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Supervision, direction or control

Supervision direction or control


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Supervision, direction or control

One of the more controversial aspects of the Summer Budget 2015 was the focus on Supervision, Direction or Control (SDC) – three words every contractor will need to be fully aware of.

They are already significant and currently used by HMRC within the agency rules that were revised in April 2014 and became effective in April 2015.

However, since the Summer Budget they are now key to the proposals used in the consultation to revise Travel and Subsistence and in the discussion document on revisions to IR35. Clearly SDC is becoming the key focus for HMRC in its battle against false self employment.

Our ebrief IR35 and T&S: Proposed changes and the impact for contractors and freelancers explores the new proposals made by HMRC:

  • that will introduce SDC as a test to establish whether or not Travel and Subsistence is an allowable tax deduction
  • that will simplify the IR35 test to a single test for whether SDC exists or not
  • and in both cases that the end client should determine SDC status

This ebrief explores what is meant by SDC and discusses some of the practical considerations, effects and action points for contractors and freelancers

Make sure you stay in the know with the changes affecting the contractor world. With Intouch, your dedicated Personal Accountant will help you get the best, and the most, from your Limited Company while all the time remaining compliant. Everything you need for a monthly fee.

What is SDC?

Trying to answer the question of what SDC means is not easy, largely because it is a very subjective test, and one view of SDC will not be the same as another. We know from experience, one of the main criticisms of IR35 is the subjective nature of the assessment. Unfortunately the same problem exists when assessing SDC.

In the real world, many degrees of SDC will exist at different levels. The question to ask is whether the level of SDC that actually exists is sufficient for the legislation to be applied? Sadly, there is no formal measure of what triggers the ‘in or out’ answer. The answer will be a subjective decision reached by the contractor, the client and HMRC and there is little chance that all three will always be in agreement. Eventually only one view matters, that of a tribunal or a court. Frustratingly uncertain, we would agree, that there is no clear way of defining SDC in a way that gives everyone certainty every time.

HMRC’s view of the world

We can find the view of HMRC set out in their guidance and the examples that they give. These are available over many pages of the employment status manuals that can be found online. The problem is that this is only a view expressed by HMRC; it is not necessarily the law, only their interpretation of it, and it can often be said somewhat biased towards the decision they would prefer.

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 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 coordinate the 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.

Although a degree of control may exist it is important to establish whether that control is at a sufficient level of interference in the manner in which the work is carried out. Control at a superficial level is not necessarily sufficient.

The ability to require a worker to report may be nothing more than proper regard for health and safety, other regulatory control or to obtain an update on progress. These are not the same as control and are not the issues HMRC are concerned with.

Control is often looked in terms of what, where, when and how. At Intouch, we would also argue the need to add ‘who’ to this.

When and Where

Contractual rights over working hours and location are not necessarily control for the purposes of SDC where the nature of the task dictates that it must be completed in a specific place or within a time slot out of practical considerations.

Issues such as security, confidentiality, access to systems, installations or equipment and access to key personnel are all factors that dictate location, however these are not relevant SDC issues that are being exercised, they are a matter of necessity and a distinction should be made.

Most contracts that are knowledge based are measured in some form of time. Working hours are therefore a measure of value and not solely a measure of control; and where the task is site based out of necessity then normal office hours are a constraint to the access of the site rather than control over performance. Any contract that defines hours, rate and duration are also applying a form of fixed contract value and not just control over time.

SDC factors that must be considered are those that are not connected to the task itself. Where a client can switch a person from one job to another or send that person to other jobs at other locations then SDC is being applied.

A contracted task that requires presence at multiple locations in order to complete that contracted task is not relevant.

Where a worker is required to obtain prior authority from the client to take time off, or to agree a variation in hours, such as ‘overtime’ then the client is likely to possess rights that maybe considered important in connection with when work is undertaken. Therefore where a contract specifies the hours to be worked, whilst control may not exist to the extent those working hours are for practical purposes, control may exist where permission must be sought to vary those working hours.

What

The question of SDC over what is done is directed at whether the client can determine, on a day to day basis, the job that is undertaken and the ability to move a person from one job to another. It is important not to confuse a detailed work specification with SDC over what job is undertaken.

Clearly within a project based assignment the task is determined from the start and is defined for the purposes of the requirement at both a high level and also, at times, in a detailed specification. There is one assignment to complete a defined task. The client has no ongoing SDC over the ‘what’. The ‘what’ is, by necessity, defined by the contract for the very practical need to define what is being contracted and paid for.

Whereas in a continuing service, where a workers services are more aligned with a team of people, often employees, or is supplying a specific skill in a general, wide ranging manner then the ability for the client to move someone from one job to another is far greater and SDC is more likely.

The contract, together with working practices, will identify whether or not the role undertaken is more likely to be conducive with being moved from task to task or job to job, or so clearly defined that the worker can say “No, it’s not my job”.

When considering the ‘what’ mutuality also plays a role in assessing SDC, or rather SDC plays a role in assessing whether or not mutuality of obligation exists.

If there is no mutuality of obligation then there cannot be, or can only be limited, SDC over the ‘what’ is undertaken. If there is no obligation to accept a role offered, nor to offer a role, then SDC is limited.

How

The courts generally focus on the ‘how’ a job is completed as the main deciding factor when considering SDC. HMRC also state within their guidance to the agency legislation that they look for whether or not the worker has the freedom to choose how they do their work, and whether or not someone (or someone on behalf of the client) has the power or authority over the worker to dictate how the work is done, by imposing control over them, subjecting them to supervision or giving them directions.

The detailed instructions given by the client, which may also be included in the schedule attached to the contract, should therefore be considered carefully to understand the nature of the services

The scope and depth of those instructions may give an indication of the practicalities of exerting SDC over how the task is performed. The less detailed the instructions the more unlikely that control exists, as, in the absence of detail, there is nothing specific to control other than overall delivery of the final product. Where instructions are extensive, they may remove much of the independence over performance but again this may, in some measure, be attributable to the nature of the service or project.

The degree of control that is exercised has to be looked at in the context of what is being done or produced. Often tasks are not isolated but are part of a larger whole. That whole is an accumulation of many parts that could not come together without some measure of control, supervision or direction over the many parts. Where parts of the whole are undertaken by employees it is appropriate to consider the level of SDC, over a contractor by comparison with SDC over employees operating in a similar field. Only by making a fair comparison of two similar roles can the degree of SDC over one be compared with SDC over another.

There must be adequate skills to exercise control. This is particularly relevant to tasks involving knowledge based work, where it is the worker’s skill and expertise that is required. Where those skills are broadly available to the client from its employees, then that client could have the skill

There must be adequate skills to exercise control. This is particularly relevant to tasks involving knowledge based work, where it is the worker’s skill and expertise that is required. Where those skills are broadly available to the client from its employees, then that client could have the skill

The key to understanding SDC over how a task is undertaken is to understand the task and the skills that the worker brings to bear, and having understood that then to consider how SDC could be applied to the manner in which the skill is applied to the task. The actual performance of SDC then depends on the ability of senior management to perform that role. This is especially important with high end technical skills.

The position the worker has amongst other workers, employed or otherwise, is also relevant. Routine reporting to management may be considered control but is more likely supervision and direction, although the mere reporting of progress is different and does not confer anything. Becoming part and parcel of the organisation structure is a risk where the contract is for a long period of time. The longer the presence within the organisational structure the greater the risk that supervision and direction evolves as the worker begins to change the way they complete a task to become consistent with the working practices within the organisation.

Control may exist, but is that control such that a sufficient level of interference exists in the manner in which the work is carried out, therefore control at a superficial or low level is not sufficient?

Supervision and direction are the less, weaker versions, of control. Reporting and exerting influence over performance is not the same thing as control and may amount to no more than considerations over other areas such as quality, time, safety or adherence to other working practices applicable to the workplace

Who

This is the additional factor we feel should be considered when assessing control.

A contract that does not require personal service or does not refer to the supply of personnel is clearly much more difficult to apply SDC to, as there can be only limited SDC where the obligations are for one business to supply a service to another business without any reference to the individuals concerned.

That does not mean SDC cannot apply, only that it is difficult to demonstrate.

Therefore control is by necessity associated also with personal service and the stronger the substitution the weaker the likelihood that SDC exists over the individual worker.

Case law and precedent

As we have expressed above the only body that can make a final decision (assuming a dispute) is the legal process. This relies to a large extent on case law, or precedents, and it is to those that we must turn to try to understand SDC.

A right of SDC

The existence of a right to do something is treated the same, regardless of whether or not that right is exercised in practice. Rights are usually clearly defined within the formal contract.

The formal contract therefore becomes so much more important in assessing whether SDC rules will apply

Unlike IR35, which is mainly concerned with real world working practices and not the formal contract, SDC is concerned with whether a right exists.

Verbal or written

A contract does not need to be in writing and can also be verbal. If the formal written contract contains references to the existence of a right of SDC, but there is no actual intention to exercise those rights, it could be argued that the right is unreal and has been varied verbally. Alternatively if you have verbally agreed to be subject to rights of SDC but these are not covered by the written contract, for instance a sham contract written to overcome SDC, your verbal agreement is as effective as if the rights are in the written contract.

If the actual contract contains both written and verbal terms then you should be cautious, if there is no evidence of any verbal variation of the terms of the written contract it would be difficult to substantiate without some supporting documentation. Equally if the actual working practices indicate that SDC exists that is not within the contract you can still be caught.

Obtaining an accurate and complete statement of the terms will be essential where the written contract is not fully reflective of the SDC terms that apply

Not just the client

Another SDC issue that may be overlooked is whether or not it is exercised by someone other than the actual engager. For instance, if your work is subject to SDC by a fellow contractor, then where that SDC is exercised in connection with the work provided to the end client that is, in effect, as good as the client exercising SDC over your work.

Supply chains

Where your contract with the end client is not direct and involves agencies and other employment intermediaries then additional problems arise. Whilst rights and obligations normally filter both ways throughout the supply chain you must be aware of the risk that your client believes that they have rights of SDC when your contract suggests otherwise.

If the proposals materialise and the end client is involved in establishing your SDC status then any variations between contracts will become, let’s say, problematic to address.

Clearly it is important to make sure that your understanding of the contract mirrors that of the client and a statement of the terms will help to identify anything that is inconsistent.

IR35 and SDC

IR35 is a broad assessment of working practices. One of those tests is control and clearly there will be an overlap when considering both SDC and IR35. However, IR35 is much broader and the existence of control alone does not mean that IR35 applies. There are clearly situations where SDC will apply whilst IR35 will not.

A discussion document was issued by HMRC regarding possible changes to IR35 in the future. There was no surprise that SDC emerged as HMRC’s preferred measure as a means of simplifying IR35. The proposal was not widely accepted and most commentators considered this will be a mistake as an oversimplification and unlikely to achieve the stated objectives.

What does being caught by SDC mean?

That depends on how you work:

Intermediaries / Agency Reporting

Clients and Intermediaries have been required to report gross payments to intermediaries since April 2015. If you work through a personal service company (‘PSC’) you will most likely have been asked for your National Insurance number. This arises from the requirements that your client or agency must report the payment gross to your company. PSCs are exempt from reporting payments that are dividends but would have to report payments to other intermediaries or subcontractors.

For any payments made directly to individuals who are subject to SDC, they must be made under PAYE, and not paid gross.

Umbrella workers

Most Umbrella workers will be losing the ability to claim expenses in April 2016. From that date expenses, except mileage, will most likely be subject to PAYE and deducted before payment is made to them. If the T&S rules go ahead and the worker is subject to SDC then mileage will be lost as well and no tax relief available via self assessment.

PSC

If a PSC worker is subject to SDC, and the T&S proposals proceed, they will be unable to claim T&S from the client. They will also be subject to any proposed changes to IR35 should they ever emerge as firm proposals based on SDC.

Most Umbrella workers will be losing the ability to claim expenses in April 2016.

Conclusion

When it comes to SDC, the most important thing you can have is clarity:

Early on in your contract, clarify your real day to day terms with your engager and get them to confirm your understanding. This is a good opportunity to iron out any discrepancies so that both of you are clear on how you are expected to conduct your work.

Soon after you begin your assignment ensure you have your contract reviewed so you are confident that what your contract says is a true reflection of the reality.

After you have been working for a few weeks have your working practices reviewed.

Retain any evidence you have to prove that you are not under the supervision, direction or control of your end client. Having this to hand can save a lot of worry and time if you need to prove your status later down the line.

Don’t wait until April 2016 to address any issues. Once you have identified your position, if you have a problem, or you think there’s a problem with your contract, sort it out now.

Work with a trusted contractor accountant to risk assess every contract you undertake.

Only by gaining an understanding your SDC risk will you be able to formulate a plan to:

  • obtain evidence in your favour
  • mitigate the risk areas
  • change your terms
  • change your role and working practices
  • ultimately, change the client….!

As well as supporting and guiding you through every step of running your own Limited Company, IR35 contract risk assessments are part of the monthly service you’ll receive from Intouch Accounting

For a monthly fee, you’ll get everything you need to run your company smoothly, efficiently and compliantly. We work with contractors every day so we know what you need, when you need it:

  • Unlimited advice from your expert Personal Accountant
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  • If you don’t yet have a Limited Company, we can incorporate you for FREE within 24 hours, and help you set up a business bank account, VAT and PAYE registration.

We’ll be keeping a keen eye on changes to SDC. If you’re not already an Intouch client, sign up to our mailing list today to ensure you receive our blogs and follow us on social media for news as it happens.

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