Today, 17/7/15, the Treasury published the Intermediaries Legislation (IR35): discussion document following the Budget of 8/7/15. The discussion document is remarkably scant on detail of the Treasury’s own ideas on reforming the operation of the IR35 legislation so we’ll help.
We do not accept that the law creates excessive grey areas or is over-complex. The common threads running through all judgments which held that the engagement under review was outside IR35 are the existence of an overall project basis, independence on the part of the PSC’s representative to determine how, when and where to do the work, a commercially enforceable right to substitute the representative and evidence of being in business such as gaining income from other clients and exposure to commercial risk. The existing law, both statute and judgments, is clear but administrative reform based on common sense will produce better results than hitherto.
Therefore, a legally binding statutory declaration (i.e. enacted by legislation and set out in a prescribed form) signed by both the PSC and end-client before the start of an engagement could be used to provide evidence of mutuality of obligations, whether a right of control over the PSC and its representative exists (see above) and whether the end-client would accept substitution and the use of subcontractors. The statutory declaration would provide a thorough questionnaire to focus the parties’ minds on the true working practices (which have primacy over the terms) and provide a warning of penalties if incorrect or dishonest information is provided, possibly including liability for HM Revenue & Customs’ costs.
Further, the statutory declaration would need to clarify whether there are any restrictions upon the PSC in providing services to other clients during the currency of the engagement. A much more nuanced definition of control than the control test in respect of umbrella workers and their entitlement to tax relief on expenses would be set out in the statutory declaration and cover the areas above. Additionally, the statutory declaration would ask whether the engagement could have been obtained without the help of a recruiter and if independent legal advice has been sought regarding the contract. After all, a PSC which uses its own terms and looks for work independently is more likely to be in business on its own account than a PSC which relies on recruiters, notwithstanding the existence of a master-vendor arrangement between a recruiter and an end-client.
The same statutory declaration would also help to clarify whether the worker should be entitled to rights under regulation 3 (2) (b) of the Agency Worker Regulations 2010. This would provide much needed certainty for both recruiters and end-clients. In essence, if the statutory declaration confirms that there is no project basis to the engagement then it will serve as confirmation that the Agency Worker Regulations 2010 apply to the engagement.
The sting of the proposed statutory declaration is that fixed term engagements where the PSC’s representative is expected to fill a role (evidenced by advertisements published by the end-client and/or recruiters and the draft agreements) and be part of the end-client’s ‘business as usual’ operation will automatically be caught by IR35. The Treasury provided an example of how two lawyers, both undertaking substantially the same work, could face markedly different tax liabilities. The lawyer operating through a PSC would, of course, pay much less tax than the lawyer employed on a contract of services.
Where the PSC’s representative is undertaking a defined role within the end-client’s business then the option of receiving a tax advantage by the use of dividends should not be available and the end-client or recruiter will be required to deduct PAYE and NICs at source. Many PSCs fall into this category of ‘super temp’ and would be caught if this proposal is enacted. This can be accomplished by a Finance Act rather than modifying the IR35 legislation (section 49 (1) (a) – (c) Income Tax (Earnings and Pensions) Act 2003) directly thereby circumventing previous objections to reform. The concept is simply to make PSCs and end-clients acutely aware of the need to crystallise the working practices at the outset rather than to complacently hope for the best. This complacency is not helped by HM Revenue & Customs’ lack of aggression in conducting inquiries.
Historically, the main reason for the continued pressure from the Treasury upon PSCs is insufficient training for both recruitment consultants and HR practitioners. Unfortunately, many in house drafted contracts for the supply of PSCs to end-clients are not fit for purpose and require substantial re-writing by the PSC’s representative to properly reflect the true working practices. Common industry mistakes include defining the services as a job title as a matter of standard practice in a contract which is purportedly for use by self-employed PSCs. Therefore, updated guidance from HM Revenue & Customs and other stakeholders would provide greater certainty for PSCs and end-clients, especially for the benefit end-clients’ HR staff who may not be aware of employment status. The key question is whether or not the work involves providing a commercial service, i.e. delivery of a time-sensitive project, which is outside of an end-client’s normal functions. If there isn’t a project then the other tests are academic.
Please contact us if you have any questions.
Published 17/7/15
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