IR35 test: Supervision, Direction or Control

There are more ways to assess IR35 than skin a cat

Regular followers of the Intouch blog will by now be familiar with some of the more controversial proposals to come out of the Summer Budget. In particular, the suggested reforms aiming to improve compliance to the Intermediaries Legislation (IR35) have made people rather hot under the collar.

This week, I would like to focus on the three words every contractor and engager needs to be fully aware of; ‘Supervision, Direction or Control’ are already significant indicators currently used by HMRC as a test for disguised employment / false self-employment in the agency rules (ESM2029).

One of the ideas floated in the open IR35 discussion document is to align the IR35 test with that used for temporary workers. If this comes to fruition, the right of Supervision, Direction or Control (SDC) is likely to become ever more prominent in the future interpretation of IR35 status.

What is Supervision, Direction or Control?

HMRC uses facts relating to SDC to assess whether an individual is free to do their work as and when they choose, without supervision, direction or control of the hirer and is thereby working through a company legitimately and correctly taxed as an independent worker.

Essentially, the idea is to provide a framework with which to differentiate a truly self-employed individual or PSC from a disguised employee. Yet many people still don’t really understand what these terms mean, or how and when they apply, so let’s take a look.

 

Supervision refers to someone overseeing a person doing work to ensure quality standards are met and / or to help a person develop their skills.

Direction refers to the provision of “instructions, guidance or advice” as to how a job must be completed, along with coordination of how the work should be done.

Control refers to a person being told what work they should be doing and how they should go about doing it. It can also refer to someone having the power to move a person from one job to another.

 

As hinted at in the proposed reforms, should HRMC be able to demonstrate that an individual is, in fact, working under authority, is being supervised, controlled or directed by the hirer, IR35 will apply.

A seemingly innocuous word that makes all the difference in the debate on SDC is ‘or’ – as only one of these three proof points need apply for an individual to fall inside IR35.

The real fly in the ointment is HMRC’s latest (and not fully considered) idea to put the onus of deciding whether or not IR35 applies onto the engager, instead of the worker and exposing them to additional taxation if they get it wrong. We will be discussing this issue in more detail next week.

Who will SDC apply to?

Well, this is the million dollar question and the saying, “There’s more than one way to skin a cat,” is never more true than when applied to the ins and outs of the IR35 legislation.

Some cases are easier to assess than others. For example, a self-employed worker brought in to cover a permanent member of staff’s maternity leave is likely to be subject to the same terms of supervision, direction or control as an employee, thus IR35 is more likely to apply.

In my opinion, control is the battleground on which this issue will be fought, for someone only need prove that they are not controlled to stand a chance of winning the argument. It is too early to say that control is at the head of the Holy Trinity of SDC but if it is, then if control is absent perhaps a lack of sufficient direction and supervision will follow.

Interestingly, if SDC are all degrees of control and not separate tests as HMRC is suggesting, then control is where the argument will be won or lost. This could be done through something as simple as a revision to their existing contract. However, I have a sense of ‘deja vu’ about this solution in that we have been here before with the right of substitution being inserted into contracts.

Each situation is open to subjective interpretation and the examples given in the IR35 discussion document are too clear cut and out of touch with reality to be helpful. To truly earn support within this complex industry, HMRC must first get a proper handle on the nature of the businesses and workers it is attempting to better regulate.

So long as viewpoints compiled by trade bodies and individuals are taken on board, the discussion document could be a positive first step towards modernising these outdated and unrealistic stereotypes.

The repercussions of change

The danger for HMRC is that, in trying to get everyone to play fairly by changing the rules of the game, it will still drive people to the wrong side of the IR35 line. We could end up with yet more abuse of the system that is even harder for the government to clamp down on.

The Association of Professional Staffing Companies has already warned the proposals would have a “devastating effect” on the flexible recruitment market. I share the same fears for the contracting industry as a whole, but this is not the end of the story. There is still a chance to influence decisions before they make it to consultation stage and HMRC has invited suggestions for alternative options.

At Intouch, we will be contributing to the conversation and are already in talks with our key trade body contacts to discuss and propose a more effective solution for reform.

If you haven’t already, please sign up to the Intouch blog below so we can keep you informed of the latest developments in IR35 legislation, industry news and helpful advice.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Unlimited shades of grey as HMRC closes in on IR35 abusers

HMRC closes in on IR35 abusers

As the post-Summer Budget dust starts to settle, there is a hotly debated topic still keeping contractors awake at night. Last week I started to look at the proposed changes to dividend tax, which form part of a series of wider reforms to the Intermediaries Legislation, commonly known as IR35.

The publication of HMRC’s IR35 discussion document in July has triggered a growing sense of unease amongst the contractor community. The big concern is that these latest attempts to achieve clarity will only serve to move the onus of declaring a worker’s status from the worker themselves, to the reluctant client.

The story so far

In order to get on board with the so-called “Rationale for Change”, it is important to first understand the current situation…

Under the current ways of trading with a client, self-employed workers have been able to use employment intermediaries such as Umbrella companies, employment businesses and Personal Service Companies (PSCs) as a way to reduce their tax and National Insurance payments.

As a result, people pay different levels of tax depending on whether they are employees, self-employed, or work through their own Limited Company.

An example of this is a contractor being able to claim tax relief for travel and subsistence costs to and from their usual place of work, whereas an employed worker doing exactly the same job would have to grin and bear it with no tax reliew for themselves. It is this disparity that the Chancellor, George Osborne, wants to even out.

Who is at risk?

Most contractors are operating fairly and squarely through these employment intermediaries and have legitimate and justifiable reasons for working through a Limited Company, such a the protection of limited liability, greater flexibility and long-term planning options. However, some are taking unfair advantage of the system and it is these “abusers” that the Chancellor has set his sights on catching.

In my view, anything that helps police the industry more effectively and “level the playing field” so it is fair to all, is a good thing. By tightening the noose on IR35 abusers, the Chancellor is paving the way for legitimate PSCs to get on with what they do best and being recognised for the valuable contribution they make to the UK’s flexible workforce.

Understandably the fear is that, rather like trawling the ocean to catch a few naughty fish hiding in the shadows, many compliant businesses will be caught up in the new measures designed to better fill the Treasury’s coffers. The other contentious matter is introducing the concept of “fairness” to a moral and ethical debate. How can ‘fair’ be anything other than subjective?

As you can see, the situation is not as clear cut as HMRC would like us to think. The Treasury’s promise to the Chancellor that the IR35 reforms could help raise an additional £430 million is, in the view of many commentators, unrealistic.

There may be trouble ahead

A key flaw in the discussion document’s suggestion is the proposal of putting the responsibility of assessing a contractor’s IR35 status onto the engager. This is likely to cause a serious headache for UK employers. Why does HMRC think engagers will be any more accurate in doing this than the worker, unless it is accompanied by transfer of debt provisions?

To me, this is where the reforms start to unravel. Is the tax man seriously expecting people to put up their hands and declare, “I am Spartacus!”?

The current guidance for identifying “supervision, direction or control” [see ESM2029 for examples] to help assess the worker’s tax status is, in itself, entirely based on hypothetical examples and open to misinterpretation in the real world. This is a subject I will be exploring in more detail on the Intouch blog over the coming weeks.

The constant challenge for HMRC is deciding who should, or should not, be either side of the IR35 dividing line. In an ideal world, HMRC would like to make every PSC worker or self-employed contractor fit in a neat little box and put the onus on the engager to determine where they slot in on the compliancy scale.

After reading the discussion document, you would be forgiven for thinking that every individual case is easy to assess. The case study examples are so clear cut and unrealistic it’s almost caricature.

For as we know, the reality of whether IR35 applies or not is anything but black and white. In fact, there are so many shades of grey in between that there are almost unlimited ways to argue the situation.

This is why HMRC has struggled to enforce legislation in the past. So although its good intentions are to be supported, viewing the current landscape through an oversimplified lens and merely playing around with subjective rules is unlikely to improve effectiveness of the current legislation.

To make a real difference, HMRC needs a system that sorts the wheat from the chaff, and can identify abusers based on something other than gut feel. They should not be scared of rapid expansion in a modern method of working just because the Treasury would be better off if we were all permanent employees.

I have no doubt HMRC recognises and accepts the reality of this deeply complex issue and wants to develop solutions that work within the grey areas as well as the black and white ones. The discussion document asks for help and, as stakeholders, we must respond responsibly and impartially. It is still better for Spartacus to identify himself rather than letting the soldiers of HMRC do it.

There’s no doubt the industry faces change ahead. But rather than hiding away, now is the time to fasten your seatbelt and talk to your accountant about what changes you might need to put in place to reinforce best practice standards and compliancy.

If you haven’t already, I recommend anyone who suspects they might be affected by the changes should read HMRC’s Intermediaries Legislation (IR35): discussion document or speak to your trade body and get involved in the conversation while you still have a chance to make a difference.

At Intouch our priority over the weeks and months leading up to next April is to advise and support our clients making the correct decision on their IR35 status.

If you are concerned about the proposed IR35 reforms or your compliancy position, give our team of expert contractor accountants a call on 01202 375491 and let Intouch make this complex issue a simple one to resolve.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

HMRC slammed in House of Lords Report – IR35 update

IR35 update

The House of Lords Select Committee has published a report on Personal Service Companies in which they make a series of recommendations, many of which do not show HMRC in a good light and no doubt reflect what many Contractors have been thinking for a long time!

The first recommendation suggests that HMRC carry out a detailed assessment of how much IR35 costs to enforce, so that a better assessment can be made on whether it’s having the intended effect and is proportionate.   The Committee accept that abolition of IR35 as proposed by the Office of Tax Simplification would be attractive, yet sadly deems it unwise if the legislation does indeed have the effect that HMRC claim.  HMRC have stated in the past that IR35 saves £550m so it will be interesting to see this figure justified.

The paper then goes on to acknowledge that the IR35 rules demand a great deal of time and effort by Contractors, and that it can be difficult for them to quickly and accurately know what their tax liabilities are given the contract by contract nature of IR35 and the need to have an understanding of case law.  Our own experience in talking to Contractors reflects this, with many feeling very exposed due to not having the time or expertise to really feel sure of their own status.

The Business Entity Tests also feature, which the Report suggests should be reviewed to see if they can work better to provide certainty for taxpayers.  HMRC’s Contract Review Service should also be publicised more, although how many Contractors trust HMRC to be impartial is another matter!

Other interesting points in the report concern making the Service Company question on the P35 and Tax Return mandatory fields, if HMRC deem them necessary, and a further review on the possibility of merging tax and National Insurance.

It will be interesting to see where this goes, so we’ll keep you updated as we know more.

Read the full report via the PCG website.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Freelancer wins long battle over IR35

Freelancer wins long battle over IR35

Mark Fitzpatrick (taxpayer) and sole owner of MBF Design Services Ltd was cleared by a tax tribunal of charges brought by HMRC under the IR35 legislation, which claimed that he was using his Limited Company to avoid tax when working as a contractor to Airbus. The IR35 challenge brought by HMRC appears to have lost of several counts but most clearly on a lack of “mutuality of obligation” (“MOO”). It seems that if contractors arrange their affairs correctly and the arrangement terms reflect the reality of the situation then IR35 will not apply.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.