Abbey Tax is a provider of insurance and consultancy services provided to end users largely via accountancy practices and trade associations looking to offer protection and additional services to their clients and members. We have a team of advisers and consultants staffed almost exclusively by ex-Revenue Inspectors and ex-VAT officers, and our primary role is to ensure that customers get best advice and can afford the best defence in the event that their clients or members are investigated.
Our services also include providing a commercial contract review service, where we engage with thousands of contractors, agents and advisers each year. The review service considers the working practices as well as the contractual terms before offering an independent opinion as to the ‘IR35 status’ of an engagement. We therefore have significant experience in advising on, and dealing with, enquiries relating to status generally and IR35 specifically, as well as having an in-depth understanding of the practical issues relating to this Consultation and the Intermediaries Legislation (IR35): discussion document, to which we will also be responding separately. In responding, we have also sought to represent the views of our clients, who are also concerned by these proposals.
As we are regular commentators on status matters – whether via our own in-house publications, our Blog (www.abbeytaxblog.co.uk) or in contributing to the publications of others – and not withstanding that our clients expect us to have a view on the consultation, our concern is that this consultation reflects a fundamental policy shift with potentially very damaging outcomes.
Whilst we recognise the difficulty that HMRC faces in dealing with false self employment and do not condone the actions of those parties who are abusing the system, if these proposals were to be enacted on the basis of this consultation, it would produce results with far-reaching consequences, which fly in the face of Government pronouncements of the last 20 years in connection with a flexible labour force, the promotion of self employment and the Government’s approach to the digital market.
These proposals for the Personal Service Companies (PSCs) – for ease we have chosen the term used by HMRC, but recognise it is not universally accepted – are likely to do more damage to those who by choice or by circumstance find themselves to be self employed and have to incorporate to find work, than it is likely to save in lost revenue to the Treasury by seeking to tackle abuses in the ‘umbrella’ market.
We believe that these proposals will certainly reduce the incentive to be self employed and to accept the transient nature of contract work without the potential rewards. The proposals are too wide-ranging, using criteria which are too general and theoretical and take no account of how the contractor market actually operates. If they are applied as suggested here, any benefits accrued by tackling the aforementioned abuse, will be outweighed by destroying the contractor market.
This may, of course, be the aim of the proposals, but if enacted in their present form, it will leave contractors unable to reap the benefits of operating without the security of secure employment, and make it more difficult for engagers, who genuinely need a temporary resource, to meet the challenges and demands which they face to stay ahead of their competition. It surely cannot be the aim of this consultation to damage the country’s economic fabric.
We would like to generally follow the format of the Consultation, as well as seeking to respond directly to the questions found on Page 23 of the Consultation. We also took the opportunity to highlight the key points of this response by attending the IR35 reform: discussion round-table on Tuesday September 15 2015.
2. The Issues
We recognise that there are abuses in the umbrella market, but it is not a market in which we specifically operate and therefore it is not an area where we feel qualified to comment.
In respect of issues surrounding travel and subsistence generally, there is clearly a lack of understanding of matters such as the 24-month rule specifically. Even in future, where a PSC can demonstrate that there is a lack of Supervision, Direction or Control, we would not be surprised to find that many PSCs would not operate the 24-month rule as it was intended.
Unless the intention of the proposals is to effectively prohibit any claim for travel & subsistence relief by a PSC, these proposals in isolation will not suffice. Whilst we acknowledge that there is guidance on HMRC’s website in respect of these issues and we also regularly advise on these matters, we believe that in relation to PSCs, there is more that HMRC could do to explain the 24-month rule in particular. Indeed, we feel this would be in keeping with the general tenor of the House of Lords Select Committee recommendations for better guidance from HMRC on status/IR35 (see particularly, Summary of Conclusions and Recommendations No’s 16, 20 & 21).
On page 10, reference is made to the discussion document issued on 16 December 2014 and the issues raised in response. Specifically, the current consultation concludes:
“As a consequence of the different treatment for different employment models, there were concerns that large numbers of contractors and agency workers would establish PSCs, leading to a potential loss to the Exchequer. The Government recognises these concerns and has adapted the original proposals.”
We recognise that this would be an issue and particularly could see the creation of PSCs for those on lower rates of pay. Indeed, colleagues here have attended round-table discussions with HMRC in 2012 and 2013, where the issue of forcing the low paid to incorporate was raised together with those individuals who are an employee on the Friday and contractor on the following Monday.
Surely these scenarios involve an element of compulsion and, whilst this may be a generalisation, would not these low-paid individuals not also require a guiding hand in the background for individuals to help them through the accounting and taxation requirements involved? Was it not the intention of the 2007 Managed Service Company legislation to deal with such issues?
If, however, this would be too onerous, then is it not feasible for HMRC’s computer systems to identify all those PSCs with a low turnover – perhaps £30K or less per annum – and consider the status of these individuals? Presumably HMRC could consider some form of transfer of debt to penalise engagers who should be employers?
Lest any suggestion be made that we make these proposals because it might increase any income that Abbey Tax might earn either in insurance premiums or consultancy, it is unlikely that these types of client would (be able to afford to) insure or indeed look to engage a consultancy for their defence.
3. The Proposal: Supervision, Direction and Control
We are very concerned that how HMRC considers the definition of the terms ‘Supervision’, ‘Direction’ and ‘Control’ on p14 provides insufficient clarity and the examples provided on page 15 are much too simplistic. The wording of the consultation is reproduced in gold with our comments below.
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.
It is almost unheard of for a client to give a contractor a brief and then expect the contractor to return within a specified timescale with the finished article (as suggested by Example 1) without their being some interaction with the client in the meantime.
Whether a householder is having building work undertaken at home or a commercial organisation launching a new product or service, there is always someone with the role of “Project Manager” (PM) whose role it is “to ensure that person is doing the work they are required to do and it is being done correctly to the required standard.” There is hardly a project being undertaken where there aren’t regular update meetings being chaired by a PM, whose responsibility it is to deliver the project, but that doesn’t mean that the PM has any control or knowledge/expertise about how the work is done. Furthermore, as a customer, would you not want to ensure that the work is being done properly?
The second sentence to the definition offered above, one can accept, but the first sentence effectively means that there are barely a handful of people in the UK not caught by this definition. That surely cannot be the intention of the legislation.
Direction is someone making a person do his/her 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 co-ordinate how the work is done, as it is being undertaken.
This definition is also unclear and the comments made about supervision apply here too.
How are “instructions, guidance, or advice” defined? At what point does the scope (the ‘what’) of the project become “instructions, guidance, or advice”? Again, using Example 1, what if the retailer explains that in their sector, products are usually demonstrated using one particular method, or the proprietor states that the website needs to be released in several stages or explains that the website is part of a wider campaign and therefore these are constraints which need to be followed? Does the scope now involve ‘direction’?
Another example of changes in scope is demonstrated by the Tribunal Case, MBF Design Services Ltd  UKFTT 35 (TC). The contractors were involved in a project, based on integrated engineering such that a change made in the design by one contractor could immediately affect the work of the others, thereby changing the scope of the project. There was never any suggestion that MBF came under the client’s control because the key test is surely ‘how’ the work is undertaken.
Many organisations with several locations or different business units will have unified reporting methods in order for management to be able to compare like-with-like. This will inevitably constrain how a contractor might report his/her findings and you could argue that it influences ‘how’ the work is undertaken. But in reality, does the fact that there are physical or practical constraints as to where and when work can be undertaken or how it is presented, genuinely amount to direction?
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.
This definition seems entirely reasonable and would constitute the test which we believe in reality determines independence – can the client exercise (or have the right to exercise) control? If the answer is ‘yes’, then this is a key indicator of employment.
In the final paragraph on page 14, we read:
“HMRC will consider factors such as the work being performed by the worker, whether the worker is able to decide when or where they carry out the work and whether the worker can decide how the work is done. Where there are procedures, methods and instructions which must be followed, it is likely there will be supervision, direction or control over the manner in which the services are provided. However, being required to comply with statutory requirements like health and safety procedures is not determinative, as all workers, regardless of status must comply with this.”
Nobody would disagree with the final sentence, but ‘when’ or ‘where’ the individual carries out the work is surely not necessarily relevant, nor indeed is the ‘what’. When Abbey Tax enquires about ‘control’ via the working practices questionnaire, we do ask the contractor what input they have into the ‘what’, ‘where’, ‘when’ and ‘how’ of the engagement.
It is very rare that a contractor will define the scope of the project – it is after all, the client who has determined that they need a resource to meet their need; the ‘what’.
Where security or commercial interests are paramount, then it is unlikely that the client will want a contractor logging into secure terminals from offsite. The location may also be determined by other physical and practical issues such as where equipment is or where the people are located who can assist the contractor.
If the work has to be undertaken on site, then the same factors may determine the timing, or at least determine how flexible the contractor can be with his or her working patterns.
Once again, the real test of independence can only be whether the client can determine ‘how’ the work is undertaken. If the engager can, as would be suggested by the definition of ‘control’, then the contractor is not independent.
Surely, ‘supervision’ and ‘direction’ are red-herrings; it is virtually impossible to find an engagement without one of these two elements – HMRC seemed to acknowledge that in the Round-Table Discussion on 15th September. Therefore the real test must be whether all three of ‘supervision, direction AND control’ are present, although one might argue that if there is ‘control’, then there will also be ‘supervision and direction’. So why not consider control – or how the work is undertaken – as the only test?
If the work is task-based and there are no specific project deliverables, then there is likely to be control. If the engager can provide specific project deliverables, which require outside expertise – even if there are internal staff doing similar work – which is for a limited time period and is not the replacement for an employed role left unfilled, then there will be no control, or no more than should be the case over an independent contractor.
4. The Examples Considered
Example 1 – Working through an employment intermediary following the proposed changes
An independent retailer requires their own website to market and sell their products online. The proprietor contracts with an employment agency to supply them with an IT consultant to design, build and release the website on-line. An IT consultant is sent along to meet the proprietor, who explains their requirements. Having no expertise in IT, the proprietor gives the IT consultant photographs of the product range and the price list and tells the IT consultant they have a free reign to undertake the work as they choose. The IT consultant works at the retailer’s premises during the engagement and completes the job after which the engagement ceases. In this example, the proprietor had no right of supervision, direction or control over the manner in which the IT consultant provided their services. As such, the IT consultant is able to claim tax free travel and subsistence expenses for their travelling between home and the retailer’s premises and for lunch costs, regardless of whether they work through an Employment Intermediary, including a PSC or an Umbrella Company.
This example is too simplistic – a point that was acknowledged by HMRC in the round-table discussion on 15 September – and it is hoped that HMRC can provide better examples on the back of tighter definitions for supervision and direction. There is absolutely no chance that the retailer would not want to be updated on progress ‘to ensure that person is doing the work they are required to do and it is being done correctly to the required standard.’ It would not matter that the retailer does not have the requisite expertise; furthermore, was there ever an IT project where the spec was not changed and different functionality required? At what point do these changes become ‘direction’?
Example 2 – Working through an employment intermediary following the proposed changes
A local authority needs an IT consultant to provide 4 months cover for a permanent employee who is on maternity leave. The local authority contract with an employment agency to send along an IT consultant to provide the cover. The job entails the IT consultant working within the local authorities own IT department alongside permanent employees, undertaking the same duties. Throughout the engagement the manager of the IT Department assigns the work to the IT consultant and gives instructions as to how that work must be done. The IT manager monitors the IT consultant’s work, as they do with the permanent employees work. In this example the IT manager had a right to supervise, direct and control the manner in which the IT consultant provided their services and that right was exercised. Therefore, the IT consultant is not able to claim tax free travel and subsistence expenses for travel between home and the local authority’s premises and lunch costs. The local authority’s premises is regarded as the IT consultant’s permanent workplace for the duration of the engagement.
Example 2 is a perfect example of ‘control’. Supervision and Direction are irrelevant. This is a task-based role – not a project – and is to cover for an employee.
If the consultation is going to offer any practical guidance, then Example 2 needs to reflect reality, which on many engagements will lie somewhere in between the two examples. Further examples are needed to explain how ‘supervision’ and ‘direction’ might need to be considered.
5. Transfer of Liability
Both Options make it the engager’s responsibility to confirm with the employment intermediary whether the contracted worker will be under the right of supervision, direction or control, to allow for the appropriate tax relief to be available.
Option 1 suggests that both the engager and employment intermediary are jointly liable, but because it then refers to situations where the engager has misled the employment intermediary, it allows for debt transfer for the amount owed by the employment intermediary.
Option 2 suggests that the employment intermediary is solely liable unless the engager has misled the employment intermediary; in which case HMRC can transfer the liability to the engager.
Leaving aside that it took several readings to clarify the difference; the changes to the Finance Act 2015, as outlined on page 17, suggest that neither option is particularly relevant. We cannot see why an engager would worry about the issue if “It will be the responsibility of the intermediary to determine that relief is, in fact due. So they will have to be confident that the worker is not subject to supervision, direction or control in order to pay expenses without the deduction of tax and NICs”?
The Consultation seems to have an inherent ‘conflict of purpose’, but in case the options are still relevant, our initial concern comes from the House of Lords Select Committee Report, which noted in its Summary of Conclusions and Recommendations (No 7), as follows: “We acknowledge that businesses would generally resist being made responsible for IR35 assessment, finding the additional administrative pressure and liability as overly burdensome.” It can therefore be safely assumed that end clients/engagers will refuse to entertain Option 1.
We believe that if there is any potential for the client to become liable should the rules not have been operated correctly, the concern is that they will simply act in concert and operate on the assumption that all contractors are subject to a right of control. It will not affect the client to make such a statement; it will affect the contractors engaged. This approach will, of course, exonerate engagers from any liability (and responsibility), such that the status liability continues to rest beneath them in the contractual chain. This seems to be hardly fair, or we suspect, the intention of these proposals.
The other reason that we believe that engagers will take this view is because ‘supervision’ and ‘direction’, as they are currently described, will exist in every single engagement that is likely to be offered.
Where the liability would only be the client’s if ‘fraudulent information’ is provided, the same will be true; i.e. the client will err on the side of caution and confirm a right of control – just to avoid any liability in the future should their original opinion be found to be incorrect.
Assuming that it remains the contractors’ responsibility (as the employment intermediary), there will need to be a requirement for the client/agency to disclose whether or not the contractor will be subject to supervision, direction or control at the outset to allow the contractor to make an informed decision.
However, it is how the market reacts, which is of primary concern. If all roles are caught by supervision, direction and control, then individuals will want higher pay rates. It is likely that this will not be achievable for the vast majority of contractors, who will have to suffer the financial consequences. Whilst there is an argument that at the lower pay scales, where it is very likely that control exists, this will have the desired effect in terms of tax remittances; it will be more than compensated for by the restricted opportunities for contractors who will just seek local work to minimise the impact of these proposals. Contractors will become more risk averse and businesses will no longer have “access to the individuals, skills and services it needs to encourage growth and respond rapidly to new demands” to quote the opening paragraph of David Gauke’s foreword to the proposal.
However, if engagers are prepared to make the decision between engagements, then the initial reaction for PSCs would be the same as if an engager or agency offered the assignment on the basis that it was ‘caught by IR35’. Which contractor would accept the work? Very few and so the result is that engagers will reduce the administrative burden and at the same time negate any liability by declaring all roles as ‘caught’ by supervision, direction or control.
Except for those contractors charging the highest fees, where engagers might take the risk about supervision, direction and control not applying, the broad rump of the contractor workforce will be wondering about the value of contracting. We imagine that some of the specialist sectors such as aerospace, oil & gas, the nuclear industry, financial services and certainly the public sector, which rely on contractors travelling great distances to undertake necessary and much needed project work will find it difficult to attract contractors who cannot recover their travel and subsistence costs.
Not all of these sectors will be able to pay the additional fees to allow the contractor to cover the cost of marginal rates of tax being applied to the cost of travel and subsistence payments. We therefore risk the best specialist talent moving overseas where there are not these restrictions.
It is hard to see how contracting will remain an attractive option as the risk/reward balance will be thrown completely out of kilter. Accepting engagements will be driven by how close they are to where the contractor lives rather than matching contractors’ skills and expertise to where it is most needed; certainly, it will wipe out entrepreneurial spirit – what will be the point of training for a role or sector if the investment in new skills coupled together with the lack of security inherent in contract work, only to find that the cost of working in what is essentially a temporary workplace is wiped out on the basis of something as grey and capable of being manipulated as ‘supervision’ and ‘direction’ in its proposed format.
6. Response to Consultation Questions
Question 1: Do you agree that the structure of the proposed legislative changes will achieve the policy objectives?
Whilst we can see that the changes for (low paid) umbrella workers may have the desired effect, we believe that the revenue saved here will be replaced by the fact that contracting will become less attractive to those genuinely undertaking project work where the client requires their outside expertise for a limited time period only.
Question 2: Will there be any consequential difficulties in administrating each engagement as a separate employment?
We believe that engagers will simply declare all but the highest paid engagements ‘caught’ by supervision, direction and control, which will alleviate any administrative burden. Employment Agencies will have additional administration in terms of operating PAYE, but these burdens will no doubt be met by payroll service providers. The question is who will meet the additional costs? The Engagers will resist and so many agencies may find margins squeezed or ultimately go out of business, which will be a financial drain on the Exchequer, as well as resulting in contractors not being paid and the ramifications for them as a result.
Question 3: Are there any particular professions who will be significantly affected by these proposals?
‒Any engagement with strict security or procedural standards: Banks/Financial Services, Government Departments, Nuclear, Oil & Gas, Aerospace
‒Any engagement with a company that needs to monitor progress against budgetary or wider project requirements – this will be particularly relevant in the Public Sector?
‒Any engagement where the work being undertaken involves something which needs to be integrated into a client’s existing system, e.g. if a piece of software is being developed; something that needs to meet industry standards or regulations, e.g. if a piece of equipment is being designed; something where the client has certain preferences or requirements which may not be apparent at the outset; e.g. if a new logo or website is being designed (creative industries)
Many of the specialist sectors which rely on contractors travelling great distances to undertake necessary and much needed project work will find it difficult to attract contractors who cannot recover their travel and subsistence costs.
We are also somewhat taken aback by the comment on Page 13 under the ‘Definition of an Employment Intermediary’ which reads:
“However, professional service firms that second staff to clients will not be caught by the new rules, as their business is not substantially in the supply of labour”
Surely, the business of professional service firms is about nothing more than providing solutions via the supply of labour – with varying levels of expertise – no different from the average PSC.
If the Engager has a genuine project which needs to be completed, why should the Engager be forced to pay for the most expensive option of the large consultancy, rather than a PSC? This approach clearly creates a two-tier consultancy market which is unfair in terms of competition to get work and adds unnecessary additional expense to the Engager? Finally, why does HMRC not regard a PSC as a ‘professional services firm’? We cannot see any differences in the services provided.
Question 4: Will these changes result in a significant shift in the way those affected are employed? If so, what would this shift be and what would be the impact for the workers concerned?
Unless engagers can be persuaded to pay more, then it is going to make contracting less rewarding to the point that many people will seek permanent work. With almost 5 million of the country’s workforce already self employed, it is hard to see where these people will find permanent work when much of business is modelled on using contract staff and does not want the responsibility of having a permanent workforce when skills and resources are only required on a short-term basis.
Question 5: Would the definition of employment intermediary as proposed cause any practical difficulties? Please provide details and examples.
For the reasons stated above bringing PSCs into this legislation will make this form of contracting less attractive and entrepreneurial spirit, skills and expertise will be lost to the market as a whole. If HMRC is genuinely concerned about the rise of PSCs, then it has two weapons in its armoury: the MSC Legislation and IR35. As requested by the Chancellor and recommended by others, it needs to enforce the legislation.
Question 6: Do you agree with the definition of the terms supervision, direction and control and will these definitions cause any practical or commercial difficulties? If so, what will these difficulties be?
As noted above, the definition of control seems to be reasonable, the definitions of ‘supervision’ and ‘direction’ have not been properly explained, and as they stand, are so wide-ranging that they can – and will be – interpreted by HMRC to cover virtually every engagement that exists.
We struggle to think of an example of an engagement for which at least one of those definitions wouldn’t apply. It is unrealistic to expect any client not to monitor progress against deliverables/objectives. A right to check that ‘the work is being done correctly and to the required standard’ surely would not equate to a right of control over the manner in which the service is provided.
Furthermore, these definitions assume that collaboration – and contractors do work in teams – is tantamount to a right of control. This surely cannot be the intention of the proposals.
HMRC need to work with control only. On the basis that other than health & safety, site rules and the assumption that the contractor is working towards the common aim of completing the project, there should be no control exercised over an independent contractor where there are specific project deliverables, which require the contractor’s expertise for a limited time period, and the role is not the replacement for an employed role left unfilled.
Question 7: Which option for a transfer of liability would work best to ensure future compliance, Option 1 or 2?
Businesses will not want to work with Option 1, but whichever option is imposed, the likely response is to determine all but the highest paid engagements to be ‘caught’ by supervision, direction and control. It is unlikely that HMRC will have to worry too much about compliance, but may see tax receipts fall as businesses look elsewhere for their resources and the contractor market shrinks as worthwhile engagements become fewer and fewer.
If HMRC are willing to work with control only – on the basis that it does not exist where there are specific project deliverables, which require outside expertise for a limited time period, and the role is not the replacement for an employed role left unfilled – then this would make far more sense. It would not only be a more realistic proposition – and one which could much more easily be tested – but would avoid rigging a market in such a way that genuine self-employment trading through a PSC becomes almost impossible.
As the Lords noted: “Serial contracting is a feature of the modern British workforce and is supported by both businesses and contractors.” If changes need to be made to the PSC market, then HMRC should surely follow the requirement of the July Budget to “engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment” and not pursue options which are designed to by-pass the legislation just because HMRC are not willing, or able, to enforce it.
If these proposals are implemented, we would also have two rather bizarre situations. Firstly, there will be two tests for employment status: those who are engaged via an intermediary and those who are engaged as sole traders/self employed. Secondly, there will be the interaction with IR35.
The test for those engaged via intermediaries will focus solely on supervision, direction or control. HMRC has already decided that personal service exists and presumably is ignoring mutuality of obligations altogether. The consultation contains a passing reference to financial risk and other factors to be considered, but it does seem that HMRC want to boil matters down to the one test.
However, those engaging the self-employed will still be able to consider the three key issues of personal service, mutuality and control, as laid down by Justice MacKenna in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968, as well as in-business and financial risk factors. How can there be two different tests?
We wonder whether part of the reasoning is that HMRC realise that end clients will not engage the self-employed because the status risk then falls upon the engager. This therefore restricts the options for those trading through PSCs to ply their trade as ‘self employed’.
Finally, there is the interaction with IR35. Under these proposals, an engagement via a PSC will be caught by supervision, direction and control and so the travelling expenses will be disallowed. However, the contractor may be able to demonstrate (in addition to any ‘in-business factors’) that there is no mutuality of obligations and may have sent a substitute; i.e. not caught by IR35. Are we saying that for the same engagement the contractor is both ‘employed’ and self employed’?
We have noted that in the Intermediaries Legislation (IR35): discussion document that HMRC would like to see IR35 boiled down to the same single test; presumably in an effort to reduce HMRC’s workload, it will effectively seek to apply the lowest common denominator, meaning that the Intermediaries Legislation will quietly become obsolete.
We recognise that there are abuses in the umbrella market, but HMRC has the Intermediaries and MSC Legislation to tackle these abuses; it just needs to police the market better, as it has been asked to do by the Chancellor, and as was recommended by the House of Lords Select Committee Report. To widen these proposals to PSCs is taking the proverbial sledgehammer to crack a nut.
Author: Paul Mason, National Contractor Manager
Contributors: Jacqui Mann, Nigel Nordone and Rebecca Walker
E mail: firstname.lastname@example.org