IR35 Factors, IR35 Compliance, are you caught?

The Treasury must act urgently to clarify what it means by self-employment, according to Barry Roback, Chief Executive of JSA Services, an IT contractor accountancy provider.

Despite the 2006 Budget report, in which the Chancellor said that he would make a statement this summer setting out his plan to prevent 'promoters of mass-marketed managed service company schemes disguising employment income as dividend', the Treasury Press Office now says that there is
no date scheduled for an announcement. Presumably, what he is concerned about is the apparent disregard of existing rules that govern the use of dividends by those using (and managing) non-compliant composite companies (i.e. IR35).

Roback argues that it is the Treasury's own muddled thinking, rather than deliberate tax avoidance by contractors, or the vast majority of legitimate promoters of managed service schemes that has caused most of the current problems, and that action is needed now to clarify these rules. Although Roback accepts that it would not be easy to draw up a statutory definition of self-employment, he maintains it is essential that an effort be made to do so, in order to sort out the current quagmire.

"At the moment, contractors often find themselves in an impossible position" he maintains. "They are left to make the difficult decision as to whether they are to be treated as self-employed for tax purposes (i.e. outside of IR35), by assessing how their tax status would be viewed 'hypothetically' if the intermediary through which they work - whether a partnership, limited company or managed service company - did not exist. This is a complicated enough notion even for an experienced accountant, let alone a naive contractor."

He stresses that employment status health checks are made virtually impossible, since the 'deemed' employment relationship must be tested not simply between the worker and the intermediary, or between the intermediary and the recuitment agency, but crucially, it must include a review of the terms and conditions under which the agency supplies the worker to the end client.

This is often impossible, because contractors and their intermediaries have no real influence over these terms and conditions, nor, indeed, any right to see them. "This is akin to the middle ages when witches were burned at the stake not because of what they had done, but what their
accusers said they had done".

Roback acknowledges that it is perfectly understandable that contractor agencies want to keep the terms of their engagement with their clients confidential, but this puts contractors in an impossible position because, in effect, they don't really know under what terms and conditions they are being deployed, yet if they wish to work outside of IR35, they are responsible for ensuring that they meet HMRC's complicated criteria of self-employment.

"In the absence of a simple to understand statutory definition of employment, contractors must acquaint themselves with the vagaries of past case law to help define their employment status for tax purposes. Although the courts have been fairly consistent in applying the three critical tests of employment, namely Control, Mutuality of Obligation and Substitution, it is surprising just how difficult those seemingly simple tests can be, especially for those who are unfamiliar with the coded shorthand that often goes along with a Judges' summation."

Roback cites, for example, Mr Justice Clark in his summation of Propertycare Ltd v Gower, when he stated that Mutuality is more than a simple obligation on the employer to pay for work done: there must generally be an obligation on the employer to provide work and the employee to do the work. Even for trained tax legal/tax experts, in the context of the sophisticated modern world of contracting, these concepts are not easy to interpret.

Roback concludes that the Treasury is actually robbing itself of potential tax revenue and creating more work for
itself than is necessary. By failing to define exactly what it means by self-employment, and relying instead on outdated legal precedent and often 'out of context' tests of employment, the Revenue cannot expect taxpayers to get it right.

"While the current 'grey' situation might suit unscrupulous composite company managers and many end-users -
particularly, ironically, in the public sector -there is a real need to simplify and codify the criteria for self-employment. There is no point in The Chancellor huffing and puffing about managed serviced schemes, if he then does nothing about the root problem. But then, that's politicians for you!"