Adrian Marlowe, MD of recruitment and employment law specialists, Lawspeed, examines this - and a offers a potential solution to the problem:
He’s 'not self employed', therefore he must be 'a worker' said the Court of Appeal, in the recent Pimlico Plumber case. (See: Plumber case throws spanner in works of self-employment status - July 2018, Shout99)
In reaching this decision, the hare has been set loose and the HMRC hounds will soon follow. If the plumber is a worker HMRC may consider that he should have been paid on a PAYE basis, not gross, leaving Pimlico liable for all the unpaid NICs and PAYE for many of its 'workers' for its many years of existence.
So how could this impact on the contractor tax IR35, and thus on the contractor supply sector?
Firstly, from a contractor’s perspective, it should make little difference as the position is just as confusing as it was before Pimlico. Having said that the Court highlighted the enormous difficulties that exist in assessing ‘employment’ under English law, so emphasising the confusion.
With different meanings under different pieces of legislation, someone can be employed for one purpose, purpose (a), and not employed for another, purpose (b), yet find arguments that work for purpose (a) being levied to support arguments relevant to purpose (b). Thus, arguments that a hirer is not ‘a client or customer’ of a contractor business as discussed in Pimlico could be used to support the proposition that the hirer is a deemed employer for IR35 purposes. Yet there is no law that says that if the hirer is not a client or customer of a business the individual representing the business must be an employee of that hirer.
Accordingly as things stand the uncertainties that currently exist in assessing IR35 status will continue, but outcomes are likely to be affected by the new government proposal to extend the off payroll public sector rules (IR35). If implemented, contractors may find that the way they pay tax is taken out of their hands, as the proposal is that the hirers and agencies should be liable for employment taxes on the contract rate unless the contracted work arrangement is actually outside IR35 as decided by the hirer and/or agency.
How they decide is to be assisted by the online tool CEST, an HMRC creation that seeks to assess status, and which has come under continuous criticism since its launch last year. There is little doubt that this tool is flawed, not the least that it purports to assess status on facts that cannot be known at the time it is used, namely before the assignment starts, and without any assessment of the contracts in play.
When advising the Association of Recruitment Consultancies (ARC) in its challenge to CEST and the public sector off payroll rules in 2017 we pointed to this and the fact that outsourcing decisions to a piece of software (HMRC claims that CEST uses artificial intelligence) is potentially unlawful.
As liability will fall to the payer of the contractor, contract supply agencies are in for a shock if not prepared in terms of process for assessing IR35 status, suitable administration, and readiness to negotiate new pricing with both hirers and contractors each of whom may be seeking a different result. Hirers that could be exposed to liability will as always pass the risk to the agencies, and contractors will want to be paid gross as before. Mayhem may well follow.
There is a much simpler solution. As HMRC claims it wishes to level the playing field for all, public and private sector alike, the inherent problem with the original IR35 should be addressed. Rather than stick with the plan from year 2000, under which HMRC has to show that IR35 applies if it is to collect the tax, and manipulate it so that agencies and hirers are liable for contractor tax, a proposition that sticks in the craw of any business using a contractor, the basic rules should be changed. This can be done as a two part process.
First, the contractor should have to show that the tax does not apply, the default otherwise being that IR35 does apply. This would massively cut HMRC administration, would obviate the need for further complex legislation in the private sector, enable the public sector off payroll rules to be dropped, and avoid the potential mayhem and conflicts that I mentioned above.
Second, the rules should not assess hypothetical employment, but instead consider whether the contractor has a real and genuine business. It is hard to argue that someone who buys an off-the-shelf company for £25 and does little else is running a business that could justify tax support. In contrast a person who sets out to make profit other than from simple deployment of their time, potentially employing others for a genuine business and profit objective, should be able to justify tax support.
If the rules focus on business rather than employment there would be no need for assignment by assignment assessment which requires understanding the employment tests of ‘supervision’ ‘direction’ ‘control’ ‘mutuality of obligation’ and so on, not to mention all the accompanying administration, risk and liabilities.
HMRC cries of ‘false self employment’ and ‘tax avoidance, at least as far as contractors are concerned, should disappear into the ether. At the same time genuine entrepreneurial individuals would be encouraged to positively set up genuine businesses for the sake of genuine businesses rather than the negative of tax avoidance.
Self employment definition
Employment status is currently being reviewed following consultations that closed in May and June 2018 (‘the Status Consultations’). One idea put forward was for a new definition of self employment, or putting it another way, a definition of what is a business.
However despite the absence of any Government decisions following those consultations, the obvious continuing uncertainties and ambiguities on employment status highlighted in the Pimlico case, and the arguments that rage over HMRC’s use of its online CEST tool, it is surprising that HMRC has already pushed ahead with the IR35 consultation.
HMRC cannot say that the public sector rules were fully and independently reviewed before being implemented. ARC’s arguments got as far as the Treasury Select Committee but the planned hearing was thwarted by Theresa May’s announcement of the general election on the same day. The arguments put forward were therefore never fully considered.
The subject matter is so significant, involving as it does a huge change to our culture and flexibility of workforce in the UK, that HMRC should be required to consider all the options in the light of the direction we, as citizens of the UK wish to take, before taking any further action.
This should involve a full review by Parliament following the recommendations that in turn follow the Status Consultations.
Hopefully the proposal I make above concerning IR35 will appear attractive in it’s simplicity, thus maintaining the status quo that one business should not be liable for the tax of another.
This article was written by Adrian Marlowe, Lawspeed.
For more information about all aspects of IR35 see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2018