a client rather than engaging a specialist firm from the outset. In this case, agencies would restructure the services they are providing so that they no longer merely place people in a client’s organisation, but they actually tender for projects and consultancy and take on the whole of the work instead. This is being referred to by many, as a statement of works. 9.77 There is no reason why this would not work in practice as long as there is a genuine move to providing services rather than people. This cannot simply be a paper exercise where the terms of business are changed when in practice nothing has changed. It would have to be clear that the agency is the 176

Private Sector Medium and Large Organisations 9.83 client and the original end client would have to relinquish control over the project and purely be concerned with the agency achieving the outcome rather than the means and methods in which it does so. 9.78 In order for this to work, it would also have to be a completely seperate and independent business to the client, rather than a joint venture set up between the agency and the client. 9.79 It will be very easy for this type of offering to be structured incorrectly and so if this is a route being adopted it will need a great deal of consideration as I suspect there will be many arrangements set up to achieve this purpose that would quickly fail under enquiry, at which point the end client would remain liable. 9.80 Finally, this will not stop IR35 but it may be beneficial for two reasons. The end client will no longer have to be concerned about IR35 status determinations and the agency may not meet the criteria for being a medium or large organisation meaning the responsibility and liability for IR35 will remain with the PSC (that is unless of course the small company exemption is removed from the legislation at some future point).

IR35 status determination 9.81 The best way of initially addressing IR35 is to review the way in which the individual PSCs work and what terms they work under. This will provide the client with knowledge over whether IR35 applies or not, in the first instance. If the legislation does apply then the options become quite clear because one way or another, PAYE must be operated and so then it is just a decision as to whether this is via the deemed payment route or whether they are employed as a fully-fledged employee or work through an umbrella company. It may be that a discussion with the worker or the circumstances of the assignment have an influence on this. 9.82 If the opinion is that IR35 does not apply or even that IR35 does not apply following further representations from the worker, the client should not feel compelled to operate PAYE for fear of HMRC reclassifying the position. The consequences and financial liabilities at stake will be significant if the decision is wrong, but if the person making the decision about IR35 is well versed on the legislation and case law, they should be able to not only reach a conclusion but also set out the reasons why, which will form part of the Status Determination Statement. If this is further supported in accurate contracts, it will be very hard for HMRC to disrupt this position. 9.83 It is worth noting that in most of the cases that reach the tax tribunals, the end client and the worker usually have a different understanding of the working relationship. This makes the outcome of the case much harder to predict and open for debate. If the position is carefully considered by the client however under the new rules, it is very likely that all parties will agree to the way in which the individual works and it will be very rare for HMRC to be able to disturb how the parties view their working relationship. 177

9.84  Private Sector Medium and Large Organisations 9.84 There are a few options available to clients in regard to determining IR35: •

The first is that people within the organisation are trained specifically on IR35. For this to be done properly it will take time and of course money but ultimately the client will be in a position to make the decisions itself without incurring ongoing fees other than keeping on top of any developments. This can always be complemented with having an expert as a back-up in case of any uncertain decisions, challenges by the workers or HMRC enquiries.

•

The next option is to outsource this function completely. The clear advantage of this is that you would be getting expert opinions on IR35 and as such can demonstrate reasonable care. It also means there is no requirement for an individual within the organisation to take on this burden. There is also scope for suing any adviser under their professional indemnity policy if the decision they reach turns out to be incorrect. The disadvantage is the cost and ensuring the organisation instructs someone that has a thorough understanding of IR35.

Agency and fee payer 9.85 If there is a third party in the contractual chain that makes the payments to the PSC, they will be responsible for paying the PSC in accordance with the Status Determination provided by the client. If the client has carried out the above exercise and reviewed the position with reasonable care and informed the next party in the supply chain, the client has fulfilled their obligations under the IR35 legislation and will not have to then be concerned about IR35. Using an agency or other fee payer therefore provides a buffer of protection to the client and they can engage PSCs without the ongoing worry about the liabilities they will face if they get the decision wrong. 9.86 If the above two routes are applied and reasonable care is taken and another entity pays the PSC, the client will be protected from the legislation and the purpose behind changing the legislation will have been fulfilled because IR35 will have been applied correctly and so ‘non-compliance’ will drop (or at least the intention will have been that IR35 was applied correctly as it will always be up for debate). Once it can be established that reasonable care has been taken in reaching the decision and the information used to reach that conclusion was honest and genuine, it is unlikely HMRC will challenge the IR35 status further and if they do, given their track record, it would be unlikely they would win. It must not be forgot that with the original IR35 legislation and the cases that went to tribunal, the worker and the client will have often had a different understanding of the working relationship. This is less likely to be the case under the new provisions and it will be very hard for HMRC to disturb what is being said if both the client and the worker are clear on the terms of the working relationship and the contract sets these terms out as well.

178

Chapter 10

IR35 Case Law

SIGNPOSTS •

The courts must obtain the facts of a case and then construct a hypothetical contract between the worker and the client based on those facts and determine whether that hypothetical contract would have been one of service or for services.

•

The best authority for determining whether a contract is of service is the Ready Mixed Concrete case (Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2  QB  497). The courts must consider whether there is mutuality of obligation, personal service and control for the contract to be deemed one of service.

•

Once the three key tests in Ready Mixed Concrete have been considered, the courts can move on to other factors and tests to determine the nature of the relationship.

•

HMRC have been on a largely unsuccessful run of challenging cases under IR35 over the last 10 years and so there is no need to panic and have knee jerk reactions to IR35.

•

If HMRC can demonstrate careless behaviour with regard to IR35, they can extend the tax determination period to six years and bring it in line with the National Insurance liability period.

THE HEART OF THE LEGISLATION 10.01 The IR35 legislation is set out in ITEPA  2003, Part 2, Chapter 8 and Chapter 10. The legislation sets out the broad parameters of when IR35 applies but case law is required to gain a detailed understanding of whether an engagement is caught by IR35. 10.02 Section 49 of Chapter 8 and s 61M of Chapter 10 is where the core principles of the legislation are contained and these sections are typically the contested parts as they make it necessary to establish whether a worker would have been an employee of the client. 179

10.03  IR35 Case Law 10.03 Both s 49(1)(a) and s 61M(1)(a) state that: ‘This Chapter applies where an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”).’ 10.04 This is quite simple and applies whenever a worker provides services to another party and so will be satisfied in virtually all cases where a personal service company (‘PSC’) is being used. Note that this subsection applies at the point the services are personally provided and is not critical on whether the services are ‘required’ to be performed personally. A right of substitution would therefore not alter the fact that services are personally provided at the point an individual turns up and works. 10.05 Section 49(1)(b) of Chapter 8 (and s  61M(1)(c) of Chapter 10) then go on to say that the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (‘the intermediary’). This is where the personal service company comes into play because the individual will not be working directly for the client and will instead have their own company through which they are working. This is also why a self-employed sole trader who is not incorporated, working directly for a client, will not fall foul of this legislation. 10.06 So far, these are very straightforward and are never really a bone of contention with HMRC or in the courts. It is s 49(1)(c) of Chapter 8 and the corresponding s  61M(1)(d) of Chapter 10 where the fun begins. These subsections state that the legislation applies where the circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client. In other words, if the limited company did not exist and the individual worked directly for the client, would the way in which they work be like an employer and employee? 10.07 Park J  in the High Court decision in Usetech Ltd v Young [2004]  EWHC  2248 (Ch) considered how this applied in practice and held that ‘sub-para (c) involves an exercise of constructing a hypothetical contract which did not in fact exist, and then enquiring what the consequences would have been if it had existed’. Focus Point The courts must consider the facts of the case and use those facts to construct a hypothetical contract. If that hypothetical contract would have been a contract of service, IR35 will apply. 10.08 There will of course be contracts in place between the parties, even if they are not in writing, and whilst that may form an important ingredient in making the ‘hypothetical contract’, it is the hypothetical contract and not the actual written contracts that the courts must consider. 180

IR35 Case Law 10.10 Diagram 10.1 of the hypothetical contract Client

PSC

What terms would be in this hypothetical contract?

10.09 The passage in Usetech has been cited many times since as the correct approach to be applied, so it is clear from the authorities that a hypothetical contract must be created. To construct this hypothetical contract the courts must then decide what information should be taken into account, along with how much weight it should carry, as well as what information should be discarded. 10.10 This alone is no easy task especially if the contractual chain is not as simple as Diagram 10.1 where a personal service company contracts directly with a client. In that case there will usually be one main contract between the parties and a relatively clear understanding between the parties of their working relationship and contractual obligations. It may not pose too much difficultly to create a hypothetical contract in that situation. It can however become much harder to establish what terms should be included in the hypothetical contract when other parties are involved, such as recruitment companies. Diagram 10.2 of the hypothetical contract with one agency in the supply chain Client

Agency Hypothetical Contract

PS

181

10.11  IR35 Case Law 10.11 In Diagram 10.2, the individual will have a contract with his personal service company (in theory, even if it is just implied), who will have a contract with the agency, who in turn will have a contract with the client. It can be quite common for the different contracts to have different clauses and different wording to account for different commercial positions. With all these different contracts, it can quickly become problematic to establish which terms, and in which form, they would feature in a hypothetical contract. Example – Difference in contracts Ted is a software developer and has agreed to work on a project with a bank through a recruitment agency. Ted has his own personal service company and in the contract his company has with the agency (the lower contract), there is a clause which allows for his company to use any substitute workers as his company sees fit, provided they have the requisite skills. This is broadly written and would usually demonstrate the contract is not one of employment, provided it is an accurate reflection of the working relationship. The contract the agency has with the client (the upper contract) however does not contain such a provision and makes it clear that they require the personal service of Ted, as that is whom they interviewed and whom they want to provide the work. HMRC challenge the position and the tax tribunal will have to consider both contracts to establish whether the substitution clause would feature in the hypothetical contract and if so whether it would be as far-reaching as the one between the company and the agency or whether a more narrow version would be included, which may not determine IR35 on its own and merely be one other factor to consider. 10.12 There does seem to be an inherit injustice with IR35 in that a taxpayer can enter into a contract in good faith that it will represent the working relationship, only for HMRC or a tribunal to discard some of its key terms when it is not mirrored throughout the contractual chain even if the parties at the top and the bottom of the chain would have no way of knowing the contractual position of others. The overriding factor however is to apply the legislation as it was intended and in R  (Professional Contractors Group) v IRC  [2001]  EWCA  Civ 1945 the judge held that whilst the lower contract between the personal service company and the agency would be an important part of the factual relationship, at the end of the day, it was just a part of the relationship and so cannot determine the issue on its own. 10.13 The worker will not, in most cases, see the contract an agency has with the client, let alone be privy to the negotiation of its terms, and the same is true for the client who will also not know what terms an individual has signed with the agency. This was referenced in the Usetech case where Park J said ‘ I recognise the force of Mr Smith’s argument that neither Mr Hood nor the taxpayer was a party to that agreement, and would not be bound by it and indeed may have been quite unaware of its terms’. It will nonetheless be taken into account when the judge considers the position. 182

IR35 Case Law 10.19 Focus Point The courts will consider all the contracts in the supply chain, the working practices and witness information when analysing whether IR35 applies. The taxpayer however has to make a decision about IR35 even though they will only be entitled to some of this information.

10.14 These issues are present in most of the IR35 cases that have reached the courts where an agency is involved. If there is a conflict between the terms in the different contracts, any witness evidence may shed a greater light on the position and prove to be very important in establishing the true position. This is not to undermine the contracts as the courts will be very aware that just because a term is not enforced, does not mean it does not exist. 10.15 The weight attached to witness evidence will depend upon many factors such as whether the individual was credible with their recollection of events, how much involvement they had over the work being undertaken and whether they had any involvement in the terms agreed between the parties. 10.16 The courts will consider all these factors when deciding what the arrangements and circumstances are, and the weight given to each may depend on the individual case. For example, a representative from the client may be a witness at a hearing and whilst they may be able to provide information about the working relationship, they may have no knowledge of the agreed terms under which the individual provides their services. 10.17 Once the courts have formed a view as to what terms would be included in the hypothetical contract, they can determine whether that contract would be one of service. To do this, they will consider the vast case law on this subject including cases relating to employment status, IR35 and employment law, as these all consider the question of when an individual is an employee or not. The IR35 case law is set out in more detail below but before moving onto that, it is important not to forget about the remaining provision in the legislation.

Office holders 10.18 Section 49(1)(c)(ii) of Chapter 8 stipulates that the legislation will also apply when ‘the worker is an office-holder who holds that office under the client and the services relate to the office.’ Chapter 10 also contains similar provisions for office holders. 10.19 This was added to the IR35 tax legislation in 2013 as a measure to try and stop company directors from forming personal service companies through which to work and receive their money. It can be difficult for HMRC to obtain information about the true nature of the relationship where the parties who HMRC have to obtain the information from are closely linked (such as the 183

10.20  IR35 Case Law director or a company and the company itself), HMRC therefore had difficulties in establishing that IR35 applied in this type of situation and it was believed the easiest solution was to adapt the legislation and bring it in line with what the National Insurance contributions (NIC) legislation already said. 10.20 The principle behind this part of the legislation is that if an individual is an office holder (for example a director) of the client, IR35 will automatically apply and HMRC will not even need to consider the ‘hypothetical contract’. 10.21 What constitutes being an ‘office holder’ was set out in Great Western Railway Company v Bater [1920] 8TC231: ‘A  permanent, substantive position which had an existence independent from the person who filled it which went on and was filled in succession by successive holders’ 10.22 This definition was considered and approved in the subsequent case of Edwards v Clinch [1981] 56TC367, where it was also considered that the post need not be capable of a permanent or prolonged existence, but it must have an endurance at least beyond the tenure of one man. 10.23 If the position of a company director is considered with this definition in mind, a company director is a permanent position in the company and clearly substantive. It does not relate specifically to the person doing the work and is not a ‘role’ that the person filled but a position they are appointed under. The position of director will continue beyond the current director’s tenure and so will invariably meet the criteria of an office holder. 10.24 HMRC also consider club treasurers, trade union secretaries and trustees to be office holders. Focus Point If a worker is also an officer holder of the client, IR35 will apply automatically. 10.25 It is possible for a company director to structure their affairs in such a way that they can still provide services via a personal service company and as a director, but it will always be a risky strategy and will require careful application. To achieve this, the individual would have to have a Director’s Service Agreement which covers the work they complete as a director. They will also need to be remunerated separately for that work. In addition to their work as a director they could then have a personal service company which covers the work they do on a consultancy basis (which would also require separate agreements and separate payments). They could then effectively wear two different hats when undertaking work; one as a director and one as a consultant, although these should be clearly distinguished. This would in theory, stop IR35 applying automatically anyway and then it would just be the usual IR35 argument you would have to have with HMRC. 184

IR35 Case Law 10.30

Terms 10.26 ITEPA 2003, s 49(4) of Chapter 8 and s 61M(3) of Chapter 10 state the ‘circumstances referred to in subsection (1)(c) (or s 61M(1)(d) for Chapter 10) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.’ 10.27 This demonstrates and puts it beyond any doubt that the terms agreed between the parties must be considered and included when deciding what the arrangements are for creating a hypothetical contract.

Why aren’t sole traders caught by IR35? 10.28 On the face of it, a self-employed individual working through an agency (the intermediary) may appear to tick the boxes for when IR35 applies. ITEPA  2003, s  50(1)(b) provides the answer as to why this is not the case and it is focussed primarily on personal service companies. The legislation prescribes: (i) receives from the intermediary, directly or indirectly, a payment or benefit that is not employment income, or (ii) has rights which entitle, or which in any circumstances would entitle, the worker or associate to receive from the intermediary, directly or indirectly, any such payment or benefit, the intermediary is treated as making to the worker, and the worker is treated as receiving, in that year a payment which is to be treated as earnings from an employment (‘the deemed employment payment’). If a sole trader is paid by an intermediary for work undertaken, it will be deemed employment income and therefore not caught by the IR35 provisions. The position is different however when a personal service company pay dividends to the shareholders as this will not be employment income. The same is true for having rights ie, shares in a company, which entitle the individual to receive a payment.

IR35 CASE LAW Special Commissioner cases 10.29 As many of the cases that consider IR35 were initially heard at the Special Commissioners, it is worth setting out why cases were heard there and the importance of their decisions. 10.30 Prior to the tax tribunal system changing, IR35 cases were heard before the General Commissioners, unless the taxpayer elected for a hearing at the Special Commissioners. The Special Commissioners were presided over by technical tax experts whereas the General Commissioners were often 185

10.31  IR35 Case Law lay persons, sometimes with a solicitor or barrister chairing the hearing. The Special Commissioners’ judgments were reported and as such were publicly available for future reference whereas the General Commissioner hearings were not. This means that anyone can access the facts of a case at the Special Commissioners and the reasons for the decision, and apply it to their own case. 10.31 The Special Commissioner judgments, like the First-tier Tax Tribunal judgments now, do not bind any court and are persuasive in value only but they can still be highly influential in a case with similar facts and the Special Commissioner cases were very important in the early days of IR35 when the legislation was new and there were very few cases on the topic. 10.32 On a seperate note, the first IR35 cases at the Special Commissioners do not feature ‘HMRC’ in the case name. This is because initially the Status Inspector who raised the Determinations would be listed as the respondent in the case rather than HMRC as a body. This no longer applies.

The first IR35 cases 10.33 The first reported case on IR35 was Battersby v Campbell [2001] SpC 189. The case was not overly helpful in clarifying how IR35 would apply and what features the courts would look for in a contract of employment. In this case, Mr Battersby obtained a contract with a bank, via a recruitment agency to work as a computer analyst and programmer. He was subsequently taken on directly by the bank under PAYE. 10.34 This was the perfect first case for HMRC to take to the Special Commissioners to get a win under their belts. The appellant in Battersby did not have any legal representation and chose to defend the case himself, which is admirable in some respects, but a risky strategy when it was a new piece of legislation and the appellant clearly didn’t understand the principles of employment status and how to demonstrate he was not an employee of the client. 10.35 The appellant’s defence centered around it being commonplace in the computer industry for this type of work to be undertaken by contractors and that he was not a tax fraudster. Whilst industry practice may have some minor bearing in case law for determining employment status (cases such as O’Kelly and others v Trusthouse Forte plc [1983] IRLR 369 and Castle Construction (Chesterfield) Ltd v Revenue & Customs [2008]  UKSPC SPC00723 referenced standard practice in the industry as part of their conclusion over employment status) it is a very weak argument to be reliant on and Mr Battersby did not put forward any case law or legal arguments at all to support his overall position. He also did not counter any of HMRC’s arguments as to why IR35 did apply. The Special Commissioner accepted that he was not a tax fraudster but that was deemed to have no bearing on IR35 and so the legislation, in this case, applied. 186

IR35 Case Law 10.41 Focus Point Putting forward the argument that you are not a tax fraudster will not help you win an IR35 case. 10.36 It is understandable that a tax payer may not wish to incur the costs of a legal defence, especially when it gets to a hearing stage, but the sad thing with this case was that Mr Battersby actually had a reasonable chance of success if he had argued the case correctly and applied case law. 10.37 The second case to reach the Special Commissioners did not end much better. In FS Consulting v McCaul (2002) SpC 138, the appellant did at least have legal representation and so legal arguments were advanced and the boundaries of the legislation explored a little more, but ultimately it was another win to HMRC. 10.38 In FS Consulting, the appellant put forward the argument that because the work was through an agency, he was not paid by the client and had no contract with the client and so the legislation could not apply. It was worth a try but never really had merit and so the Special Commissioner quickly dismissed this line of argument and said that such a finding would go against the very purpose of the legislation and the legislation requires a hypothetical contract to be considered between the client and the appellant, not an actual contract. 10.39 In relation to the facts of the case, Mr Simpson of FS Consulting had the right to ‘propose’ a substitute, but any substitute would have to be approved and previously provided high level consultancy to the client. This was not really a right of substitution at all and was instead, merely a right to propose a replacement with the client retaining control over whom provided the services. This was more in line with the ratio decidendi in the MacFarlane v Glasgow City Council case (see Chapter 2) and so was not sufficient in demonstrating that FS Consulting was outside IR35. 10.40 Mr Simpson was not controlled over how he worked but he did have to follow the client’s regulations and procedures suggesting they retained a right of control. He was also told what work to do, when to do it and had to notify the client of any absences. The appellant did not provide any equipment or have any financial risk and so any argument that he was in business on his own account would have been difficult. The Special Commissioners did not place more reliance on any one particular factor and held that the factors pointing towards employment outweighed those which pointed away from it.

The first taxpayer win 10.41 In the same way that the taxpayer should not have taken the Battersby v Campbell case to the Special Commissioners, HMRC should never have pursued the case of Lime-IT v Justin (2002) Spc 342. 187

10.42  IR35 Case Law 10.42 This was the first successful IR35 appeal at the Special Commissioners and HMRC did not get off to the best start when the HMRC inspector handling the enquiry, had to start the hearing by reading a two page apology to the appellant for the way in which he had conducted himself during the enquiry process. The most notable mismanagement of this case was that HMRC did not seek any information from the end client about the working relationship and also based their decision on the wrong contract. The taxpayer was not able to get sight of the upper contract between the client and the agency and although HMRC had a copy, they would not release this until the Special Commissioners Directions required them to do so, at which point it was evident that HMRC had been providing the taxpayer with misleading information about what was contained in that contract. 10.43 Whilst most of these factors will not have a direct bearing of the outcome of the case, it was an embarrassing position for HMRC, and the Special Commissioner did note that in future cases, the Commissioners will wish to explore evidence from the client which in itself was an important development in how cases should be presented to the courts. 10.44 This case was also a little more interesting in terms of the facts. The taxpayer negotiated a right of assignment into the contract that was not part of the standard contract. It was not a great substitution clause in terms of providing the appellant the ‘right to send a substitute’, but the judge said it showed great thought had gone into the clause as it included things like an overlap time so it was therefore deemed to be genuine. 10.45 The appellant was not told how to complete the work and the client was not entitled to direct her to perform any task other than those agreed. The contract could, and in fact was, terminated early without notice. Lime-IT had its own website and marketed itself to local businesses as well as completed work for four other clients during the engagement with the client in question. In addition to this, the taxpayer would sometimes work from home where she had a room with four computers in and the company had invested £1600 to buy a new computer specifically for this contract. 10.46 It was also recorded that at one point the agency were late in paying the appellant and the appellant had to threaten legal action before the money was paid which was deemed to be inconsistent with an employment relationship. 10.47 In this case the judge followed the Market Investigation approach of considering whether someone is in business on their own account and held that control is not particularly important when dealing with an expert. According to the judge, it was clear that the appellant was in business and there was in fact very little to suggest she was an employee of the client. 10.48 When considering all of the above, it was surprising HMRC pursued this case to a hearing, but the local tax office that handled this case at the time were known to be stubborn and it is likely they lost perspective in this case and got too wrapped up in trying to win even though the facts did not support their 188

IR35 Case Law 10.55 position. Their confidence was also high from winning the first reported cases on IR35.

High Court win for HMRC 10.49 Synaptek Ltd v Young [2003] EWCH 645 (Ch) was the first case to reach the High Court following an appeal from the General Commissioners. Part of the appeal was on the basis that the Commissioners has reached the view that Mr Stutchbury was generally in business on his own account and yet the General Commissioners concluded that IR35 applied for this specific engagement. 10.50 This is therefore a very important case to consider because potentially it means that there is scope for an individual being deemed an employee even if they have overwhelming factors to show they have their own business. 10.51 Synaptek provided software engineering and had many factors in their favour, as evidenced by the General Commissioners findings. For example, it had invested nearly £30k of equipment into the business and previously had four employees working for it, as well as provided services to many customers during its history. 10.52 During the contract in question, the client procured that Mr Stutchbury did the work personally and that although he could use substitutes, this was only with the client’s approval. The court held that this meant Mr Stutchbury was obligated to perform the work personally unless and until it was agreed otherwise. 10.53 He was not told how to compete the work and the hours were only a guide, he didn’t use his own equipment and listed 41 differences between how he worked compared to direct employees. It really was quite surprising on the facts that the General Commissioners reached their conclusion that IR35 applied. 10.54 Appealing a judgment and getting them to overturn the decision is no easy task however and the High Court held that there is no presumption that an engagement entered into by a person who is in business on his own account is a contract for services rather than a contract or service and the fact that he was in business on his own account was no doubt an important contextual circumstance to be taken into account, but it was no more than that. Focus Point Being in business on your own account does not necessarily mean the contract is one for services. 10.55 This is a good example of the threshold needed to overturn a court decision. The First-tier Tribunal is a fact-finding tribunal as they are the ones 189

10.56  IR35 Case Law that hear the evidence, so are naturally best placed to evaluate the facts. The courts should only intervene in this process if the facts found were ‘such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal’ (Edwards v Bairstow [1955] 3 All ER 48). Applying this to the Synaptek case, if there was any scope for the original decision (making it a reasonable conclusion), the case will be upheld, and the original decision will stand. 10.56 The question over what was meant by mutuality of obligation also arose in this case and Hart J  concluded that it was unnecessary to examine mutuality in detail, as Mr Sheldon (on behalf of HMRC) accepted that ‘if, taking the period of the notional contract as a whole, the client was under no obligation to provide work, the necessary element of mutuality was indeed lacking for that period’. In this case however the contract stated that the client was under an obligation to allocate work throughout the agreement, meaning there was mutuality. 10.57 The judge also questioned why there would be termination provisions in the contract if there was genuinely no obligation to offer work during the contract. HMRC’s comments on mutuality do appear helpful but they will be of limited value in future cases as they were only comments by HMRC rather than the judge and they were not fully tested and explored.

Challenge the right client 10.58 Tilbury Consulting Ltd v Gittins (2003) SpC 390 was a somewhat unusual case but one which will be of interest with the changes to IR35 in 2021. 10.59 Mr Tilbury was an IT software engineer and the enquiry started as a result of Mr Tilbury requesting a contract review by HMRC who in turn said they would need to consider the case in more detail. A rookie mistake and not one that is highly recommended unless you are a glutton for punishment. Focus Point The Tilbury case started because the taxpayer requested HMRC to review his contract – this happens more often than you would think and it not an advisable approach unless you enjoy being under enquiry. 10.60 The notable part of this case is that Ford (the client in HMRC’s eyes) outsourced IT projects to Compuware who then had full operational control of the projects. Ford had no control whatsoever over the project or the individuals undertaking the work and so in reality, Compuware were the client for IR35 purposes, but HMRC did not appreciate this until the hearing and instead argued that Mr Tilbury was an employee of Ford’s. An argument that simply could not be followed. 190

IR35 Case Law 10.66 10.61 This was the first case to move away from standing back and painting a picture and instead placing more weight on control and personal service which was also an important step forward, especially in light of the Synaptek case. 10.62 This case will be of interest with the changes to IR35 in April 2021 when some agencies are moving towards restructuring aspects of their business to offer clients a ‘solution’ rather than just staff so that they too are deemed to be the client like Compuware rather than Ford. This approach is discussed more in Chapter 9.

Clear as mud 10.63 Ansell Computer Services Ltd v Richardson [2004] SpC 425 was the next case at the Special Commissioners and at this point the previous cases had provided a mixed bag of results and no clear pathway for taxpayers to follow when deciding how to approach IR35. This was not made much better by this case but there were some interesting points raised which are worth considering in more detail. 10.64 Mr Ansell was a computer software engineer in the defence sector. When he signed the contract with the agency it contained a provision which stipulated that the contract between the agency and the client would reflect the terms in the lower contract. The Special Commissioner referenced this as important in this case because the paperwork between the client and agency was limited and so it enabled the Special Commissioner to give due credit to the terms in the lower contract. The fact that the witness for HMRC who worked for the client business also had no knowledge of the actual terms agreed, supported the position that the taxpayer’s evidence should be preferred. As was seen in Lime-IT v Justin (2002) Spc 342, HMRC let themselves down by not calling the correct witnesses to shine a light on the contractual terms, especially in the absence of paperwork. 10.65 The Special Commissioner also echoed an issue for taxpayers that was also highlighted in Lime-IT. This was that the ‘intermediary’ is liable for IR35 and yet they have no means or power for requiring the client to explain their contractual position with another party. It only took 17 more years after this case but hopefully this will be an issue of the past with the changes to IR35 in April 2021 when clients and agencies will have to be more forthcoming about the terms agreed in the contracts. 10.66 The Special Commissioner considered the case law and found both Ready Mixed Concrete and Market Investigations not to be overly helpful in this case. HMRC had relied heavily on the ‘business on your own account’ test as set out in Market Investigations and said that because Mr Ansell had no helpers, had no financial risk or ability to profit and had no equipment he could not be in business on his own account and must have been an employee. The Special Commissioner placed little weight on this argument though and held that the secure and secret nature of the work being undertaken meant this was not possible and therefore this was a neutral factor. It was also clear from 191

10.67  IR35 Case Law Hall v Lorimer [1993] 1 WLR 939, that one did not need to be in business on their own account for the contract to be a contract for services. 10.67 The Commissioner then went on to consider five factors that helped him reach a decision. These were that the client was under no obligation to keep him in work, he was under no obligation to undertake any work, he could take time off when he chose, he could use substitutes (even though there were in fact very few people in the whole country that were capable of doing the work) and there were other non-employee factors (no entitlement to healthcare, social club, bonuses, company cars, training, parking, pension and holiday pay, unlike permanent staff). 10.68 Finally, the Special Commissioner turned his attention to mutuality of obligation. Mr Smith, representing the taxpayer argued forcefully that there was a lack of mutuality of obligation and that meant Mr Ansell could not by law, have been an employee. The Special Commissioner concluded by stating that he could see considerable force in this submission but ultimately, he had already decided the individual was a contractor and so it was unnecessary for him to decide whether a lack of mutuality of obligation would mean Mr Ansell cannot be an employee. This was a master class in avoiding a tricky subject (politicians, take note). 10.69 This case is important for a few reasons. Firstly whilst the Special Commissioner does not answer the ultimate question on whether there was mutuality and what it was, he does confirm there is considerable force in the argument that was advanced. 10.70 Secondly it highlights that an individual does not have to be in business on their own account to be outside IR35 and this case was ultimately decided on the core principles of mutuality, control, personal service and factors inconsistent with an employment relationship. 10.71 The right of substitution was also one of the key factors for finding Mr Ansell was outside IR35 even though he never arranged for anyone else to do the work and would have found it difficult to have done so. This emphasises that it is the ‘right’ of substitution, which is important, not whether one is actually sent. This concept was well covered in employment status cases but it was good to see the crossover into IR35 cases. 10.72 Finally, and something that is often overlooked, is that HMRC may speak with a client representative such as a project manager and whilst they can provide insight as to what happens in practice, they may not know what was contractually agreed.

Two more High Court cases in HMRC’s favour 10.73 In 2004 and 2005 there were two more IR35 cases at the High Court, both of which the taxpayer lost. The latter of the two was Future Online Ltd v Foulds [2004] EWHC 2597 which did not add a great deal to the application 192

IR35 Case Law 10.78 of IR35. In that case Mr Roberts was deemed to be subject to a right of control and was an integral part of the business. 10.74 The judgment in the earlier case of Usetech v Young [2004] EWCH 2248 (Ch) ended up playing an important part in the development of IR35 and was a big win for HMRC especially in relation to the importance of mutuality of obligation. 10.75 Mr Hood was an engineer designer in the oil and gas industry where he worked for a client, through an agency, but was treated in a manner barely distinguishable from the client’s employees. He was even offered a contract of employment at one point, but he turned it down. 10.76 The appeal centred on two main grounds, the first relating to personal service and the right of substitution and the second was regarding mutuality of obligation. 10.77 For personal service, it was found that the taxpayer could not dictate, at will, who would perform the work: it had to be Mr Hood. There was a substitution clause but only in the lower contract and the court held the upper contract was for the provision of Mr Hood’s services, not for the services of him or a substitute. Park J in the High Court concluded the right of substitution was largely illusionary. He also commented as follows: ‘The presence of a substitution clause is an indicium which points towards self-employment, and if the clause is as far reaching as the one in Tanton it may be determinative by itself. In this case, however, if, contrary to my view, the hypothetical direct contract between Mr Hood and ABB has to be assumed to have contained a substitution clause similar to that in the Usetech/NES contract, in my opinion it would not be sufficient to override the effect of all the other considerations which led the Commissioner to decide that the relationship would have been that of employer and employee.’ This passage provides clarity over substitution clauses and upholds the importance of a substitution clause where it is broadly worded like the one seen in the Express and Echo contract with Mr Tanton. Where the clause is fettered however and it is evident that personal service is in fact required, it will add very little to support the view that the contract is one for services. 10.78 For mutuality of obligation the Special Commissioners had considered the view expressed in Synaptek but highlighted the fact that the views on mutuality of obligation were not fully argued. They then went on to say: ‘Certainly there must be mutuality of obligation, but that does not imply that the ‘employer’ is required to provide work: so much was made clear by Stephenson LJ in Nethermere; the requirement of mutuality may be satisfied by the obligation, on the one hand, to work and, on the other, to remunerate.’ In the appeal, the High Court held that if there is no obligation to offer work nor to pay when no work available there is no continuing contract of employment over the whole period, but that leaves open the possibility that each separate engagement might itself be a free-standing contract of employment. In essence, 193

10.79  IR35 Case Law one must consider mutuality of obligation within the course of each separate agreement rather than mutuality over the entire period of engagement (as was so with employment cases such as Carmichael and another v National Power plc [1999] 4 All ER 897). 10.79 The High Court held that this wasn’t the case in this engagement as the contract lasted 17 months and there was nothing casual about it. There would have been both an obligation to provide work and an obligation to pay for a minimum of 37.5 hours a week and on that basis the mutuality requirement would in any event be satisfied. Park J also made the following observations: ‘I would accept that it is an oversimplification to say that the obligation of the putative employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship… However, in this case it was at the lowest open to the Special Commissioner.’ It is only where there is both no obligation to provide work and no obligation to pay the worker for time in which work is not provided, that the want of mutuality precludes the existence of a continuing contract of employment. 10.80 This makes it clear that mutuality of obligation will not normally be satisfied by the simple payment for work done but that there is scope for this if that is the courts conclusion. The case then confirms that where there is no obligation to provide work or to pay when no work is available, there will be no contract of employment.

Open and honest 10.81 The case of Netherlane Limited v York [2005] SpC 457 was not remarkable or a particularly noteworthy case and it was concluded by standing back and looking at the overall picture to assess whether IR35 applied. 10.82 The part of the case that was interesting related once again to the conduct and behaviour of the parties. This time it was the taxpayer who the Special Commissioners were critical of. The Special Commissioner commented that there was ‘a real lack of evidence’, the witness statements were unhelpful, and information had not been provided to HMRC. The judge mentioned that the tribunal procedures are in place to stop an ambush, but they did not work on this occasion. The taxpayer, it would appear, had thought they would win the case by being difficult with HMRC rather than being forthcoming. Whilst enquiries can be invasive and frustrating, it is important to maintain integrity because the truth will ultimately come out and the courts will frown upon obstructive behaviour and could even award costs against that party. 10.83 In the same vein of being open and honest, Island Consultants Limited  v HMRC  [2007] SpC 618 was another IR35 victory for HMRC. The main reason this appeal reached the tribunal was because the appellant 194

IR35 Case Law 10.89 maintained throughout the enquiry that he could send a substitute in his place, but just before the hearing, he changed his mind and said that he didn’t actually think he could. This is not what you want to hear as an advocate just before a hearing but as most of the hard work had been done by this stage the hearing went ahead and the taxpayer lost. 10.84 The positive aspect of this case was that the irreducible minimum of control, personal service and mutuality of obligation as per Ready Mixed Concrete were applied rather than moving straight to the ‘business on your own account’ or ‘standing back’ tests. 10.85 With regard to control, Dr Avery Jones accepted that that not much control would be expected of an expert, but some control must still exist. The appellant, Mr Hough was told where to work as well as when, he had to comply with all reasonable requests of the client and had to co-operate with its staff. The Special Commissioner commented that this amounted to sufficient control although it was still rather less than one would expect for a normal employee. This is a slightly confusing statement because the test as laid down by Ready Mixed Concrete was whether there was sufficient control to create an employer/employee relationship. 10.86 With regard to mutuality, the Special Commissioner held that this was a five-year project with plenty of work and that the client was obliged to provide and pay for work during the contract subject to early termination provisions. 10.87 In relation to personal service, the court found there was no right of substitution and at best, the client may have considered a request which would require considerable scrutiny. This was in line with the change in evidence of the taxpayer. 10.88 One intriguing aspect of this case was that a representative of the client had signed a confirmation of terms document (drafted by the taxpayer to try and demonstrate a right of substitution), but the court held this right of substitution to make no commercial sense and the document was disregarded. Confirmation of terms documents became common place because of the ‘unknown’ of not having a contract directly with the client but in this case, as it had no bearing on the true relationship, it was given no weight whatsoever. Focus Point Confirmation of terms documents, like contracts, will only be given weight if the courts consider them to be an accurate reflection of the working relationship. If they bear no resemblance to reality, they will not be worth the paper they are written on.

10.89 Once the Special Commissioner considered control, mutuality of obligation and personal service he then adopted the approach of standing back 195

10.90  IR35 Case Law and looking at the picture which also pointed towards employment. This was a clear approach to applying IR35 in line with employment status case law.

A small but important win for the taxpayer 10.90 By the end of 2007, HMRC appeared to have the upper hand regarding Special Commissioner decisions. They had not only won several cases (including the Special Commissioner case of Dragonfly Consulting Limited v HMRC [2007] SpC 655 which was then appealed and MKM Computing Ltd v HMRC [2007] SpC 653), but had three High Court victories as well. 10.91 For these reasons the judgment in First Word Software v HMRC [2007] Spc 652 was not only welcome but an important step for the taxpayer in defending IR35. The taxpayer won the case of Datagate Services Ltd v HMRC [2007] SpC00656 in the same year but there was nothing of particular note in the judgment. 10.92 In First Word Software, Mr Atkins was a computer consultant working at Reuters who had engaged him for a specific project of migrating their various human resource and payroll systems into one global system. Whilst in practice there was no substitution, the taxpayer could have assigned the work to another contractor as long as Mr Atkins provided a two or three day handover and gave the client the opportunity to interview any replacement. 10.93 If, for any reason, Mr Atkins was unable to work on the project at any stage, they would not find him anything else to do as his scope of work was purely on that project. Although Mr Atkins was engaged for his specific expertise for a particular project, he was not told the way in which it should be done, only the ‘thing to be done’. He also controlled the means to be employed in doing it and when it was to be done. 10.94 The court once again followed the Ready Mixed Concrete approach which was now beginning to be applied consistently and held that IR35 did not apply. 10.95 There was deemed to be a lack of personal service, a lack of mutuality of obligation and a lack of control. The Special Commissioner referenced that with control they took into account that Mr Atkins was engaged for his specific expertise, but the manager did not control the way in which Mr Atkins worked, in the same way that an employer controls an employee, even a senior employee. 10.96 The court also found that he was in business on his own account as he used his own computer and the company was an established business five years’ before the contract and it continued to be after this contract. There was also financial risk because of the risk of non-payment and insufficient engagements. 10.97 HMRC accepted that, if there were a right of substitution, then the fact that it was not exercised was not relevant. This should not be overlooked 196

IR35 Case Law 10.102 because although Express and Echo Publications Ltd v Tanton [1999] IRLR 367 makes it clear that it is the right of substitution that is important rather than whether a substitute is sent, HMRC still argue this not to be the case. 10.98 Mr Conway for HMRC went on to argue that the contract only allowed for a right of assignment which is different to a right of substitution. The decision of the case however makes it clear that the right of assignment can equally show a lack of personal service. Focus Point The right of assignment in First Word Software was sufficient to show a lack of personal service. 10.99 Once again, the courts commented on the information presented to the courts. This time, focussing on HMRC for calling witnesses who had no knowledge of the contractual arrangements, nor the working practices for the period actually under appeal. Whilst such a witness may be able to provide generic information, it will add little to the enquiry compared to the evidence from the taxpayer and in those circumstances, the evidence of the taxpayer will always be preferred. This point may be of particular importance where HMRC challenge IR35 and the client is a large organisation, as HMRC will often seek to obtain information via the client’s dedicated HMRC contact rather than speaking with parties actually involved in the work undertaken.

Dragonfly era 10.100 Maybe an era is giving HMRC too much credit, as their success was short lived in the grand scheme of IR35, but HMRC certainly enjoyed a couple of good years in their fight against IR35. The highest profile case being the High Court decision in Dragonfly Consulting Ltd v HMRC [2008] EWHC 2113 (Ch). 10.101 Before considering the judgment of the High Court in Dragonfly, it is worth revisiting the Special Commissioners findings and also the case MKM Computing Ltd v HMRC [2007] SpC 653 which also had the same Special Commissioner as Dragonfly and unsurprisingly drew similar conclusions. 10.102 Dragonfly Consulting was a company set up by Mr Bessell who was a skilled IT tester and worked on three separate projects for the AA. Some of the important facts were: •

If one stage of testing on a particular project finished early, there would always be something else to be done on the project. If he did not work, he would not get paid for that period.

•

The client had accepted substitutes for other contractors in the past, but it would depend on the circumstances. They expected Mr Bessell 197

10.103  IR35 Case Law to do the work personally and would not have expected him to send a substitute. Towards the end of the third project, Mr Bessell was having back problems and did agree to send a substitute for that period but that phase of the contract was cancelled so it did not happen. •

Mr Bessell accepted the client did not have to accept any substitute offered. It was found as a fact that the AA did not just want a competent tester, they wanted Mr Bessell.

•

The AA retained the right of control and his work was monitored. He would have to accept their reasonable directions to what he was doing, rather than how he was doing it.

For personal service – as was seen in Usetech, the Special Commissioner in Dragonfly held that with the right of substitution, first one asks whether it is such a right that it cannot be treated as a contract for personal service? If yes that is the end of the matter, if not then it becomes another factor to go into the pot to be evaluated along with other relevant features. In this case it was evident that personal service was required and although it was possible that substitutes may have been agreed, any right of substitution would have been overly fettered, and Mr Bessell only had a right to suggest replacements. Ultimately personal service was required. 10.103 With regard to control, the Special Commissioner made it clear that the right of control can be sufficient and that control does not need to be exercised in practice for an employment relationship: ‘A  right of control need not be a right to control every aspect of what is done, how it is done, when and where it is done; instead a restricted right may be adequate. MacKenna J accepted that in many cases the employer or controlling management have no more than a general idea of how the work is done and no inclination to interfere, but some sufficient framework of control must surely exist.’ Focus Point As sufficient framework of control must exist in an employment relationship even if control is not exercised on a day to day basis.

10.104 When considering mutuality of obligation, Special Commissioner Hellier considered whether it included an obligation on the employer as well as the employee. He found that whilst the obligation on the employer may be an important factor, it is the obligation on the employee to do the work which is the condition of (and therefore fundamental to) employment. 10.105 The Special Commissioner was very detailed in his analysis of mutuality and commented that he could not find in the case law authorities a statement as wide as that which was found in Propertycare v Gower [2003]  UKEAT  0547_03_1411 (being that mutuality of obligation was the obligation to offer work and the obligation to accept it). He continued by 198

IR35 Case Law 10.109 saying that in the Carmichael case ([1999] 4 All ER 897), the House of Lords appeared to place the employer’s obligation in higher regard than was seen in Nethermere (St Neots) Ltd v Taverna and Gardiner [1984] IRLR 240 and the case of Montgomery v Johnson Underwood [2001] IRLR 269 suggests some flexibility over how mutuality is applied. 10.106 He then went on to set out his final position ‘with some diffidence’ which doesn’t inspire a great deal of confidence. He held: ‘An obligation on the employer to provide work or in the absence of available work to pay is not a precondition for the contract being one of employment, but its presence in some form (such as for example an obligation to use reasonable endeavours to provide work, to allocate work fairly, or not to remove the ability to work e.g. by removing the pupil to be taught) is a touchstone or a feature one would expect to find in an employment contract and where absence would call into question the existence of such a relationship.’ From the above passages it would seem that the Special Commissioner is taking a stance on mutuality in between Nethermere and Propertycare v Gower as discussed in Chapter 2. His conclusion was ultimately that an employee must be obliged to do the work for a contract to be one of employment and the employer must be obliged to pay when no work was available. A contract of employment would usually contain a mutual obligation to offer work and its absence would be compelling, but not fatal to, the contract being one of employment.

The High Court decision 10.107 This Special Commissioner’s judgment was appealed on four grounds. The first two grounds were that the wrong conclusion was reached on personal service and control, the third ground was that the Special Commissioner held the intentions of the parties was irrelevant and the last was that the individual could have been deemed a worker and was not necessarily an employee. 10.108 The High Court dismissed the appeal and concluded that the decision reached, and its reasons were all perfectly justified. In relation to control, the High Court held that the Special Commissioner was entitled to find that Mr Bessell was subject to a degree of supervision and quality control which went beyond merely directing him when and where to work. The court continued by saying that in the case of skilled workers, you do not expect to find control over how the work is done and that conversely, in the case of a self-employed worker you would not expect to find regular appraisals and monitoring of the kind attested to the client. 10.109 When considering the intention of the parties the judge acknowledged that the intention of the parties may not be specifically agreed between the parties because of the nature of the contract being hypothetical and that at best the intention of the parties only really provides assistance if the case is borderline. 199

10.110  IR35 Case Law 10.110 The fourth point of appeal was quickly dismissed as the High Court held that the Special Commissioner had no reason to consider ‘worker’ status as this is for very specific and self-contained categories.

MKM Computing and Alternative Book Company 10.111 The judgment in MKM Computing Ltd v HMRC [2007] SpC 653 was released a couple of months after the Special Commissioners’ judgment for Dragonfly and followed a similar path. 10.112 Mr Ellwood was computer programmer and prior to working for the end client LGL, he advertised his business in the Yellow Pages, he had company notepaper and a website. He worked consistent hours and could not wander in and out of work as he saw fit. He worked in a team and was allocated work by a manager and although he was not subject to detailed control over how, what and when to work, he had to report progress to the IT director and those interchanges were found to affect what he did, when and how he did it. 10.113 The initial contract he agreed was extended 13 times because of ongoing projects and it was found that if a project were to finish early the client would just find him other work to complete. If the computers crashed, he confirmed that he would sit around and twiddle his thumbs and would generally be paid for down time. 10.114 In cross examination the IT Director from the client’s business was asked whether Mr Ellwood could send someone in his place, the Director confirmed that it just would not happen. The Special Commissioner found that the contract was with Mr Ellwood personally, that is whom they interviewed, that is whom they knew and who they thought they would get. They may have considered a substitute but were not bound to do so. There was a substitution clause in the lower contract, but this was only applicable when Mr Ellwood was ‘unable’ to work, meaning he would have to when he was able. The clause also meant that consent from the client would have to be first obtained and the Special Commissioner stated that a contract containing a right to substitute if, and only if, the employer consents is, until consent is given, a contract which plainly satisfies the personal service condition. Focus Point A  contract containing a right to substitute, if and only if, the employer consents is (until consent is given) a contract which plainly satisfies the personal service condition – Special Commissioner Charles Hellier in MKM Computing. 10.115 In MKM there was mutuality during the course of each fixed term as Mr Ellwood was obliged to work and they were obliged to remunerate him. The client was under no obligation to provide Mr Ellwood with work but there 200

IR35 Case Law 10.120 would have been an obligation to pay if work was not available (as evidenced by him being paid for twiddling his thumbs). 10.116 Alternative Book Company Limited v HMRC  [2008] SpC 685 was yet another win for HMRC and this was another case with generally little to contribute to the overall application of IR35. It was though, another case in which the appellant had written confirmation from the client that substitutes could be sent. When called as a witness however the client’s representative confirmed that he was asked to sign these documents by many contractors and that the wording wasn’t his and he wouldn’t accept a substitute under any circumstances. The appellant also confirmed that the substitution clauses in the contracts were included purely to help with IR35 and the court found them to be window dressing. 10.117 This once again highlights that clauses in a contract and written statements must be a genuine account of the relationship, otherwise they will not hold up under scrutiny. 10.118 This case, like Dragonfly, appeared to have a reasonable prospect of success until the actual hearing and then the witness evidence made a favourable outcome far less likely.

The taxpayer era 10.119 Those were the glory days for HMRC and are now something of a distant memory after a string of losses for HMRC at the First-tier Tax Tribunals including the cases of: Novasoft Limited v HMRC [2010] UKFTT 150; MBF Design Services Ltd v HMRC [2011] UKFTT 35; Marlen Ltd v HMRC [2011] UKFTT 411 (TC); Primary Path Ltd v HMRC [2011] UKFTT 454 (TC); ECR Consulting Ltd v HMRC [2011] UKFTT 313; MDCM Ltd v HMRC [2018] UKFTT 201; Jensal Software Limited v HMRC [2018] UKFTT 271; and RALC Consulting Limited v HMRC [2019] UKFTT 702 (TC). This is putting the recent media cases to one side for the time being along with the recent decision of Northern Lights Solutions Ltd v HMRC [2020] UKFTT 100 (TC). 10.120 It may just be coincidence but as HMRC started losing cases on a regular basis the government decided that the IR35 legislation was not effective and needed to change. It could be argued that these cases demonstrate that perhaps the problem with non-compliance isn’t as widespread as perceived and many companies are not actually caught by the legislation especially when the 201

10.121  IR35 Case Law comments of R (Professional Contractors Group) v IRC [2001] EWCA Civ 1945 are taken into account whereby it was stated that the legislation was not intended to catch everyone and would only apply to the borderline cases. 10.121 These cases all provide a deeper insight into IR35 and the case law but there are two that the author feels are more noteworthy than the others, these are the cases of Marlen and Primary Path.

Marlen 10.122 In the case of Marlen Ltd v HMRC [2011] UKFTT 411 (TC), HMRC challenged the way in which Mr Hughes worked for JCB. This concise judgment highlights the importance of mutuality, control and personal service and that these factors are sufficient on their own for a contract to be one for services rather than a contract of employment. The judge stated: ‘It is our conclusion that there is no mutuality of obligation and the degree of control which would have been needed to establish a contract of employment just did not exist and the appeal should succeed on this basis.’ 10.123 When the tribunal judge considered control, he held that in many ways Mr Hughes worked under the same kind of control as other senior employees in the team. There were however some differences that led to the overall conclusion that there was a lack of control. For example, Mr Hughes had a great deal of flexibility over his working hours and could come and go as he wished, whereas employees did not have this right. Mr Hughes was not subject to appraisals, disciplinary procedures and would have to correct any defective work in his own expense. These factors established a lack of control compared to employees. The tribunal judge went on to say: ‘Whilst we have found some evidence of control, that which does exist, falls short of what is required in the terms of the test propounded by MacKenna J.’ This again establishes that control must be to a sufficient degree and of a quality and nature that one would expect of an employee. 10.124 When considering mutuality of obligation the judge confirmed that Ms Smith (for the appellant) was correct in her view that there was no mutuality of obligation within any of the individual contracts because Mr Hughes was sent home when the computers were down and one of the contracts was terminated early. This is clearly in contrast to the MKM case where the taxpayer would instead be paid to sit and twiddle his thumbs until there was more work. 10.125 The last point to note in this case was that although there were not any great financial risks in terms of loss of capital, the judge agreed that Mr Hughes did carry the risk of termination without compensation and non-entitlement to payment when computers crashed as well as putting work right at his own expense. These factors all pointed towards a contract for services. 202

IR35 Case Law 10.132

Primary Path 10.126 In the case of Primary Path Ltd v HMRC [2011] FTT 454 (TC), Mr Winfield worked at database software developer and set up his business in 2000. He worked for British Telecom before obtaining a contract with GSK which was the contract under dispute. The appellant marketed its business via its website, through membership of a professional body and by searching for contracts in the specialist field. 10.127 Mr Winfield’s skills were unique and no one at GSK had knowledge in that field. He was left to get on with the work and had little involvement with the client’s employees in respect of the technical aspects of the work. The work was however part of a wider project and so had to be checked for standards. 10.128 There was an expectation that he would be available during ‘core business hours’ but he otherwise had flexibility and could also work from home when he chose. He could have used a substitute worker if any substitute had comparable skills, but it was found that this was not needed in practice. The appellant also provided services to other parties during the period under enquiry, some to a significant extend. 10.129 The tribunal found that the hypothetical contract would include provisions that Mr Winfield must co-operate with GSK and take directions and more specifically that GSK had the right to direct Mr Winfield as to where and when and the timetable within which his services are to be performed. But, Mr Winfield could at his discretion determine the manner, means and methods in or by which he performed the services. 10.130 The tribunal considered personal service and said that no employment contract envisages that the employee will send along someone else in his stead to perform the duties he has been engaged to perform. Therefore, any contract which has at least some recognition that the provider of the services can supply a substitute in certain circumstances must seriously be considered as being a contract other than for employment. 10.131 The evidence that Mr Winfield was in business on his own account was deemed to be compelling because he marketed his own business and he worked for other clients during the contractual period, including some purely on a speculative basis.

A win for both sides 10.132 The case of JLJ Services Limited v HMRC [2011] UKFTT 766 (TC) was  the first IR35 case in which the tribunal concluded that part of the engagement was within the scope of IR35 and part was outside. This may sound a little strange but when the facts of the case are considered, it makes sense. 203

10.133  IR35 Case Law Focus Point It is possible to have part of an engagement caught by IR35 and the other part not, although this type of case should be quite rare an involve a shift in the working relationship and terms of engagement.

10.133 Mr Spencer was an IT specialist working for Allianz Cornhill Management Services via an agency between the years of 2000 and 2008. When Mr Spencer initially undertook the work, it was for specific shortterm projects (some with gaps in between where no work was undertaken for Allianz). At the end of 2003 this pattern changed however, and Mr Spencer was engaged on an indefinite basis for generic IT work. 10.134 The tribunal concluded that Mr Spencer ticked many boxes for being self-employed when working on projects but that the relationship changed (one example being more control over the work) when it became for an indefinite period and for generic work. 10.135 This judgment does not mean that all project work will naturally be outside IR35 and all general consultancy will be within, as each case will be dependent upon its own facts and it is only a First-tier decision, but it does emphasise that it is easier to argue someone is self-employed when they are brought in to achieve a specific purpose because of their specific skillset. This is almost in line with the rationale in Gabriel Oziegbe v HMRC [2014] UKFTT 608 whereby the court held that it will not be possible for a client to control how the services are provided when the services are extraneous to their normal course of business. In the JLJ case, when Mr Spencer was working on a project, the tribunal held that he was using his expertise in a manner that could not be controlled in the sense of how he did the work. 10.136 The tribunal in this case also considered the substitution clauses in the contracts and held that ‘as with all similar contracts drafted to seek to sustain non-employee status, the clause was inserted to achieve the desired tax purpose, and it has virtually no bearing on our approach to the decision.’ 10.137 The court also cited that case law progressively indicates that the mutuality of obligation test is of diminished importance, or that it is indeed nearly meaningless. They did however go on to say that mutuality of obligation ‘was far from clear’ to them and so this passage should not be given a great deal of weight especially in light of the other IR35 cases around the same time that concluded it was important and could determine the issue.

Two clients – one caught, one not caught 10.138 In a similar result to the above, George Mantides v HMRC [2019] UKFTT 387 was the first case to be challenged whereby the 204

IR35 Case Law 10.144 appeal was for work carried out for two different clients and one of the contracts was deemed to be outside IR35 and the other within. 10.139 The case concerned a urology specialist at different hospitals where he worked as a locum. The judge in this case was Charles Hellier, whom had previously been the Special Commission in MKM Computing and Dragonfly. 10.140 He made a few useful observations that can be applied in other cases. The first was where he said he would agree that the more qualified a right of substitution is, the less serious its effect on the overall picture. This is not something we do not already know from other cases but the importance of substitution clauses is not black and white and all or nothing, at the one end of a spectrum you can have clauses like Express and Echo Publications Ltd v Tanton [1999] IRLR 367 whereby their presence ensures the contract is not one of service. At the other end of the spectrum there are cases such as MacFarlane and another v Glasgow City Council [2001] IRLR 7 EAT whereby there are so many restrictions on the right to send another person that it is barely a factor to take into account. This case highlights that there is also a grey area in between whereby a right of substitution may be limited, and the extent of those limitations dictates how powerful it will be in deciding the case. Focus Point The weight given to a right of substitution may vary from case to case and whilst a fettered right may not be sufficient on its own to win a case, it can still be a factor pointing towards self-employment.

10.141 The judge also stated that ‘it seems to me that something which can be called control is a necessary feature of an employment relationship even for a skilled employee’. This statement is very important as HMRC are quick to dismiss control as an employment status test when it comes to skilled workers but even skilled employed would be subject to an ultimate right of control.

HMRC’s media campaign 10.142 If ever there was any doubt as to how unpredictable and complicated IR35 can be, the seven cases to reach the tax tribunal during 2018 and 2020 concerning people in the media sector, answer this question. 10.143 HMRC were successful in three of these cases and the taxpayer in the other four. Three of the cases were for presenters at the BBC in which HMRC won two of the cases. Three were presenters for ITV whereby the taxpayer was successful in two. 10.144 In Paya and others v HMRC  [2019]  UKFTT  583 and Kickabout Productions Limited v HMRC  [2019]  UKFTT  415, the decision of the tribunal was split, and the casting vote of the chairman determined the issue. 205

10.145  IR35 Case Law In the Kickabout Productions case, the tribunal commented at one stage that control must be considered but it not decisive, and yet, in Albatel  v HMRC  [2019]  UKFTT  195 the tribunal concluded that Ms Kelly was not caught by IR35 because of a lack of control. 10.145 It is true that each case will different and the weight attached to the relevant factors will be dependent upon the facts in that particular case, but these points do not provide much comfort for those trying to determine their position with regard to IR35. Even the judge in the Kickabout Productions case mentioned that increased clarity is badly needed with IR35. On the plus side, it does also show that irrespective of the cases that have gone before the tribunal, each case will stand on its own merits and taxpayers should not be dissuaded from taking their case to a hearing just because HMRC have notched up a couple of victories (after several years of IR35 abstinence). 10.146 HMRC still have an ongoing campaign in this sector and so one would expect more cases to reach the tribunals. It is worth considering each of the cases in a little more detail to understand not only how and why they were decided but also to show how the courts are applying IR35 in the latest round of cases.

Christa Ackroyd Media Limited v HMRC 10.147 Christa Ackroyd Media Limited v HMRC  [2018]  FTT  69 (TC) was the first of the media cases to reach the tax tribunals and was subsequently appealed (with the appeal being dismissed). Christa Ackroyd was a television journalist who presented Look North on BBC1 from 2001 until 2013. HMRC opened an enquiry and challenged the appellant under IR35 for the years 2006 to 2013. 10.148 Ms Ackroyd was initially approached by the BBC in attempt to boost ratings over its ITV rival programme and the BBC encouraged Ms Ackroyd to work through a PSC. As part of the BBC’s attempt to reach a bigger audience, Ms Ackroyd had considerable influence over changes to be made to the programme but the tribunal found that the BBC was under no obligation to accept any suggestions or advice as it was still their programme and she would not simply be given a ‘free role’. It was accepted that the appellant had a high degree of autonomy in carrying out her work but that the BBC could ensure Ms Ackroyd provided the services they required. 10.149 The BBC have editorial guidelines which comprise of 359 pages detailing the BBC’s values, reporting, funding, external relationships and politics. There was some dispute as to whether the appellant was bound by these guidelines and the tribunal concluded that it didn’t really matter because the BBC did not have to contractually bind the appellant to the Editorial Guidelines because they were entitled to direct what work she did and how she did it. 10.150 The first contract agreed was for a five-year period and the second contract was for seven years. Within that contract it was agreed that the BBC would have first call on the services of Ms Ackroyd for up to 225 days a year 206

IR35 Case Law 10.155 and they had the right to require her services on any particular day of the year subject to reasonable notice. The contract also stated that they were not obliged to call upon Ms Ackroyd’s services but would still be obligated to pay her if they did not do so. On top of this, the contract could only be terminated in the event of a breach of contract. The tribunal concluded that these factors clearly established mutuality of obligation. 10.151 The contract agreed between the parties also expressly prohibited the appellant from using a substitute in place of Ms Ackroyd and as such personal service was evidently required. 10.152 The result of this case was not surprising and the only argument was really that there was a lack of control and whilst this may have been true on a day to day basis, it appeared from the judgment that the BBC retained an ultimate right of control over how the work was provided.

The Ackroyd appeal 10.153 The Ackroyd case was appealed (Christa Ackroyd v HMRC [2019] UKUT 326 (TCC) because of the First-tier Tribunal’s findings on control and how the hypothetical contract is made up. 10.154 The arguments around control did not produce anything in the judgment overly remarkable but the points about what should be included in the hypothetical contract are certainly worth considering. In this case, the relationship was directly between the PSC and the BBC and there was no other intermediary or agency in the middle unlike most IR35 cases. The representative for the taxpayer argued that in this situation, the position is clear and the terms agreed between the BBC and the PSC should make up the terms of the hypothetical contract. Those terms were detailed, negotiated and contained a ‘whole agreement’ clause and there was no evidence that they did not reflect reality. This is a plausible argument and certainly a point worth arguing but the Upper Tier held that the First-tier Tribunal was right not to confine itself to the contract and that even the legislation instructs the courts to consider the ‘circumstances’ rather than just the terms. Focus Point The courts should consider the circumstances of the engagement and not be restricted to just the terms of any written contracts.

Atholl House Productions Ltd v HMRC 10.155 Atholl House Productions Ltd v HMRC  [2019]  UKFTT  242 also concerned a presenter of the BBC but this time the individual in question was Ms Kaye Adams. 207

10.156  IR35 Case Law 10.156 In this case, the tribunal went into great detail about the terms of the agreement and whether the terms should be discarded in favour of what happened in practice. In the end the tribunal concluded that the terms could be disregarded in two respects. The first was that Ms Adams could in fact work for others when the contract stated otherwise. The second was that personal service was required as accepted by the taxpayer even though the contract allowed for substitutes to be sent. 10.157 The tribunal set out its position with regard to what is meant by mutuality of obligation (an obligation to offer work and pay when no work is available as well as an obligation on the employee to perform work) and held that it was satisfied in this case, as the BBC were obliged to pay a minimum fee irrespective of whether work was undertaken and the appellant was obliged to present the programmes. 10.158 On control the Tribunal decided that whilst the BBC could have ‘pulled rank’ on editorial control they could not control the work she did for others nor did they have first call on her services. 10.159 The Tribunal also stood back and looked at the overall picture and this also supported the taxpayer because she had been a freelance journalist for 20 years, were she worked on a series of engagements, building up her own profile and reputation with social media and the way in which she conducted herself and accepted engagements with lower pay were it would raise her own profile. 10.160 The judgment finished by distinguishing the case with Ackroyd who also worked for the BBC. They said the material differences were that Ms Ackroyd worked on a five-year contract and seven-year contract compared to a one-year agreement for Ms Adams. The ratio of income from the BBC was a lot lower in Ackroyd and around 97% of her work was from the BBC. Ms Ackroyd had a clothing allowance and the BBC had first call on her work which was not the case here. Ms Ackroyd also had to get consent from the BBC over any non-BBC engagements.

Albatel v HMRC 10.161 Albatel v HMRC  [2019]  UKFTT  195 centred around whether the IR35 legislation applied to Lorraine Kelly for the work on the Lorraine TV show and her presenting work on Daybreak. 10.162 Counsel for the appellant put forward arguments about personal service and mutuality of obligation but the main thrust of the defence rested on control and her being in business on her own account. The tribunal concluded that IR35 did not apply because the level of control fell substantially below the sufficient degree required to demonstrate the contract was one of service. Ms Kelly was also deemed to be in business own her own account because of the substantial other work she carried out. 10.163 Ms Kelly had control over the program, the running order, how long interviews would last and was ultimately responsible for ensuring the ratings 208

IR35 Case Law 10.171 were good. She was not bound by ITV’s Code of Conduct and they could not tell her what to do. ITV wanted to move the programme outside of London and Ms Kelly refused and so it stayed in London. 10.164 The appellant undertook a variety of other work from writing, to designing and advertising, to being a brand ambassador, as well as appearing in other television shows. The tribunal reached the conclusion that ITV were not employing a servant, but rather purchasing a product, namely the brand and individual personality of Lorraine Kelly. 10.165 This case and the Ackroyd case have interesting parallels in terms of the production of the relevant shows and whilst it is abundantly clear that Ms Kelly was not subject to any control with regard to ‘her show’, Ms Ackroyd appeared to come across as more of an influencer over her programme and the direction it would take.

Kickabout Productions 10.166 This case concerned a presenter for Talksport, Mr Hawksbee, who presented a show which was named after him. The appellant retained control over the content of the show, the guests, what was covered and how, subject only to OFCOM’s stipulations about broadcasting and the need for commercial breaks at certain intervals. The tribunal did however reach the conclusion that Talksport retained the right to edit, delete and control the show. 10.167 In a somewhat surprising turn, the tribunal acknowledged ‘some FTT decisions on the intermediaries’ legislation placed weight on the absence of such control’ but ‘in our view, it should be afforded little weight’. They later went on to say that control must be considered but will not be decisive. This is at odds with case law and whilst certain aspects of control may be natural because of the nature of the work, the courts have made it clear that every employment relationship should have at least some framework of control. 10.168 The tribunal held that Mr Hawksbee could not arrange for others to undertake the work and he was contracted to carry out the services personally. The show he presented was named after him after all. 10.169 The contract between the appellant and Talksport stipulated that the appellant had to work for a minimum of 222 days a year and the minimum conditions for mutuality therefore existed. 10.170 Given the above, the outcome of the case is a little surprising as the only factors in Mr Hawksbee’s favour were that there was a lack of obligation on Talksport to provide Mr Hawksbee with work, he was not entitled to holiday pay or other training and he was paid per show. This is perhaps why HMRC felt the need to appeal this decision. 10.171 The First-tier Tribunal judge concluded by saying that they acknowledge that other people may not have reached the same view. 209

10.172  IR35 Case Law

Paya and others v HMRC 10.172 Paya and others v HMRC [2019] FTT 583 was also decided by casting vote of chairman. The judgment consisted of approximately 150 pages, so not one for those wishing to dabble in IR35, but it is certainly one if you want a comprehensive review of the case law. 10.173 By way of background, the appellants in this case were all forced into working through PSCs in order to be able to continue working for the BBC, following on from the 2004 Neil Report which raised concerns about the BBC engaging sole traders to provide services. 10.174 This judgment also referenced that on an ongoing basis, HMRC themselves acknowledge that IR35 is difficult to apply in practice. They also refer to a senior officer in HMRC who was recorded as saying that he advised those he trained on this area that they would be competent after three years and understand it after five years. This highlights the onerous task the taxpayer faces – they are expected to be an expert in IR35 or face the penalties and liabilities if not. 10.175 It is well recorded in the previous two cases involving the BBC that they have extensive editorial guidelines. In the Ackroyd case the appellant argued that whilst she was aware they existed, she did not consider herself bound by them and did not recall ever seeing them. In this case however the editorial guidelines were mentioned in the terms of business, the covering letter and the inducement letters and so the court had little option but to conclude they formed part of the working relationship. 10.176 The tribunal placed a great deal of weight on the contractual terms agreed because there was no agency in the contractual chain and so generally the terms of business would represent the best available evidence of the terms agreed. 10.177 The tribunal did acknowledge however that there was a substantial disparity in bargaining power between the BBC and the worker and the presenters felt they had little choice but to accept the majority of the terms. 10.178 Part of those terms was that the BBC required a minimum number of days, or to pay the contract fee. This satisfied the requirement of mutuality of obligation. 10.179 With regard to control, the tribunal held that the appellants were contractually obliged to act in accordance with the editorial guidelines and had extensive restrictions on their ability to carry out outside activities (unlike Lorraine Kelly and Kaye Adams). The BBC also had the right to require the appellants to carry out work beyond presenting and could control when and where they provided their services. One point that was particularly interesting in this case is that HMRC tried to recover tax for six years rather than the standard four (note that HMRC can still 210

IR35 Case Law 10.183 go back six years for National Insurance either way). This was under the Taxes Management Act 1970, s 36 which extends the limit for raising determinations to six years if there is a loss of income tax because of careless behaviour. Focus Point HMRC can extend the tax determination period to six years if they care show careless behaviour. 10.180 The First-tier Tribunal considered this point and whilst the taxpayer lost the case, the court held that their advisers had not acted carelessly. In order to meet this test, the relevant question is whether the adviser took such care as would be expected of a reasonably competent adviser. IR35 is a grey area of law whereby one has to make a judgment call on the position and simply getting that wrong does not make one careless

Canal Street Productions Limited v HMRC 10.181 This case also involved a TV presenter for ITV and its chances of success looked pretty slim. The judge was quick to establish that personal service was required, there was a sufficient framework of control and there was mutuality of obligation within each engagement. The case then turned to whether there are factors inconsistent with an employment relationship and the tribunal made it clear that they were bound by the Weight Watchers (UK) Ltd v HMRC  [2011]  UKUT  433 (TC) judgment whereby one must approach this last test from Ready Mixed Concrete on the basis that the relationship is one of employment unless there are factors to the contrary. 10.182 The taxpayer in this case provided work on an adhoc basis, supplied some very basic equipment, had worked for other clients before and after the engagement as well as had a history of using agents to find her additional work. She also worked in a different way to the employees of ITV and these factors were deemed sufficient to show she was in business on her own account and IR35 did not apply. This case is another good example (along with cases like Littlewood (trading as JL Window and Door Services) and another v HMRC [2009] STC (SCD) 243 and Sherburn Aero Club v HMRC [2009] UKFTT 65) of the low threshold for being deemed ‘in business’. This is a case HMRC would have been very confident they would have won.

Red White and Green v HMRC 10.183 At the time of writing, Red White and Green v HMRC  (2020) UKFTT 109 (TC) was the last IR35 judgment to be released by the tribunal service and was another win for HMRC and their first victory in relation to a presenter for ITV. This time Eamon Holmes was under the spotlight and the tribunal concluded that there was sufficient control and mutuality of obligation 211

10.184  IR35 Case Law to create an employment relationship. This outcome balances the scales in terms of victories and losses in the media sector and overall highlights how difficult it can be to apply IR35. 10.184 It would be very interesting to see the outcome if the presenters caught by IR35 put in a claim for holiday pay. This tax judgment would certainly not be binding on an employment tribunal but it would mean the broadcasters would have to pay a substantial amount back to the presenters.

IR35 SUMMARY 10.185 IR35 is a complicated area of law and there is a growing number of cases where even judges at the tax tribunals struggle to decide the matter. 10.186 The Ready Mixed Concrete case does remain the best test for determining the issue however and a contract of employment must have three fundamental aspects within it. A  sufficient degree of control over the individual, a requirement for personal service and mutuality of obligation. Mutuality is the obligation to offer an individual work or pay them when no work is available, coupled with an obligation on the employee to undertake the work (although sometimes this will be a significant pointer to the contract being one of employment rather than a vital condition). The courts will then consider any additional factors that point away from the contract being one of employment and ultimately stand back and look at the overall picture as per Hall v Lorimer [1993] 1 WLR 939. If the position remains unclear after all of the above, the intention of the parties can decide the issue although ordinarily this will be of limited value on its own. 10.187 All pretty simple stuff when you break it down to that basic level but of course, it is never that basic and not only do the courts have to establish what the facts of the case are but they then have to decide which facts formulate the ‘hypothetical contract’ which they can then decide in accordance with the above. 10.188 Just remember, if you struggle with IR35, you are in good company. Not only do the courts struggle to decide the cases but it takes HMRC five years to train someone on IR35 to the point that they understand let alone be experts in it.

212

Chapter 11

IR35 Practical Issues

SIGNPOSTS •

It has never been easier for HMRC to target companies under the IR35 legislation. From April 2021 for medium and large companies, HMRC simply need to open one enquiry into the end client’s business to find out everyone they pay that is not on their PAYE scheme. If the work is via an agency, HMRC can use the quarterly reports that agencies must submit to HMRC to risk profile who to challenge and they will already have built up a nice picture of the client before they even open the enquiry.

•

HMRC recommend their Check Employment Status for Tax (CEST) tool is used to determine employment status. This can provide an initial, free opinion over the IR35 position and can be a great starting point especially where you end up with an HMRC headed document that says IR35 does not apply. Caution should be exercised when being solely reliant on this system however as it has come under a lot of criticism.

•

If a company finds itself under HMRC enquiry, HMRC will often insist on having meetings to get all the information needed. It should be noted however that the taxpayer is under no legal obligation to meet with HMRC and it can often do more harm than good to the prospects of coming away unscathed. After all, it is very easy to say the wrong thing under pressure.

•

The wording of a contract will be pivotal in resolving an IR35 case and it is important that anyone working where IR35 may be relevant has the terms of their engagement clearly set out in writing and that those terms are considered in respect of IR35.

HANDLING IR35 ENQUIRIES 11.01 HMRC enquiries can feel like an invasive process where not only do emotions run high but taxpayers can feel like they are guilty of something even though they are not. This is not a pleasant experience for anyone but knowledge is power and if you understand the law surrounding IR35 and know what to expect with an enquiry there is no reason to feel powerless and you can be on the front foot with HMRC. 213

11.02  IR35 Practical Issues 11.02 It is unclear at this stage as to what kind of compliance activity will follow from HMRC after the changes to IR35, but the author does not expect a huge surge in enquiries. Prior to the IR35 changes being delayed until 2021, HMRC had promised a soft landing with compliance but it is unlikely such an approach will be adopted when the legislation does come into force given it has now been delayed by a year. Judging from previous changes to the agency legislation, it is quite possible that HMRC will start off with a scattergun approach before concentrating on those it believes warrant further investigation. Example of HMRC’s possible approach to IR35 compliance When the agency legislation was amended in 2014, HMRC were concerned with intermediaries paying individuals on a self-employed basis. Whilst the legislation was bedding in, HMRC sent out letters to a considerable number of intermediaries warning them about the changes to the legislation and the need to address it. This was effective and helped remind everyone that HMRC were monitoring the area. This was then followed up with more targeted letters that asked intermediaries to clarify their processes and procedures and justify how they operated. This was still a broadbrush approach that was not overly labour intensive on HMRC’s part and enabled HMRC to see who was taking the legislation seriously and those that were trying to hide. No further action was then taken for those that demonstrated good compliance procedures and full enquiries followed for those that did not. A similar approach could easily be adopted with the new IR35 legislative provisions.

11.03 An IR35 enquiry can start for many reasons. It may just be unfortunate luck that HMRC have randomly selected the company for a compliance visit or it could be initiated from knowledge HMRC already have about the business such as the number of individuals paid off-payroll as highlighted in the quarterly agency reports. 11.04 In April 2014 the agency legislation was amended and whilst this has no direct impact on IR35, it did bring about a new reporting requirement in 2015 meaning anyone deemed to be a specified intermediary (predominately recruitment agencies) would have to submit quarterly returns to HMRC confirming anyone that has been paid without deduction of PAYE and National Insurance Contributions. The result of this is that any personal service companies (PSC) who receive gross payments from an agency, or other intermediaries in the supply chain, will have those payments reported to HMRC confirming each off-payroll person or company being paid, how much and the reason why PAYE was not deducted. 11.05 This has been an invaluable tool for HMRC to challenge companies under IR35 (and the agency legislation) because not only do they get a lovely list of limited companies being paid by agencies but they can also see the pattern of payments to risk profile companies and establish how much is being 214

IR35 Practical Issues 11.10 paid, how often and for how long. Whilst the duration of a contract should have little impact on whether IR35 applies, HMRC will be more inclined to challenge a company that has been working for the same client for a number of years and gets a fairly consistent payment. 11.06 The report does not detail the end client and so a bit more work from HMRC would be needed to build up a profile of the end clients and how many people they use off-payroll in respect of the new IR35 rules but it would not be overly difficult to establish this. 11.07 This reporting, by its very nature, exposes agency work to a higher threat of an IR35 enquiry than if the work was being carried out directly for a client (with the exception of when HMRC have targeted campaigns such as the media sector). On the flip side of this however, for the new rules, where a client uses an agency, the agency adopts the role of a fee payer and provides the client with a certain level of protection with regard to IR35 and so whilst PSCs working via agencies may be problematic in one respect, it can also have a great benefit. Focus Point The quarterly reports agencies have to send to HMRC are the perfect risk profiling tool for HMRC to target companies under IR35.

11.08 That is not to say that a direct relationship will not be challenged but that it is easier pickings for HMRC. In a direct relationship, where there is no reporting, HMRC can still obtain the same kind of information to target companies but they have to do a little more work to achieve this. It has long been the case that HMRC can and will speak directly with large employers and find out who they pay that is not on their payroll and then open enquiries as they deem appropriate. This will naturally be a standard route for HMRC with the 2021 changes to IR35. 11.09 There is not a great deal one can do to stop a compliance check but medium to large companies and work via agencies will certainly be under HMRC’s watchful eye for the next few years. When the IR35 legislation changes in April 2021 for medium and large companies, it should in theory be easier for HMRC to target more individuals under IR35 than before because the client and fee payer will be responsible for IR35 and so HMRC can challenge IR35 on a larger scale and consider IR35 for all the individuals engaged instead of opening individual enquiries. This may end up an even slower process than it is now, because once an enquiry starts, HMRC will have to consider a number of individuals within each enquiry and it is likely that by the time HMRC speak to the individuals doing the work, HMRC will have already established a good understanding of the working relationship. 11.10 It is reasonable to assume that despite the fear of IR35, HMRC may not actually open that many enquiries into large companies because they 215

11.11  IR35 Practical Issues will assume the large companies will not only have the resources to take the necessary advice but they will always err on the side of caution as the stakes are higher. That may still be the case, at least until it settles down and larger organisations become more relaxed about the IR35 risk and position.

CHECK EMPLOYMENT STATUS FOR TAX TOOL (CEST) 11.11 Once HMRC send out a letter confirming they wish to carry out a compliance check on PSCs, the subject of IR35 will quickly arise and HMRC will invariably ask if the taxpayer has considered IR35 or not and why IR35 doesn’t apply to the engagement. 11.12 HMRC usually ask whether the Check Employment Status for Tax tool (CEST) has been used to reach an opinion and for a copy of its results. Focus Point HMRC’s CEST tool has been heavily criticised and even the government acknowledged in 2019 that it needs improving. It has since been amended but has not addressed many of the problems it was criticised for.

11.13 Please be aware that this tool has been heavily criticised for not adequately covering key aspects of IR35 and employment status such as mutuality of obligation. The government acknowledged that the CEST had shortcomings in 2019 and it was reviewed and amended in late 2019 but it still contains many of the issues that were previously highlighted. It is perhaps best to use CEST as a useful indicator to start with rather than an absolute answer. Example 1 of a question from CEST: Substitutes and Helpers Does your client have the right to reject a substitute? A substitute is someone you send in your place to do your role. This can include rejecting a substitute even if they are equally qualified, and meet your client’s interviewing, vetting and security clearance procedures. 11.14 This is a question from CEST but it has many potential issues compared to the established case law. The first point to note is that it is titled substitutes and helpers but does not actually ask at all about helpers. The correct question to consider is whether ‘personal service’ is required. A right of substitution is an example of a lack of personal service but the test under Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497and Express and Echo Publications Ltd v Tanton [1999]  IRLR  367, was not whether they could substitute, it was whether personal service was required. In First Word Software v HMRC [2007] UKSPC SPC00652for example, the taxpayer had the right to assign the contract and 216

IR35 Practical Issues 11.20 this was sufficient in establishing a lack of personal service even though it is different to bringing in others to assist. 11.15 The focus should also not be on the right to reject a substitute but the right to use someone else. In many cases, especially where the work is highly skilled, the client will naturally wish to retain the right to reject an individual who is not capable of doing the work. The courts have held many times that restricting the right to send substitutes for people who are skilled and experienced is understandable and does not interfere with the question over substitution and personal services. This question does not take into account that it is acceptable to restrict the right of substitution in this way however, which is a fundamental flaw in the CEST. Example 2 of a question from CEST: Working arrangements Does the client have the right to decide how the work is done? This can include your client instructing, guiding or advising the way the task could be completed. This is not relevant if it is highly skilled work. For example, airline pilot. 11.16 This question is framed so that control over how the work is undertaken is irrelevant if the work is highly skilled. Whilst it is true that there will naturally be less control over a skilled worker, the courts have said that in an employer and employee relationship there would still be the right of control even if it is not exercised because they are skilled at their work. 11.17 The above two examples highlight just two issues from CEST, and these are in relation to personal service and control which form two of the three pillars of an employment relationship and are arguably two of the most important questions to get correct. The third pillar, mutuality of obligation, is not even considered in CEST at all. 11.18 If a taxpayer has gone through the process of completing the CEST and it confirms that the relationship is outside of IR35, the taxpayer will be able to rely on that confirmation provided they answered the questions honestly and accurately. HMRC may still want to ensure that the answers put into the tool match up with what happen in practice and it would be quite easy for HMRC to challenge the way in which the questions have been answered. 11.19 It soon becomes easy to see why HMRC will probe what happens in practice and it will be quite easy for them to argue that the information uploaded into CEST was incorrect and therefore the result will not be relied upon. 11.20 It is common knowledge that because this is anonymous (and rightly so), the taxpayer can just keep resubmitting the form until they come up with a response in their favour. This is however a fairly pointless exercise because HMRC will still question the position and if incorrect answers have been provided, it will quickly become evident. HMRC have also confirmed that 217

11.21  IR35 Practical Issues where this is deemed to be the case, higher penalties for non-compliance will be issued. 11.21 There is of course the very real prospect that the taxpayer completes the CEST only to be told the engagement is caught by the IR35 legislation. In most of these cases, if HMRC ask whether the CEST has been completed, the taxpayer would probably say no rather than confirming that it said the relationship was caught by IR35. This would not be a great start to an enquiry. 11.22 In the author’s opinion, the CEST should, at best, be used as a rough guide about IR35 but it is not, by any stretch, a conclusive answer to whether IR35 applies. The courts would also place very little weight on the result of the CEST because it is not legally binding and the courts will always form their own view based on the facts and the legislation, not HMRC’s own status tool. There are countless court cases across different tax areas that highlight that HMRC’s guidance is not the law nor will it bind the courts in any way. The best approach in determining IR35 is to understand the area so that it can be correctly applied without the need for CEST or to engage someone who does.

MEETINGS 11.23 In the vast majority of cases, HMRC will request a meeting or telephone call with the taxpayer to understand the working relationship and what has been agreed between the parties. This can have advantages as it speeds the enquiry process up, but it can also have significant disadvantages and so must be considered carefully. 11.24 If no such meeting takes place, HMRC will have to obtain the information by asking questions which will then lead to more questions. and given that it will often take HMRC six weeks to reply to a letter, this can easily add months onto the enquiry. 11.25 Enquires are rarely over quickly however and adding a few months to an IR35 enquiry by dealing with HMRC in written form may well be worthwhile in the long run. If a meeting is agreed with HMRC it is very easy for them to ask leading questions or for the taxpayer or its representative to say the wrong thing and phrase an answer incorrectly and once something has been said, HMRC will make a note of it and ask the interviewee to confirm the notes of meeting. This will ultimately form part of the document bundle that would be presented during a tribunal hearing and so an innocent mistake in a meeting over terminology or interpretation can end up in front of the judge deciding the issue. 11.26 It may seem a little extreme to think about a potential tribunal hearing and the paperwork at the beginning of an enquiry, but this should always be at the back of the mind. 11.27 HMRC may push very hard for a meeting but the taxpayer is under no obligation to meet with anyone from HMRC. If IR35 is proven to apply 218

IR35 Practical Issues 11.30 to an engagement, penalties will be levied by HMRC and it is theoretically possible that the penalties may be ever so slightly higher if the taxpayer will not meet with HMRC. This is because part of HMRC’s penalty regime is to consider whether the taxpayer has co-operated with HMRC, and HMRC do consider meeting with them as part of that co-operating. There is no reason however why a taxpayer cannot cooperate fully with HMRC without the need for a meeting and so any claim otherwise should be strongly refuted and any difference in a penalty, be minimal. That is also working on the basis that IR35 applies, if the taxpayer defends the positions, no penalties will be raised anyway which should be the main priority and goal. Focus Point There is no obligation for a taxpayer to meet with HMRC and whether to meet with HMRC should not be something one is bullied into given the importance of what will be discussed. The taxpayer can instead request that all questions are sent in writing. 11.28 Where a meeting does take place, HMRC should issue notes of meeting and these should be written up by HMRC within seven days of the meeting or as soon as reasonably practical to do so. If they are written up any later than this, it could cast doubt over their accuracy. 11.29 It should go without saying that any notes of meeting are carefully considered and only agreed if they represent an accurate account of the discussion. It is easy during a meeting for something to be misunderstood or taken out of context and so the best course of action is to address this at the offset rather than trying to argue it wasn’t said at a later date when they have already been signed off and agreed. Careful attention to the terminology used both during the meeting and in the notes of the meeting should be used as these can have an undercurrent of bias towards IR35 applying or the individuals being employed. Example of potential bias questions During a meeting, HMRC may ask a seemingly simple and innocent question such as ‘would the client allow you to determine your hours of work?’. This would then filter into the notes of meeting as stating ‘Craig Phipps confirmed that the client allows him to choose his hours’. The use of the word ‘allow’ however is improper as it suggests the client retains control when in fact the real position was that the hours were contractually agreed or negotiated. 11.30 This is a very subtle statement and in isolation may not be too damaging but once three or four such statements make their way into the notes of meeting it can start to change the tone of the meeting and how an outside party may interpret them, ie a tribunal judge. 219

11.31  IR35 Practical Issues 11.31 If there is a continued dispute about what was said during a meeting, it is possible to ask for a copy of the handwritten notes to see if it clarifies the position. HMRC will be reluctant to do this but it can quickly resolve an issue and the author has defended cases in the past where the typed notes have contained statements completely different to what was written by hand during the meeting.

FACT FINDING 11.32 HMRC should establish all the facts about the engagement before issuing an opinion. Sadly, this is not always the case and sometimes even in cases that reach the tribunals, HMRC have not established all the information they need, whether it be meeting with the correct people or simply not asking about certain aspects of the working and contractual relationship. 11.33 The agency legislation case of Gabriel Oziegbe v HMRC  [2014] UKFTT 608 was a perfect example of this whereby HMRC had not considered one of the two necessary criteria for the legislation to apply (whether personal service was required). There have also been IR35 cases at the tribunals whereby HMRC have not approached the end client for their understanding, leading to a tribunal hearing with only half the facts. This was evident in cases such as Lime IT v HMRC (2002) Spc 342 in which the Special Commissioner stated in his judgment that in future cases, he would like evidence from all relevant parties where possible. Focus Point The HMRC case worker should establish the full facts of the working and contractual relationship. This should not take place once a case is listed for a hearing and HMRC’s advocates understandably do not like going to a tribunal without the facts which could and should have obtained. HMRC should not continue their fact-finding exercise once they have reached their opinion unless facts are still disputed by the taxpayer.

11.34 Obtaining the facts will include considering any contractual documents (or other documents that are pertinent to the work being undertaken) establishing the worker’s understanding of not only how they work in practice but what contractual rights they have, along with the same from the end client. The factors should all be used to construct the hypothetical contract and it is important to note the words of Park J in the High Court case of Usetech Ltd v Young [2004] EWHC 2248 (Ch), where he said ‘I agree with the view expressed in Lime-IT  Ltd v Justin…that while the contract between the client and the worker may be hypothetical, it is necessary to consider the actual, rather than hypothetical, facts of the case.’ In essence, no one should hypothesise the facts of the case. The job is to consider the facts of the case and then work out how they feature in the hypothetical contract. 220

IR35 Practical Issues 11.38 11.35 It is also very important to bear in mind that just because something does or does not happen in practice, does not mean the right does or does not exist. This was made clear most recently in the Court of Appeal judgment in Autoclenz Limited v Belcher [2011] UKSC 41, where Smith LJ held: ‘In my judgment the true position…is that where there is a dispute as to the genuineness of a written term in a contract, the focus of the enquiry must be to discover the actual legal obligations of the parties. To carry out that exercise, the tribunal will have to examine all the relevant evidence. That will, of course, include the written term itself, read in the context of the whole agreement. It will also include evidence of how the parties conducted themselves in practice and what their expectations of each other were. Evidence of how the parties conducted themselves in practice may be so persuasive that the tribunal can draw an inference that that practice reflects the true obligations of the parties. But the mere fact that the parties conducted themselves in a particular way does not of itself mean that that conduct accurately reflects the legal rights and obligations. For example, there could well be a legal right to provide a substitute worker and the fact that that right was never exercised in practice does not mean that it was not a genuine right.’ 11.36 One example of this could be that HMRC argue that personal service is required because a substitute was never discussed with the client and did not occur. If however, such a right is present in the contractual documents, it will not matter that such a right was not called upon. This can also apply the other way as well, in that the client may retain a right of control, even if it isn’t necessary to exercise it in practice. 11.37 The value and the weight of the contracts should not be underestimated, nor should they be cast aside. HMRC are very quick to ignore the terms of the agreement or play down their importance but this should not be tolerated. The contracts are legally binding documents and provided they are entered into in good faith and contain the rights and obligation between the parties, they should form a part of the IR35 relationship. Going back to the Court of Appeal in Autoclenz, they also confirmed: ‘Where the terms are put in writing by the parties and it is not alleged that there are any additional oral terms to it, then those written terms will, at least prima facie represent the whole of the parties’ agreement… Once it is established that the written terms of the contract were agreed, it is not possible to imply terms into a contract that are inconsistent with its express terms. The only way it can be argued that a contract contains a term which is inconsistent with one of its express terms is to allege that the written terms do not reflect the true agreement of the parties.’ 11.38 It may well be that a contract between an agency and the client undermines the terms written in the lower contract which will, no doubt, cause a problem for defending the IR35 position but the worker will still be ultimately governed by and held accountable to the contract it agrees with the agency. 221

11.39  IR35 Practical Issues Focus Point If the contract is an accurate account of the working relationship and a genuine contract, its terms should be given their full weight by the courts.

11.39 Once all the facts have been obtained HMRC should be able to reach an opinion as to whether they believe IR35 applies. If the taxpayer is sent such an opinion it will often be accompanied by Determinations and Notices confirming how much HMRC are looking to recover. If Determinations are not raised at this stage, the taxpayer can dispute any facts HMRC have relied upon to reach their opinion to try and reverse the position, as well as disputing the case by using established case law principles.

DETERMINATIONS AND NOTICES 11.40 When HMRC raise Regulation 80 Determinations and Section 8 Notices, these will need to be appealed within 30 days otherwise the full payment will be due. It is therefore critical that these deadlines are met and appealed in time. 11.41 When appealing, the taxpayer will need to confirm their reasons for appeal, but this does not need to be extensive, covering the strengths of the case. It can simply be that it is disputed that IR35 does apply. 11.42 The taxpayer can also request an independent review at this stage, at which point the case will be passed to another person within HMRC’s appeals team who will assess the case. The taxpayer can, and should, put forward any representations as to why the case should be closed including any case law to support the position. 11.43 There are serious questions as to how ‘independent’ this process can ever be as it is conducted within HMRC and most of the time the person carrying out the review will agree with the case worker who raised the assessments. It does however provide some scope for cases to be closed when the case worker has got caught caught-up in the case and lost sight of the overall picture. This blinkered view was seen in cases such as Mark Andrew Lewis (t/a MAL Scaffolding v Revenue & Customs [2006] UKSPC SPC00527 in which the Special Commissioner mentioned that HMRC had persuaded themselves of the answer they went looking for, when clearly the evidence did not support such a conclusion. An independent review in that case, (if they had been available at that time) should in theory, have realised there was very little chance of HMRC success and closed the enquiry. 11.44 If this review option is not taken, the case will be heading towards a hearing at which point any legal fees are likely to start building up quite quickly and so, in the authors opinion, the independent review is always worth trying and it can be successful. 222

IR35 Practical Issues 11.51

HEARING AT THE TAX TRIBUNAL 11.45 Once the Determinations and Notices have been raised, HMRC or the taxpayer can list the case for a hearing at the First-tier Tax Tribunal. There is a great amount of detail to consider if a case moves towards a hearing and this chapter only seeks to outline the main structure of what to expect. 11.46 When the case is listed for a hearing, the court will send Directions to the parties which are instructions and dates that must be complied with, such as when certain documents need to be provided to one another and the court. It is very important to keep to the dates in any Directions and whilst it is possible to request extensions to the dates set out in the Directions, neither HMRC nor the tribunal have to agree to an extension and non-compliance can have a negative impact on the hearing and any potential costs to be awarded. Focus Point If a case is listed for a hearing, it is important that all deadlines set by the court are complied with. 11.47 The tribunal will need to know key information about the case such as what the nature of the case is, whether witnesses will be called and how long the parties anticipate it taking in court and so on. They will ask for any dates to avoid and will set deadlines for when witness statements must be exchanged, when the skeleton arguments, agreed facts, legal authorities and document bundles must be submitted by. 11.48 These will form the basis of the hearing and any evidence that the parties wish to rely on should be included within these files.

WITNESSES 11.49 The quality of witness evidence will be crucial for the tribunal in order for them to gain a true understanding of the IR35 position. Typically, the tribunal would like to hear from the worker and a representative of the end client who has a good understanding of the working and contractual relationship. 11.50 It is always advantageous for any witness to be a witness for the appellant rather than HMRC because they will provide their witness evidence. HMRC can then cross examine what was said and the appellant can then cross examine the witness for a final time, meaning the appellant gets the last chance to go back over any details or clarify anything said during HMRC’s cross examination. If HMRC call that person as a witness however, the reverse occurs and HMRC will have the last word. 11.51 If no such person is willing to provide witness evidence, the courts have made it clear that HMRC and the appellant should consider issuing a 223

11.52  IR35 Practical Issues witness summons compelling the party to attend. The taxpayer may be less willing to go down this route for fear of upsetting the commercial relationship, but ultimately that person may be called as a witness either way so the taxpayer should give this due consideration.

YOUR CHARTER 11.52 For anyone under enquiry, HMRC have a charter (named Your Charter) that should be followed regarding an enquiry and behaviour. It is important to bear this in mind when dealing with HMRC and ensure that they uphold their end of the deal and abide by the charter. This can be found at https://www.gov.uk/ government/publications/your-charter/your-charter and is worth repeating in full: 1.

Your rights – what you can expect from us 1.1 Respect you and treat you as honest We’ll treat you even-handedly, with courtesy and respect. We’ll listen to your concerns and answer your questions clearly. We’ll presume that you’re telling us the truth, unless we have good reason to think otherwise. 1.2 Provide a helpful, efficient and effective service We’ll help you understand what you have to do and when you have to do it. We’ll deal with the information you give us quickly, efficiently, and keep any costs to you at a minimum. We’ll put any mistakes right as soon as we can. 1.3 Be professional and act with integrity We’ll act within the law and make sure that you are dealt with by people who have the right level of expertise. We’ll help you to understand your rights and we’ll be sensitive to any financial difficulties you might have. 1.4 Protect your information and respect your privacy We’ll protect information we obtain, receive or hold about you and only share information about you when the law lets us. We’ll explain why we need any additional information. 1.5 Accept that someone else can represent you We’ll respect your wish to have someone else deal with us on your behalf, such as an accountant or a relative. To protect your privacy, we’ll only deal with them if they have been authorised to represent you, and we’ll deal with them courteously and professionally. 1.6 Deal with complaints quickly and fairly We’ll deal with your complaints or appeals as quickly as we can. You can also ask someone else to look into an issue on your behalf. If we can’t resolve matters between us, you can ask us to work with someone who’s not been involved in your dispute. 224

IR35 Practical Issues 11.53 1.7 Tackle those who bend or break the rules We’ll identify those who are not paying what they owe or are claiming more than they should and recover the money. We’ll charge interest and penalties where appropriate and be reasonable in how we use our powers. 2.

Your obligations – what we expect from you 2.1 Be honest and respect our staff Please be truthful and act within the law. Give us all the relevant facts and information about your taxes, entitlements, and any additional information we ask you for. Treat our staff with the respect that you would expect from us. 2.2 Work with us to get things right Please work with us to make sure that your tax and payment affairs are right and that you’re paying and claiming the correct amount of money. Talk to us if there is anything you’re not sure about. 2.3 Find out what you need to do and keep us informed Please make sure that you know how to pay your tax and claim payments and get in touch with us as soon as possible if you need help. Tell us straight away if you’re having trouble meeting your obligations. 2.4 Keep accurate records and protect your information Please make sure that you, or your representative, keep accurate financial records that support what you tell us. Do not share confidential information with others and tell us straight away if you think someone else knows your identification details, such as passwords. 2.5 Know what your representative does on your behalf Please make sure that you know what information and payments your representative sends us. Make sure that the information and payments are accurate and on time. 2.6 Respond in good time Please send us returns and pay any amounts you owe on time and pay any interest on late payments or penalties promptly. 2.7 Take reasonable care to avoid mistakes Please take care to avoid mistakes when you send us information, pay your taxes and claim any payments or reliefs.

11.53 These all seem fairly basic and what one would rightly expect, but on occasion these standards can slip and it can, for example, feel that HMRC do not treat the taxpayer as honest, they do not provide an efficient service (for example, dragging out an enquiry unnecessarily) or that they do not act with integrity if they lose sight of the fact they should be impartial. 225

11.54  IR35 Practical Issues 11.54 Where the taxpayer feels these standards have slipped or not been met at all, it is worth pointing these out to HMRC, although in practice, it will be unlikely to change anything and the best that will happen will be an excuse and apology. HMRC may offer to pass your comments on as an official complaint but in the author’s experience this is a complete waste of time as the whole file is passed to the complaints team for review who simply justify the case worker’s actions or at best acknowledge there have been issues and these will be resolved going forward. 11.55 The other small advantage of raising these points during an enquiry is that they will most likely be included in the document bundle and if there is a consistent theme of poor standards and practice, it does not look good to the court. This will also not change the IR35 position, but it can deter HMRC from pursuing the case at a hearing if they are going to be given a hard time by the judge about it which has happened many times in the past.

IR35 CONTRACT REVIEWS 11.56 Is it important to have written terms and review the contractual documents between the parties? Absolutely! This document will record the agreement between the parties and form the backbone of whether an individual should have been an employee or an independent contractor. 11.57 The primary purpose of a contract review is to determine whether the terms in the agreement are in line with a contract of service or a contract for services. This enables the taxpayer to be confident of their position or acknowledge that the proposed terms will need adjusting if they are to be deemed outside IR35. Focus Point The provisions and the way in which they are written are fundamental to winning an IR35 case. If the document is genuine, it can determine IR35 and so it is important to ensure the contract is robust. 11.58 The contract will only stand up to scrutiny if it accurately records the relationship (irrespective of whether it is robust to start with or amended to put the taxpayer in a stronger position). The courts are fully aware that clauses may be included in a contract for employment status purposes when they bear no resemblance to the way in which the parties work together. Where this is the case and the contract or its provisions are a sham, the courts will take note of this and give little weight to what was agreed in that document, but where it was intended to represent a true understanding of the terms agreed, it must be given its due weight. 11.59 Where there is a direct relationship between a client and a personal service company, the terms will generally provide the best insight as to what the worker and client would have agreed had they contracted directly with one 226

IR35 Practical Issues 11.63 another. This point was considered in Paya Ltd & Ors v Revenue & Customs [2019] UKFTT 583 (TC), in which the tribunal considered previous case law and commented as follows: ‘We note that in Usetech Ltd v Young [2004] 76 TC 811, Park J envisaged that in a straightforward case where there are two contracts in place (between the PSC and the worker and the PSC and the Client), the content of the assumed or notional contracts will be “fairly obvious”… He continued that deciding on the terms of the assumed contracts may be more complicated where, for example, there is an agent in the contracting chain. He noted that in R  (on the application of the Professional Contractors Group Ltd and others) v IRC [2001] STC 629 Burton J was of the view that in such a case “all relevant circumstances would fall to be taken into account when determining the contents of the hypothetical contract between the worker and the end user, including the provisions (or absence of particular provisions) of a contract between an agency and the end client. However, there is no such complexity in this case. In our view, in these circumstances, the actual contractual terms between the BBC and the PSC’s constitute the best available evidence of what the terms of a direct contract would have been.’ 11.60 This passage makes it clear that a contract between a client and a PSC will form the main basis for determining a hypothetical contract. Where an agency or other intermediary is in the contractual chain, there will typically be a contract between the PSC and the agency and the agency and the client. As referenced in Usetech Ltd v Young [2004] EWHC 2248 (Ch) above. In that situation the courts will have to take into account all the circumstances and this was also discussed in the R v IRC case where it was held that whilst the lower contract between the personal service company and the agency would be an important part of the factual relationship, at the end of the day, it was just a part of the relationship and so cannot determine the issue on its own. 11.61 This may read at first as though the lower contract is not as important where an agency is involved but far from it and it is just as important to ensure the terms of the agreement are outside IR35 especially as there will be little control or knowledge over what is contained in the upper contract. 11.62 If the right of substitution is taken as an example,, if this is not addressed or is inadequately worded in the lower contract, it would be an arduous task trying to prove that such a right does exist. If however this is covered in the lower contract but silent in the upper contract, it will form part of the overall circumstances and whilst the courts may ultimately decide not to include such a right in the hypothetical contract, that can only be when there is witness evidence that disputes such a right and is preferred over the contractual document and the taxpayer’s evidence.

Review the contract in practice 11.63 It is not possible for this book to set out all the variations of clauses that will be found in contracts and cover which ones would adequately establish a 227

11.64  IR35 Practical Issues given right or not, but it can provide some general pointers to take into account when reviewing a contract. 11.64 It is important that when a contract is reviewed, the whole of the contract is considered, and the reviewer does not simply look out for buzzwords such as ‘substitution’ and ‘control’. There are endless examples of where a contract contains a perfectly good clause showing a lack of control, only for it to be contradicted elsewhere. This then casts doubt on the genuineness of the provision upon which the taxpayer was going to rely.

Control 11.65 Control is an essential element of a contract of employment. The contract should not only confirm there is a lack of control over the relevant aspects of the work but also that there is no right of control. 11.66 If such a clause is written too broadly such as ‘there shall be no supervision, direction or control over the PSC’, this blanket clause will, in most cases, be too vague to be realistic as there will usually be some form of control over what work needs doing, when or where. It is best for such a clause to be more specific, for example, if it only related to there being no supervision, direction and control as to the ‘manner’ or ‘means’ in which the services are provided, rather than covering every aspect of the work. 11.67 Control over the manner in which the work is done is an important aspect of a working relationship and whilst skilled and professional employees may not require control over how they undertake the work, an employer would still normally retain the ultimate right of control. This should be addressed in the contract because where there is a right of control over the manner, this will go a long way to establishing a sufficient degree of control. 11.68 Clauses stating that the PSC will have ‘reasonable autonomy’ over how they work will not suffice. If a PSC only has reasonable autonomy, they do not have autonomy and as such are subject to control. Equally if they have to comply with the client’s processes and procedures, this will be argued to show the client retains control. 11.69 When reviewing a contract, the reviewer should also consider clauses which demonstrate or imply control over what work is being done, where and when. For example, a clause stating that the PSC will work the hours and days the client ‘requires’ suggests control, whereas a clause saying the PSC will work the hours and days ‘agreed’ is very different. 11.70 In practice, the nature of the work being undertaken may dictate what, when and where the work is done, and this will not demonstrate an employment relationship, but the contract can still make it clear that the client does not allow the clients these rights. 228

IR35 Practical Issues 11.78

Personal service 11.71 The overriding principle to remember is personal service should not be required. A  genuine right of substitution is a good example of when personal service is required but the contract should not contain other clauses which establish personal service. 11.72 Most contracts will name the person providing the services either in the contract or in a schedule. This is a not ideal given this is a business to business contract and should not be necessary. The contract may wish to identify who the PSC representative is, but should not restrict the services being provided by only the named person. 11.73 Contracts will from time to time also stipulate that all persons providing services will be either employees or directors of the PSC. Such a clause severely limits who is able to provide the services, as typically the only employee and director will be the individual. 11.74 Where a substitution clause is contained in the contract, it must be a ‘right to send’ someone else and not merely a right to nominate or suggest another person as that would do little to establish that personal service is not required. The substitution clause should not equally be restricted to occasions when the individual is ‘unable’ to work as the courts have taken this as meaning they must carry out the work themselves when they are able. 11.75 It is natural that the client may wish to check any person providing service has the right skills and expertise. This is understandable and will not mean that personal service is required but any restrictions should only relate to the substitute’s ability to carry out the work and should not be left to the client’s absolute discretion, nor relate to other factors outside the scope of the work such as ‘general suitability’. 11.76 Depending on the nature of the work, it may be necessary for a substitute to have a handover period to ensure they can take over the work without disruption. This may make a substitute more unlikely but provided there are commercial reasons for such a requirement, it will also be unlikely to stop a substitution clause from being given its necessary weight. 11.77 Finally, the right of assignment should also be considered as this can also demonstrate a lack of personal service as was seen in First Word Software v HMRC [2007] UKSPC SPC00652. This was only a Special Commissioner’s judgment so will not be binding, but the principle stands that if the contract can be completely assigned to another party, how can personal service be required?

Mutuality of obligation 11.78 If there is a lack of mutuality in the contract it should establish that the client has no obligation to offer any work to the PSC or to pay them for periods 229

11.79  IR35 Practical Issues when no work is available and equally it should show that the PSC is under no obligation to continue providing services to the client. 11.79 It is important to note that any such provision must relate to the current agreement and should not be limited to there being no obligation to offer ‘further work beyond the current contract.’ This type of statement would show there is no umbrella type contract for employment law purposes, but it will provide no assistance in establishing a lack of mutuality in respect of IR35. 11.80 There are mixed opinions as to whether notice periods have an effect on mutuality of obligation. If the parties cannot terminate the contract early, this would suggest there is a commitment between them for the duration of the contract or even where the notice period is for a considerable proportion of the whole contract length. 11.81 On the flip side to this, if either party can terminate the agreement without any notice, it would be seriously questionable as to how it could be argued that either party has any mutuality of obligation with the other. Having no requirement for a notice period to terminate an agreement would be the bestcase scenario from an IR35 perspective but it is rarely how the world works in practice because it is good business sense and completely understandable that either party should provide the other with notice in order to terminate the contract.

Experts and advisors 11.82 There are many people and companies that offer IR35 and employment status reviews and even many people regardless of their experience and qualifications will have a view on what makes someone an employee. This is not an area one should dabble in lightly however and given the potential sums involved, it is vital that anyone undertaking a review service knows this area in great detail and ideally has defended many cases with HMRC to gain a true understanding of how this applies in practice. It is worth bearing in mind that in Paya Ltd & Ors v Revenue & Customs [2019] UKFTT 583 (TC), HMRC tried to extend the liability period because of carelessness of the adviser.

DON’T BE AFRAID OF BEING OUTSIDE IR35 11.83 To finish on a cheerful note, IR35 is a maze but it is not that difficult to navigate through with the right tools. Companies should not be scared of IR35 and provided the position is carefully considered; they should not feel compelled to put people on payroll for fear of HMRC. HMRC’s record of winning cases is not particularly good and most of the cases that reach the tribunals are the weaker cases to start with and often where no previous advice has been taken.

230

Index [all references are to paragraph number]

Agencies as consultancies fee payers, 9.85–9.86 generally, 9.76–9.80 reasonable care, 9.86 status determination, 9.81–9.84 Agency workers amended legislation, 3.22–3.23 anti-avoidance, 3.68–3.69 ‘any person’, 3.53–3.54 background, 3.01–3.04 companies, 3.25–3.28 contract for services, 3.04 contracting out, 3.110–3.112 control ‘any person’, by, 3.53–3.54 direction, 3.47–3.52 generally, 3.29–3.30 health and safety, 3.43 manner of provision of services, 3.31–3.42 presumption, 3.55–3.58 right, 3.44–3.46 supervision, 3.47–3.52 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78– 3.84 fraudulent documentation, 3.61–3.66 health and safety, 3.43 introduction, 1.28–1.34 IR35 background, 3.09–3.12 generally, 3.89–3.94 private sector agency work, 3.99– 3.104 public sector agency work, 3.95– 3.98 legislation, 3.04 liability, 3.61–3.66 manner of provision of services, 3.31–3.42 old legislation, 3.18–3.21 PAYE background, 3.13–3.16 generally, 3.105–3.109 personal service, 3.24

Agency workers – contd personal service companies generally, 3.85–3.88 IR35, 3.89–3.94 presumption of control, 3.55–3.58 project consultancy, 3.02 reporting, 3.70–3.77 right of control, 3.44–3.46 right of substitution, 3.07 self-employment anti-avoidance, 3.68–3.69 background, 3.05–3.08 companies, 3.25–3.28 control, 3.29–3.58 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78–3.84 fraudulent documentation, 3.61– 3.66 introduction, 3.17 liability, 3.61–3.66 new legislation, 3.22–3.23 old legislation, 3.18–3.20 PAYE hybrid, 3.105–3.109 personal service, 3.24 reporting, 3.70–3.77 statement of works, 3.110–3.112 supervision, direction and control, 3.47–3.52 Appeals IR35, and medium and large private organisations, 9.43–9.46 public sector, 8.50–8.53 ‘Business on own account’ generally, 2.203–2.213 introduction, 2.14–2.17 Check Employment Status for Tax (CEST) generally, 11.11–11.22 public sector, 8.33–8.38 Collection of taxes IR35, and, 6.23–6.27

231

Index Composite companies employment status, and, 1.29 generally, 5.03–5.05 Consideration employment status, and, 2.47 Construction Industry Scheme deductions IR35, and, 7.56–7.58 Consultancies IR35, and fee payers, 9.85–9.86 generally, 9.76–9.80 status determination, 9.81–9.84 Contract for services agency workers, and, 3.04 meaning, 2.05 Contract of service background, 2.06–2.07 definition, 2.01 introduction, 2.05 main tests, 2.08–2.20 Contract reviews control, 11.65–11.70 experts and advisors, 11.82 generally, 11.56–11.64 mutuality of obligation, 11.78–11.81 personal service, 11.71–11.77 Contracting out agency workers, and, 3.110–3.112 IR35, and, 9.73–9.75 Contract reviews control, 11.65–11.70 experts and advisors, 11.82 generally, 11.56–11.64 mutuality of obligation, 11.78–11.81 personal service, 11.71–11.77 Contracting out IR35, and, 9.73–9.75 Control agency workers, and ‘any person’, by, 3.53–3.54 direction, 3.47–3.52 generally, 3.29–3.30 health and safety, 3.43 manner of provision of services, 3.31–3.42 presumption, 3.55–3.58 right, 3.44–3.46 supervision, 3.47–3.52 case law, 2.08–2.20 contract reviews, and, 11.65–11.70 different aspects, 2.76–2.95 end client representatives, 2.73 exercise by third parties, 2.72–2.75 generally, 2.50–2.95

Control – contd highly skilled persons, 2.88–2.93 importance, 2.50–2.62 introduction, 1.19–1.23 location of services provided, 2.822.83 manner in which services provided, 2.84–2.86 persons controlling the individuals, 2.72–2.75 place of services provided, 2.82–2.83 professionals, 2.88–2.93 right of control, 2.94–2.95 sufficient degree, 2.63–2.71 timing of services provided, 2.82–2.83 Deemed payment medium and large private organisations, 9.48–9.53 public sector, 8.13–8.15 small private organisations, 7.39–7.60 Determinations IR35, and, 11.40–11.44 Disguised remuneration managed service companies, and, 5.02 Employee definition, 2.01 Employer definition, 2.01 Employment definition, 2.01 Employment status agency workers amended legislation, 3.22–3.23 anti-avoidance, 3.68–3.69 ‘any person’, 3.53–3.54 background, 3.01–3.04 companies, 3.25–3.28 control, 3.29–3.58 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78–3.84 fraudulent documentation, 3.61– 3.66 health and safety, 3.43 introduction, 1.28–1.34 IR35, 3.09–3.12 liability, 3.61–3.66 manner of provision of services, 3.31–3.42 old legislation, 3.18–3.21 PAYE, 3.13–3.16 personal service, 3.24

232

Index Employment status – contd agency workers – contd presumption of control, 3.55–3.58 reporting, 3.70–3.77 right of control, 3.44–3.46 self-employment, 3.05–3.08 supervision, direction and control, 3.47–3.52 ‘business on own account’ generally, 2.203–2.213 introduction, 2.14–2.17 case law background, 2.06–2.07 control, 2.50–2.95 difficulties, 2.21–2.34 hierarchy of courts, 2.35–2.39 main status tests, 2.08–2.20 mutuality of obligation, 2.96–2.174 personal service, 2.175–2.202 RMC v Minister of Pensions, 2.40–2.49 consideration, and, 2.47 contract for services, 2.05 contract of service background, 2.06–2.07 definition, 2.01 introduction, 2.05 main tests, 2.08–2.20 control case law, 2.08–2.20 different aspects, 2.76–2.95 end client representatives, 2.73 exercise by third parties, 2.72–2.75 generally, 2.50–2.95 highly skilled persons, 2.88–2.93 importance, 2.50–2.62 introduction, 1.19–1.23 location of services provided, 2.822.83 manner in which services provided, 2.84–2.86 persons controlling the individuals, 2.72–2.75 place of services provided, 2.82– 2.83 professionals, 2.88–2.93 right of control, 2.94–2.95 sufficient degree, 2.63–2.71 timing of services provided, 2.82– 2.83 definitions, 2.01 difficulties, 2.21–2.34 ‘employee’, 2.01 ‘employer’, 2.01 ‘employment’, 2.01

Employment status – contd equipment and materials provision, 2.225–2.226 future issues comparative arrangement abroad, 2.244–2.245 generally, 2.232–2.239 legislation change, 2.240–2.243 moving forward, 2.246–2.248 generally, 1.01–1.07 ‘Good Work Review of Modern Working Practices’, 1.50–1.53 hierarchy of courts, and, 2.35–2.39 ‘in business on own account’ generally, 2.203–2.213 introduction, 2.14–2.17 intention of the parties generally, 2.214–2.217 introduction, 2.20 intermediaries (IR35) agency workers, 1.28–1.34 case law, 1.43–1.49 generally, 1.25–1.27 mutuality of obligation, and, 2.156– 2.165 private sector, 1.39–1.42 public sector, 1.35–1.38 invoice submission, 2.221 legislation, 2.01–2.05 media presenters, 2.29–2.31 misunderstandings, 2.218–2.231 multiple customers, 2.222–2.224 mutuality of obligation Airfix Footwear, 2.122–2.123 Carmichael, 2.136–2.137 generally, 2.96–2.100 importance, 2.101–2.114 introduction, 1.08–1.13 IR35 cases, 2.156–2.165 meaning, 2.115–2.148 Nethermere, 2.128–2.135 notice periods, 2.166–2.169 O’Kelly, 2.124–2.127 post-Delphi decisions, 2.142–2.148 Stephenson v Delphi, 2.138–2.141 summary, 2.170–2.174 ‘within’ a contract, 2.149–2.155 myths, 2.218–2.231 off-payroll workers, 1.28–1.34 order of tests, 2.13–2.16 other factors, 1.24 ‘part and parcel’ of a business, 2.19 personal service generally, 2.175–2.179 introduction, 1.14–1.18

233

Index Employment status – contd personal service – contd right of substitution, 2.180–2.202 right to assign, 2.182–2.184 provision of equipment and materials, 2.225–2.226 Regulation 80 Determinations, 2.02– 2.04 retrospective liabilities and penalties, 2.34 right of substitution contractual clauses, 2.194–2.196 generally, 2.180–2.181 sham contracts, 2.197–2.202 too fettered, 2.185–2.193 verbal right, 2.194 right to assign, 2.182–2.184 RMC v Minister of Pensions background, 1.01–1.07 control, 1.19–1.23 generally, 2.40–2.48 mutuality of obligation, 1.08–1.13 other factors, 1.24 personal service, 1.14–1.18 use of decision, 2.13 Section 8 decisions, 2.02–2.04 ‘self-employed earner’, 2.01 ‘standing back’ approach, 2.17–2.19 submission of invoices, 2.221 Taylor Review (2016), 1.50–1.53 three-month (or other) period, 2.229– 2.230 times and hours, 2.227–2.228 umbrella companies background, 4.01–4.07 expenses for intermediaries, 4.30– 4.38 expenses for PSCs, 4.39–4.44 fraudulent information, 4.48–4.49 generally, 1.32–1.34 introduction, 1.28 operation, 4.08–4.21 problem areas, 4.22–4.29 review of role, 1.54–1.56 transfer of liabilities, 4.45–4.47 use, 1.29 Unique Tax Number (UTR), and, 2.220 work alongside an employee, 2.231 work for others, 2.222–2.224 working time and hours, 2.227– 2.228 Equipment and materials employment status, and, 2.225– 2.226

Expenses umbrella companies, and intermediaries, 4.30–4.38 introduction, 4.07 PSCs, 4.39–4.44 Fee payer consultancies, 9.85–9.86 medium and large private organisations, 9.32–9.35 public sector, 8.10–8.12 small private organisations, 7.39– 7.60 Fraudulent information umbrella companies, and, 4.48–4.49 ‘Good Work Review of Modern Working Practices’ employment status, and, 1.50–1.53 Health and safety control, and, 3.43 Hearing at tax tribunal IR35, and, 11.45–11.49 Highly skilled persons control, and, 2.88–2.93 HMRC ‘Your Charter’ IR35, and, 11.52–11.55 ‘In business on own account’ generally, 2.203–2.213 introduction, 2.14–2.17 Intention of the parties generally, 2.214–2.217 introduction, 2.20 Intermediaries see also Personal service companies agency workers see also Agency workers background, 3.09–3.12 generally, 3.89–3.94 introduction, 1.28–1.34 private sector work, 3.99–3.104 public sector work, 3.95–3.98 case law, 1.43–1.49 generally, 1.25–1.27 mutuality of obligation, and, 2.156– 2.165 private sector agency workers, 3.99–3.104 generally, 1.39–1.42 public sector agency workers, 3.95–3.98 generally, 1.35–1.38 umbrella companies, and, 4.04

234

Index Invoice submission employment status, and, 2.221 IR35 agencies becoming consultancies fee payers, 9.85–9.86 generally, 9.76–9.80 reasonable care, 9.86 status determination, 9.81–9.84 agency workers, and see also Agency workers background, 3.09–3.12 generally, 3.89–3.94 introduction, 1.28–1.34 private sector work, 3.99–3.104 public sector work, 3.95–3.98 appeals medium and large private organisations, 9.43–9.46 public sector, 8.50–8.53 background, 6.01–6.12 burden of consideration of relationship, 6.08–6.10 case law Albatel, 10.161–10.165 Alternative Book Company, 10.116– 10.118 Ansel Computer Services, 10.63– 10.72 Atholl House Productions, 10.155– 10.160 Battersby, 10.33–10.36 Canal Street Productions, 10.181– 10.182 challenging the correct client, 10.58–10.62 Christa Ackroyd Media, 10.147– 10.154 Dragonfly Consulting, 10.100– 10.110 first decisions, 10.33–10.40 first High Court decision, 10.49– 10.57 first taxpayer win, 10.41–10.48 First Word Software, 10.91–10.99 FS Consulting, 10.37–10.40 Future Online, 10.73 George Mantides, 10.138–10.141 introduction, 1.43–1.49 Island Consultants, 10.83–10.89 JLJ Services, 10.132–10.137 Kickabout Productions, 10.166– 10.171 Lime IT, 10.41–10.48 Marlen, 10.122–10.125 media presenters, 10.142–10.184

IR35 – contd case law – contd MKM Computing, 10.111–10.115 Netherlane, 10.81–10.82 overview, 6.28–6.44 Paya & ors, 10.172–10.180 Primary Path, 10.126–10.131 Red White and Green, 10.183– 10.184 Special Commissioner cases, 10.29–10.32 summary, 10.185–10.188 Synaptek, 10.49–10.57 taxpayer era, 10.119–10.131 Tilbury Consulting, 10.58–10.62 Usetech, 10.74–10.80 Check Employment Status for Tax (CEST) generally, 11.11–11.22 public sector, 8.33–8.38 collection of taxes, 6.23–6.27 Construction Industry Scheme deductions, 7.56–7.58 consultancies fee payers, 9.85–9.86 generally, 9.76–9.80 status determination, 9.81–9.84 contract reviews control, 11.65–11.70 experts and advisors, 11.82 generally, 11.56–11.64 mutuality of obligation, 11.78–11.81 personal service, 11.71–11.77 contracting out, 9.73–9.75 deemed payment medium and large private organisations, 9.48–9.53 public sector, 8.13–8.15 small private organisations, 7.39– 7.60 determinations, 11.40–11.44 fact finding, 11.32–11.39 fee payer consultancies, 9.85–9.86 medium and large private organisations, 9.32–9.35 public sector, 8.10–8.12 small private organisations, 7.39– 7.60 future changes contracting out, 9.73–9.75 generally, 9.56–9.59 PAYE, 9.60–9.64 sole traders, 9.65–9.72 generally, 1.25–1.27

235

Index IR35 – contd handling HMRC enquiries, 11.01– 11.10 hearing at tax tribunal, 11.45–11.49 HMRC ‘Your Charter’, 11.52–11.55 information medium and large private organisations, 9.39–9.42 public sector, 8.25–8.32, 8.48–8.49 legislation generally, 10.01–10.17 introduction, 6.22 office holders, 10.18–10.25 sole traders, 10.28 terms on which service provided, 10.26–10.27 managed service companies, and, 5.02 media presenters case law, 10.142–10.184 generally, 6.14 medium and large private organisations background, 9.01–9.13 ‘client’, 9.14–9.17 deemed payment, 9.48–9.53 fee payer, 9.32–9.35 information about decisions, 9.39–9.42 legislative provisions, 9.28–9.47 meaning, 9.18–9.27 reasonable care in reaching decisions, 9.36–9.38 summary of liability, 9.47 transfer of debt, 9.54–9.55 workers right of appeal, 9.43–9.46 meetings with and calls to HMRC, 11.23–11.31 mutuality of obligation, and, 2.156– 2.165 office holders, 10.18–10.25 PAYE, 9.60–9.64 practical issues Check Employment Status for Tax (CEST), 11.11–11.22 contract reviews, 11.56–11.82 determinations, 11.40–11.44 fact finding, 11.32–11.39 handling HMRC enquiries, 11.01– 11.10 hearing at tax tribunal, 11.45–11.49 HMRC ‘Your Charter’, 11.52–11.55 meetings and calls, 11.23–11.31 overview, 11.83 Regulation 80 determinations, 11.40–11.44

IR35 – contd practical issues – contd Section 8 notices, 11.40–11.44 witness evidence, 11.49–11.51 written procedure, 11.25–11.26 private sector agency workers, 3.99–3.104 background, 6.19–6.21 generally, 1.39–1.42 medium and large organisations, 9.01–9.86 small organisations, 7.01–7.60 public sector agency workers, 3.95–3.98 background, 6.13–6.18 Check Employment Status for Tax (CEST), 8.33–8.38 client-led right of appeal, 8.50–8.53 deemed payment calculation, 8.13–8.15 double taxation, and, 8.16–8.24 fee payer, 8.10–8.12 flow of information, 8.25–8.32, 8.48–8.49 generally, 8.01–8.05 introduction, 1.35–1.38 legislative provisions (2017), 8.08–8.38 legislative provisions (2021), 8.39–8.40 meaning, 8.06–8.08 problems with processing PAYE, 8.16–8.18 reasonable care in assessments, 8.41–8.47 small organisations, and, 7.16–7.19 purpose of legislation, 6.03 reasonable care in decisions consultancies, 9.86 medium and large private organisations, 9.36–9.38 public sector, 8.41–8.47 Regulation 80 determinations, 11.40– 11.44 Section 8 notices, 11.40–11.44 small private organisations Construction Industry Scheme deductions, 7.56–7.58 deemed payment calculation, 7.39–7.60 flow diagram (post-April 2021), 7.38 joint ventures, 7.31 legislative provisions, 7.05–7.15 national insurance, and, 7.32–7.37

236

Index IR35 – contd small private organisations – contd ‘public authority’, 7.16–7.19 scope of legislation, 7.01–7.04 ‘small’, 7.20–7.31 small company for a tax year, 7.26–7.30 subsidiaries, 7.31 sole traders generally, 9.65–9.72 legislation, and, 10.28 subsidiaries, 7.31 summary, 10.185–10.188 terms on which service provided, 10.26–10.27 transfer of debt and liability medium and large private organisations, 9.54–9.55 umbrella companies, and, 4.04 witness evidence, 11.49–11.51 written procedure, 11.25–11.26 Managed service companies (MSCs) background, 5.01–5.09 carrying on business of promoting or facilitating, 5.22–5.26 composite companies, and, 5.03–5.05 Costelloe facts, 5.49–5.56 Tribunal disguised employment, and, 5.02 employment status, and, 1.29 exemptions accountancy, 5.29–5.35 agencies, 5.36–5.40 legal services, 5.30–5.31 involved with the company, 5.27–5.28 IR35, and, 5.02 legislation, 5.01 operation generally, 5.10–5.12 ITEPA 2003, s 61B(1)(a), 5.13–5.14 ITEPA 2003, s 61B(1)(b), 5.15–5.16 ITEPA 2003, s 61B(1)(c), 5.17–5.20 practical issues, 5.46–5.48 provider, 5.21–5.28 transfer of debt, 5.41–5.45 umbrella companies, and, 4.06 Media presenters case law Albatel, 10.161–10.165 Atholl House Productions, 10.155– 10.160 Canal Street Productions, 10.181– 10.182

Media presenters – contd case law – contd Christa Ackroyd Media, 10.147– 10.154 introduction, 10.142–10.146 Kickabout Productions, 10.166– 10.171 Paya & ors, 10.172–10.180 Red White and Green, 10.183– 10.184 employment status, and, 2.29–2.31 personal service companies, and, 6.14 Meetings with HMRC IR35, and, 11.23–11.31 Multiple customers employment status, and, 2.222– 2.224 Mutuality of obligation Airfix Footwear, 2.122–2.123 Carmichael, 2.136–2.137 generally, 2.96–2.100 importance, 2.101–2.114 introduction, 1.08–1.13 IR35 cases, 2.156–2.165 meaning, 2.115–2.148 Nethermere, 2.128–2.135 notice periods, 2.166–2.169 O’Kelly, 2.124–2.127 post-Delphi decisions, 2.142–2.148 Stephenson v Delphi, 2.138–2.141 summary, 2.170–2.174 ‘within’ a contract, 2.149–2.155 Office holders IR35, and, 10.18–10.25 Off-payroll workers see also Agency workers generally, 1.28–1.34 ‘Part and parcel’ of a business employment status, and, 2.19 PAYE agency workers, and background, 3.13–3.16 generally, 3.105–3.109 IR35, and, 9.60–9.64 Permanent workplace umbrella companies, and, 4.09 Personal service agency workers, and, 3.24 generally, 2.175–2.179 introduction, 1.14–1.18 right of substitution, 2.180–2.202 right to assign, 2.182–2.184

237

Index Personal service companies (PSCs) agencies becoming consultancies fee payers, 9.85–9.86 generally, 9.76–9.80 reasonable care, 9.86 status determination, 9.81–9.84 agency workers, and see also Agency workers background, 3.09–3.12 generally, 3.89–3.94 introduction, 1.28–1.34 private sector work, 3.99–3.104 public sector work, 3.95–3.98 appeals medium and large private organisations, 9.43–9.46 public sector, 8.50–8.53 background, 6.01–6.12 burden of consideration of relationship, 6.08–6.10 case law Albatel, 10.161–10.165 Alternative Book Company, 10.116– 10.118 Ansel Computer Services, 10.63– 10.72 Atholl House Productions, 10.155– 10.160 Battersby, 10.33–10.36 Canal Street Productions, 10.181– 10.182 challenging the correct client, 10.58–10.62 Christa Ackroyd Media, 10.147– 10.154 Dragonfly Consulting, 10.100– 10.110 first decisions, 10.33–10.40 first High Court decision, 10.49– 10.57 first taxpayer win, 10.41–10.48 First Word Software, 10.91–10.99 FS Consulting, 10.37–10.40 Future Online, 10.73 George Mantides, 10.138–10.141 introduction, 1.43–1.49 Island Consultants, 10.83–10.89 JLJ Services, 10.132–10.137 Kickabout Productions, 10.166– 10.171 Lime IT, 10.41–10.48 Marlen, 10.122–10.125 media presenters, 10.142–10.184 MKM Computing, 10.111–10.115 Netherlane, 10.81–10.82

Personal service companies (PSCs) – contd case law – contd overview, 6.28–6.44 Paya & ors, 10.172–10.180 Primary Path, 10.126–10.131 Red White and Green, 10.183– 10.184 Special Commissioner cases, 10.29–10.32 summary, 10.185–10.188 Synaptek, 10.49–10.57 taxpayer era, 10.119–10.131 Tilbury Consulting, 10.58–10.62 Usetech, 10.74–10.80 Check Employment Status for Tax (CEST) generally, 11.11–11.22 public sector, 8.33–8.38 collection of taxes, 6.23–6.27 Construction Industry Scheme deductions, 7.56–7.58 consultancies fee payers, 9.85–9.86 generally, 9.76–9.80 status determination, 9.81–9.84 contract reviews control, 11.65–11.70 experts and advisors, 11.82 generally, 11.56–11.64 mutuality of obligation, 11.78– 11.81 personal service, 11.71–11.77 contracting out, 9.73–9.75 deemed payment medium and large private organisations, 9.48–9.53 public sector, 8.13–8.15 small private organisations, 7.39– 7.60 determinations, 11.40–11.44 fact finding, 11.32–11.39 fee payer consultancies, 9.85–9.86 medium and large private organisations, 9.32–9.35 public sector, 8.10–8.12 small private organisations, 7.39– 7.60 future changes contracting out, 9.73–9.75 generally, 9.56–9.59 PAYE, 9.60–9.64 sole traders, 9.65–9.72 generally, 1.25–1.27

238

Index Personal service companies (PSCs) – contd handling HMRC enquiries, 11.01– 11.10 hearing at tax tribunal, 11.45–11.49 HMRC ‘Your Charter’, 11.52–11.55 information medium and large private organisations, 9.39–9.42 public sector, 8.25–8.32, 8.48–8.49 legislation generally, 10.01–10.17 introduction, 6.22 office holders, 10.18–10.25 sole traders, 10.28 terms on which service provided, 10.26–10.27 managed service companies, and, 5.02 media presenters case law, 10.142–10.184 generally, 6.14 medium and large private organisations background, 9.01–9.13 ‘client’, 9.14–9.17 deemed payment, 9.48–9.53 fee payer, 9.32–9.35 information about decisions, 9.39–9.42 legislative provisions, 9.28–9.47 meaning, 9.18–9.27 reasonable care in reaching decisions, 9.36–9.38 summary of liability, 9.47 transfer of debt, 9.54–9.55 workers right of appeal, 9.43–9.46 meetings with and calls to HMRC, 11.23–11.31 mutuality of obligation, and, 2.156– 2.165 office holders, 10.18–10.25 PAYE, 9.60–9.64 practical issues Check Employment Status for Tax (CEST), 11.11–11.22 contract reviews, 11.56–11.82 determinations, 11.40–11.44 fact finding, 11.32–11.39 handling HMRC enquiries, 11.01– 11.10 hearing at tax tribunal, 11.45–11.49 HMRC ‘Your Charter’, 11.52– 11.55 meetings and calls, 11.23–11.31 overview, 11.83

Personal service companies (PSCs) – contd practical issues – contd Regulation 80 determinations, 11.40–11.44 Section 8 notices, 11.40–11.44 witness evidence, 11.49–11.51 written procedure, 11.25–11.26 private sector agency workers, 3.99–3.104 background, 6.19–6.21 generally, 1.39–1.42 medium and large organisations, 9.01–9.86 small organisations, 7.01–7.60 public sector agency workers, 3.95–3.98 background, 6.13–6.18 Check Employment Status for Tax (CEST), 8.33–8.38 client-led right of appeal, 8.50–8.53 deemed payment calculation, 8.13–8.15 double taxation, and, 8.16–8.24 fee payer, 8.10–8.12 flow of information, 8.25–8.32, 8.48–8.49 generally, 8.01–8.05 introduction, 1.35–1.38 legislative provisions (2017), 8.08–8.38 legislative provisions (2021), 8.39–8.40 meaning, 8.06–8.08 problems with processing PAYE, 8.16–8.18 reasonable care in assessments, 8.41–8.47 small organisations, and, 7.16–7.19 purpose of legislation, 6.03 reasonable care in decisions consultancies, 9.86 medium and large private organisations, 9.36–9.38 public sector, 8.41–8.47 Regulation 80 determinations, 11.40– 11.44 Section 8 notices, 11.40–11.44 small private organisations Construction Industry Scheme deductions, 7.56–7.58 deemed payment calculation, 7.39–7.60 flow diagram (post-April 2021), 7.38

239

Index Personal service companies (PSCs) – contd small private organisations – contd joint ventures, 7.31 legislative provisions, 7.05–7.15 national insurance, and, 7.32–7.37 ‘public authority’, 7.16–7.19 scope of legislation, 7.01–7.04 ‘small’, 7.20–7.31 small company for a tax year, 7.26–7.30 subsidiaries, 7.31 sole traders generally, 9.65–9.72 legislation, and, 10.28 subsidiaries, 7.31 summary, 10.185–10.188 terms on which service provided, 10.26–10.27 transfer of debt and liability medium and large private organisations, 9.54–9.55 umbrella companies, and, 4.04 witness evidence, 11.49–11.51 written procedure, 11.25–11.26 Professionals control, and, 2.88–2.93 Project consultancy agency workers, and, 3.02 Provision of equipment and materials employment status, and, 2.225–2.226 Public sector workers agency workers, 3.95–3.98 background, 6.13–6.18 Check Employment Status for Tax (CEST), 8.33–8.38 client-led right of appeal, 8.50–8.53 deemed payment calculation, 8.13– 8.15 double taxation, and, 8.16–8.24 fee payer, 8.10–8.12 flow of information, 8.25–8.32, 8.48–8.49 generally, 8.01–8.05 introduction, 1.35–1.38 legislative provisions (2017), 8.08– 8.38 legislative provisions (2021), 8.39– 8.40 meaning, 8.06–8.08 problems with processing PAYE, 8.16–8.18 reasonable care in assessments, 8.41–8.47 small organisations, and, 7.16–7.19

Reasonable care in decisions IR35, and consultancies, 9.86 medium and large private organisations, 9.36–9.38 public sector, 8.41–8.47 Regulation 80 Determinations employment status, and, 2.02–2.04 IR35, and, 11.40–11.44 Retrospective liabilities and penalties employment status, and, 2.34 Right of substitution agency workers, and, 3.07 contractual clauses, 2.194–2.196 generally, 2.180–2.181 sham contracts, 2.197–2.202 too fettered, 2.185–2.193 verbal right, 2.194 Right to assign generally, 2.182–2.184 RMC v Minister of Pensions background, 1.01–1.07 control, 1.19–1.23 generally, 2.40–2.48 mutuality of obligation, 1.08–1.13 other factors, 1.24 personal service, 1.14–1.18 use of decision, 2.13 Section 8 decisions employment status, and, 2.02–2.04 IR35, and, 11.40–11.44 Self-employed earner definition, 2.01 Self-employment anti-avoidance, 3.68–3.69 background, 3.05–3.08 companies, 3.25–3.28 control ‘any person’, by, 3.53–3.54 direction, 3.47–3.52 generally, 3.29–3.30 health and safety, 3.43 manner of provision of services, 3.31–3.42 presumption, 3.55–3.58 right, 3.44–3.46 supervision, 3.47–3.52 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78–3.84 fraudulent documentation, 3.61–3.66 introduction, 3.17 IR35, and generally, 9.65–9.72

240

Index Self-employment – contd IR35, and – contd legislation, and, 10.28 liability, 3.61–3.66 new legislation, 3.22–3.23 old legislation, 3.18–3.20 PAYE hybrid, 3.105–3.109 personal service, 3.24 reporting, 3.70–3.77 Sham contracts right of substitution, 2.197–2.202 Sole traders IR35, and generally, 9.65–9.72 legislation, and, 10.28 ‘Standing back’ approach employment status, and, 2.17–2.19 Statement of works agency workers, and, 3.110–3.112 Submission of invoices employment status, and, 2.221 Subsidiaries IR35, and, 7.31 Supervision control, and, 3.47–3.52 Taylor Review (2016) employment status, and, 1.50–1.53 Temporary workers amended legislation, 3.22–3.23 anti-avoidance, 3.68–3.69 ‘any person’, 3.53–3.54 background, 3.01–3.04 companies, 3.25–3.28 contract for services, 3.04 contracting out, 3.110–3.112 control ‘any person’, by, 3.53–3.54 direction, 3.47–3.52 generally, 3.29–3.30 health and safety, 3.43 manner of provision of services, 3.31–3.42 presumption, 3.55–3.58 right, 3.44–3.46 supervision, 3.47–3.52 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78–3.84 fraudulent documentation, 3.61–3.66 health and safety, 3.43 introduction, 1.28–1.34 IR35 background, 3.09–3.12 generally, 3.89–3.94

Temporary workers – contd IR35 – contd private sector agency work, 3.99– 3.104 public sector agency work, 3.95– 3.98 legislation, 3.04 liability, 3.61–3.66 manner of provision of services, 3.31–3.42 old legislation, 3.18–3.21 PAYE background, 3.13–3.16 generally, 3.105–3.109 personal service, 3.24 personal service companies generally, 3.85–3.88 IR35, 3.89–3.94 presumption of control, 3.55–3.58 project consultancy, 3.02 reporting, 3.70–3.77 right of control, 3.44–3.46 right of substitution, 3.07 self-employment anti-avoidance, 3.68–3.69 background, 3.05–3.08 companies, 3.25–3.28 control, 3.29–3.58 employment income, 3.59–3.60 excluded services, 3.67 Expion Silverstone decision, 3.78–3.84 fraudulent documentation, 3.61– 3.66 introduction, 3.17 liability, 3.61–3.66 new legislation, 3.22–3.23 old legislation, 3.18–3.20 PAYE hybrid, 3.105–3.109 personal service, 3.24 reporting, 3.70–3.77 statement of works, 3.110–3.112 supervision, direction and control, 3.47–3.52 Temporary workplace umbrella companies, and, 4.09 Transfer of debt/liabilities managed service companies, and, 5.41–5.45 medium and large private organisations, and, 9.54–9.55 umbrella companies, and, 4.45–4.47 Umbrella companies background, 4.01–4.07

241

Index Umbrella companies – contd definitions, 4.09 expenses rules intermediaries, 4.30–4.38 introduction, 4.07 PSCs, 4.39–4.44 fraudulent information, 4.48–4.49 generally, 1.32–1.34 introduction, 1.28 IR35, and, 4.04 managed service companies, and, 4.06 meaning, 4.01–4.02 operation, 4.08–4.21

Umbrella companies – contd ‘permanent workplace’, 4.09 problem areas, 4.22–4.29 review of role, 1.54–1.56 ‘temporary workplace’, 4.09 transfer of liabilities, 4.45–4.47 use, 1.29 Unique Tax Number (UTR) employment status, and, 2.220 Witness evidence IR35, and, 11.49–11.51 Working time and hours employment status, and, 2.227–2.228

242