Today the Chancellor confirmed that the extension of last year's reforms to IR35 will not be extended to the private sector until April 2020. This decision was based on the consultation process and representations from MPs. From April 2020, responsibility 'for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker' (para 3.8). The reforms would eventually affect only 'medium and large' businesses without providing a definition. For small businesses it is presumed that the existing Chapter 8 IR35 rules will continue.
This is welcome news for professional contractors who rightly feared that the haphazard and ill-conceived implementation of the reforms to the public sector would create chaos in the private sector and lead to reduced pay. The Law Place Limited's director, Martyn Valentine, has assisted in research with ContractorCalculator which identified serious issues with HM Revenue & Customs' CEST tool and it is hoped that the delay will allow for HM Revenue & Customs to see sense and reconsider its approach to assessing employment status.
The delay creates an opportunity to lobby the government to abolish the reforms and avoid creating another burden for the private sector. Implementation of the reforms will involve significant expenditure on training, especially for HR departments which tend to have little idea as to the distinction between a genuinely self-employed professional contractor and an agency worker.
Please contact The Law Place Limited on 07788 773871 or firstname.lastname@example.org for more information.
Recently, there has been a spate of complaints by contractors about umbrella companies and employment businesses who are deducting employer's national insurance contributions where the client is a public authority and the new 'off-payroll' (i.e. Income Tax (Earnings and Pensions) Act 2003 Chapter 10) rules apply.
In other words, the public authority client has decided that the engagement constitutes deemed employment and the party below the public authority client in the payment chain, usually an employment business, has wrongly deducted employer's national insurance contributions from the 'deemed direct payment' owing to the contractor.
This despicable practice is prohibited by statute and evidence suggests that employment businesses and umbrella companies are 'skimming off' employer's national insurance contributions resulting in significantly less income payable to contractors. Where the off-payroll rules apply a public authority client must account to HM Revenue & Customs for employer's national insurance contributions separately and not as a deduction from the fees owing to the contractor.
This is precisely the same as for any employee; after all, if you're an employee and notice on your payslip that a deduction has been made for employer's national insurance contributions your response is likely to be unprintable. The warning signs for contractors include ambiguous statements concerning 'deductions' in the contract of employment with an umbrella company and payments for odd amounts.
The consequences for an employment business or umbrella company unlawfully deducting employment contributions are dire. HM Revenue & Customs in the first instance will claim any underpayment in national insurance contributions plus interest and penalties. Further, if the off-payroll rules genuinely apply then the contractor is likely to succeed in a claim for unlawful deductions from wages against the umbrella company in the employment tribunal. This is likely where 'services' description in the contract simply refers to a job title such as speech therapist. It is predicted that in the next 3-6 months a large proportion of umbrella companies will have been liquidated.
As the recent case of Elbourn demonstrates, the employment tribunal can effectively reverse an incorrect status decision caused by using the much-maligned CEST tool (or otherwise) where the contractor claiming unlawful deductions from wages is truly self-employed for the engagement in question and, therefore, does not fall within the tribunal's jurisdiction (s.230 Employment Rights Act 1996). The only defence for an umbrella company facing a claim for unlawful deduction from wages is to show that the public authority client is a customer of a business carried on by the individual and therefore the off-payroll rules don't apply. The contractor would then be entitled to payment gross of tax under s.44 Income Tax (Earnings and Pensions) Act 2003 from the outset of the engagement. This is clearly invidious for umbrella companies.
Where a contractor has been told by a public authority client that the off-payroll rules apply the best option is to insist on being supplied by the employment business as an Agency Worker and not to sign an opt-out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003. This avoids any misunderstanding as to a contractor's rights under the Agency Worker Regulations 2010.
Let's be clear, there is no legal basis for using an umbrella company and it is unlawful for an employment business to insist or otherwise make a condition of providing work-finding services that a contractor uses a particular umbrella company which involves any form of payment or deduction from wages. In fact, a contractor in this unfortunate position would be entitled to compensation and the employment business would be investigated by the Employment Agencies Standards Inspectorate. Where financial inducements have been offered by an umbrella company to an employment business criminal penalties under the Bribery Act 2010 may apply.
Since 2003 employment businesses have been prohibited from adopting this practice. Where an employment business has attempted to force a contractor to sign an opt-out notice where there is no advantage for the contractor and the employment business wants to use a particular umbrella company it is open for the courts to strike down such a notice.
If you have any questions please send an email to email@example.com or call us on 07788 773871.
(Originally published here: https://www.contractorcalculator.co.uk/cest_assessment_rejected_judge_545010_news.aspx - includes a contribution from The Law Place Limited's director Martyn Valentine)
A contractor has successfully used an employment tribunal to prove their outside IR35 status and reclaim thousands in overpaid tax, in a case during which the tribunal Judge ruled Elbourn was self-employed. This decision contradicted the result previously given using HMRC’s Check Employment Status for Tax (CEST) tool, which had wrongly concluded that IR35 applied to his engagement.
Mr Elbourn appealed to the tax tribunal for unlawful deduction of wages, during an engagement with agency Qualserve Consulting Ltd and end-client the Met Office, on the basis that employers National Insurance contributions should not have been deducted from his rate.
However, Mr Elbourn lost his appeal on the basis that he was found to be neither an employee, nor a worker, but self-employed – meaning IR35 could not have applied to the engagement.
However, in securing legal proof of his employment status, Elbourn managed to prove that an estimated £9,500 was wrongly deducted from his income by the client and agency, who treated him as ‘employed for tax purposes’ under the Off-Payroll rules. As a result, the respondents are compelled to repay the sum deducted.
Qualserve had made the decision to tax Elbourn accordingly with a CEST assessment, which had found him within scope of the rules. An evaluation which was wholly rejected by Judge O’Rourke, who concluded: “He [Elbourn] was given a project and, apart from a weekly meeting to check on progress, he was his own master.”
“This case marks a hammer blow for HMRC,” comments ContractorCalculator CEO, Dave Chaplin. “CEST’s accuracy has once again been called into question, in a case where the contractor’s self-employed status was never in doubt.
“Moreover, the case has presented thousands more contractors, who have been overtaxed due to Off-Payroll, with a straightforward means of recouping what is rightfully theirs.
“Bizarrely, in this case, even though the client had decided using CEST, that he was a “deemed employee”, they then put up a defence claiming that he was in fact self-employed. Whatever the Judge decided Elbourn would effectively win. Either he would be found outside IR35, or be found to be an employee or worker, in which case the employers NI would have been an unlawful deduction.”
‘The Elbourn defence’: background
In August 2017, Elbourn reached an agreement in principle on a three-month contract with the Met Office and was referred to Qualserve after enquiring about the contractual position of the engagement.
In the meantime, the Met Office completed a CEST assessment without a copy of Elbourn’s contract to hand. Instead, it based its assessment on what Elbourn describes as ‘a boilerplate business analyst job description’, a practice which is actively encouraged by the taxman, as the recent emergence of an HMRC webinar on IR35 has shown.
CEST found him to be within IR35, which led to a dispute between Elbourn and Qualserve over employer’s NI, which Qualserve insisted be deducted from Elbourn’s rate. Despite this, Elbourn and his limited company entered into a contract with Qualserve to provide services to the Met Office in September 2017.
Continuing to work for several months while suffering excessive tax deductions, Elbourn’s contract was eventually terminated in January 2018, and he presented a claim under s.230 of the Employment Rights Act 1996 in March 2018.
Though Elbourn failed with his claim, the ruling shows that his limited company should have been paid without deduction of tax from the outset, on the basis that Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (the Off-Payroll rules) did not apply. As a result, Elbourn is awaiting a refund of roughly £9,500, including an estimated £3,300 in unlawfully deducted employer’s NI.
“The claim was always going to fail, for the simple fact that Elbourn’s contract and working practices pointed conclusively towards a contract for services. But that was the whole point,” notes Chaplin. “Submitting an employment tribunal claim is free and, as this case has shown, can be used to secure almost undeniable proof over an individual’s IR35 status.”
Elbourn judgment could prove catalyst for further claims
This is a tactic which we understand has only been used once before, by IT contractor John Williams in the case Williams v Hewlett Packard Ltd & Anor (2002). However, Martyn Valentine, director of IR35 specialists The Law Place – who advised Elbourn – believes this outcome could open the floodgates for many similar claims:
“It’s surprising that this route has only been rarely experimented with before. Obviously, use of the employment tribunal system would appear contrary to normal thinking for a contractor who typically goes to lengths to prove their outside IR35 status.
“But, as this case has shown, it can be used to help secure fair tax treatment for contractors who really have nothing to lose. If the Judge decides that they are self-employed, they will be outside IR35 and receive a refund of overpaid tax. If the Judge deems them to be employed, then they at least manage to secure employment rights. This could prove the catalyst for many similar claims.”
CEST assessment rejected by Judge
In a webinar delivered to NHS Trusts, HMRC’s IR35 policy advisor Mark Frampton stated that the client “is often best placed to judge whether the person would have been an employee or self-employed”. According to Chaplin, this outcome provides irrefutable proof that this is not true:
“The client aided – or rather hindered – by CEST, arrived at an assessment which was directly opposed to that reached by an employment tribunal Judge. It goes to show that end hirers are not well informed enough to make accurate status decisions, especially when they are encouraged by HMRC to overlook the individual contract and working practices.”
Chaplin adds: “Though HMRC continues to champion CEST’s accuracy, we now have the first of what I expect to be many cases where a Judge makes a status decision that contradicts CEST. This case adds to the mound of evidence already available demonstrating that HMRC’s tool is woefully inaccurate.”
Tribunal ruling ‘a serious issue for HMRC’
While great news for contractors, this outcome will surely prove disastrous for HMRC, as well as non-compliant contractor clients and agencies, as Valentine explains:
“This exposes a seismic hole in the legislation. It’s a serious issue for HMRC concerning the drafting of Chapter 10 that a contractor can make an employment status claim when outside IR35, potentially forcing the respondent to argue a position that puts them in jeopardy of having to refund significant deductions from the contractor’s income.
“The judicial impact could be considerable when you think about the costs that public authorities incur when defending against these cases. Then you consider that HMRC would have to refund the tax deducted by respondents who will have to pay the contractors. This could get very messy, very quickly for HMRC, but it will be a mess of its own making.”
He concludes: “This should also serve as a stern warning to clients and agencies who are happy to enforce incorrect tax treatment on contractors, and who fail to carry out a proper status assessment.”