CEST la vie, IR35 workers: HMRC sets out stall for ignoring Mutuality of Obligation

HMRC has attracted further ire from contractors affected by plans to squeeze them for a bit more tax under IR35 rules. After considerable prodding by contractor consultancies and other groups including freelance advisory service ContractorCalculator.co.uk, the tax agency last week released a new paper on Mutuality of …

[jmch]

where does MOO fit in?

"In employment law, it (MOO) refers to the obligation of the employer to provide work and the employee to accept it. A contract obliges the employer to pay and the employee to do the work."

Hmmm, I'm not sure this is very well defined. Even if I am a contractor rather than an employee, I still have a contract that requires me to do some specified work as requested by the client, and for the client to pay for that work. As far as I always understood it, the main differentiators are scope (do I only have 1 client or multiple clients) and assignability of work ie the contract is between the client company and my company, not with me personally, and my company can assign any other person to the task, not necessarily myself.

So where does MOO fit in?

[OhDearyMe]

Re: where does MOO fit in?

@jmch it is about as complicated as you would expect from something never properly legislated but instead built up over years of precedent from previous rulings. IIRC some of the more senior judiciary have publicly thrown their toys out of the pram and asked parliament to clear up the irreconcilable mess that precedent has made of employment status.

In terms of contractor MOO it is typically restricted to fulfilling a contract of a limited period. At the end of your contract you can walk away with no notice and no repercussions, similarly at the end of a contract the business contracting the services has no obligation to offer further contracts or to give any notice whether they will do so. Towards the end of a contract it is common for contractors to not know if they will have any work the following week - for an employee there are notice periods which apply at any time and they should not be in that position unless their employer goes bust.

[Dr. Mouse]

Re: where does MOO fit in?

IIRC, from case law, MOO for IR35 purposes is that the "employer"/client is required to provide work, and the "employee"/contractor is required to accept it.

Typically, if the client has no work for the contractor, they can tell them to come back next week, or just terminate the contract. They are not obliged to provide work during the contract length, and (even with clauses for notice periods, which are pretty meaningless unless you are prepared to shell out a lot of money in court to enforce them) can just tell you on a Monday morning that they no longer require your services, Similarly, a contractor doesn't have to request leave, they can say "I'm not working tomorrow" (or even, by contract, just not show up, although this is discourteous to the point that the client may just tell them not to bother coming back).

By ignoring MOO (or redefining it), HMRC are ignoring many years of case law. They will find themselves slapped down in court over and over again. CEST is not fit for purpose on this one point alone, and that aside still fails to correctly classify most of the cases brought to court against them in the past.

They remind me the record exec in the Chef Aid episode of South Park:

https://youtu.be/ZNJDV1XoEpw

[Sir Runcible Spoon]

Re: where does MOO fit in?

"Similarly, a contractor doesn't have to request leave, they can say "I'm not working tomorrow" (or even, by contract, just not show up, although this is discourteous to the point that the client may just tell them not to bother coming back)."

I typically inform the client when I will be taking leave, but provide them with an opportunity to let me know if it will cause them any problems. 99% of the time it's a non-issue, on those rare occasions when a client says it will cause them issues on their project I work with them to come up with a work-around (such as providing some training to one of their permies to cover the gap whilst I'm off) - it doesn't mean I won't take the leave, but as you say - it's polite to mention it.

[Nial]

Re: where does MOO fit in?

If you're an employee they have to provide work, you have to do it, and they have to pay you for it.

As a contractor if the work finishes there's no obligation on them to give you any more,

[Anonymous Coward]

Re: where does MOO fit in?

"If you're an employee they have to provide work, you have to do it, and they have to pay you for it."

Please clarify (and/or get a clue, not sure which one applies here).

There are plenty of "employees" in the UK who in recent years are on zero hours contracts, whose employers claim to have no obligation to provide work unless it suits the employer, and (in theory) where the employees can choose not to take the work offered.

The opposite end of this fiasco are those companies whose workers are nominally self employed subbies but are in practice employees, in which circumstances the employees typically carry most of the risks and downside, while the "not-employers" make all the gravy.

Some aspects of the rules are described at

https://www.gov.uk/employment-status

There is also recent case law on the subject in the UK (in England and Wales, anyway), well known companies who have found their historic claims re employment status have been rejected include Pimlico Plumbers and, obviously, Uber.

These things may still be different in the largely Toryless zones north of the border.

[Dr. Mouse]

Re: where does MOO fit in?

@AC

Some aspects of the rules are described at

https://www.gov.uk/employment-status

Due to the way the system works in this country, those rules do not apply in tax law/IR35. A person's employment status is completely separate to their IR35 tax status. You can be taxed as an employee but not be employed in terms of status. This is where the unfairness comes in, and why tax and employment law needs to be harmonised.

[Anonymous Coward]

Re: where does MOO fit in?

I totally take your point about tax law not yet being consistent with employment law (e.g. in terms of the definition of "employee") but if laws were clearer and simpler (including tax laws) that would be a disaster so it'll never happen. (Why would it be a disaster? Because there'd be less need for lawyers and fewer opportunities for tax fiddles. If you see what I mean.)

On the other hand, I think I read somewhere that "salary substitution" fiddles which arrived in UK corporates a few years ago have already fallen by the wayside, so maybe there is still some hope. But I'm not confident.

Where's Dave Hartnett these days, and why, and how? That might be a more important discussion.

[Anonymous Coward]

Re: where does MOO fit in?

How is that different to a fixed term contracted employee?

[bonerp]

Re: where does MOO fit in?

It's a shame that HMRC don't relise the slightly better paid contractor pays more tax than being employed on a lower salary. There are ways to clamp down on some of the shenanigans that some contractors perform that doesn't require everyone paying even more.

[Dr. Mouse]

Re: where does MOO fit in?

It's a shame that HMRC don't relise the slightly better paid contractor pays more tax than being employed on a lower salary. There are ways to clamp down on some of the shenanigans that some contractors perform that doesn't require everyone paying even more.

This.

If all contractors (or a large proportion of them) suddenly decided they were fed up of the HMRC's crappy treatment of them and decided to go perm, the tax take would plummet. (Also, businesses would suffer and the economy would take a hit).

Some contractors play fast and loose with the rules. Some even break the rules. Most, however, play within the rules in a fair manner and pay huge amounts of tax compared to an equivalent employee. Every contractor who decides he's had enough of this bullpoo cuts the exchequer's take by a fair whack.

[cgc]

Re: where does MOO fit in?

What worries me is that there is people out there downvoting you. They just wan to see the contractors suffer, the way the permies do...

[Anonymous Coward]

Move along

Good Lord, HMRC ignoring the law? Whatever next, bears shitting in the woods?

[Aristotles slow and dimwitted horse]

Poor old HMRC...

Poor old HMRC. It's not like they've had 10-15 years or so to sort this shambles out.

[Dr. Mouse]

Re: Poor old HMRC...

They have spent that time with their fingers in their ears singing "la la la, I'm not listening".

The courts have sorted "this shambles" out for them, but HMRC continue to ignore their rulings. Try asking HMRC for IR35 advice, and you'll get a very different answer to a competent Tax lawyer (or even what you would come up with yourself by a brief skim of the rules and associated cases).

[Herring`]

Just a question

Which has probably been asked and answered before. Has anyone who has been judged to be inside IR35 ever sued for holiday pay/sick pay/pension/notice period?

[fruitoftheloon]

@Herring: Re: Just a question

Herring,

I could be wrong, but I don't see who you would sue as you are not entitled to it, due to it not being in your contract in the first place.

Morally if you're paying the same £% as a permie you should get the same trimmings, but since when has HMRC ever had any concerns about being reasonable and moral???

Cheers,

Jay

[monty75]

Re: @Herring: Just a question

If you're an employee you're legally entitled to four weeks paid leave.

[Anonymous Coward]

Re: @Herring: Just a question

And sick pay, and a work place pension....

[Sir Runcible Spoon]

Re: @Herring: Just a question

The thing is, the client cannot sack me as I only work for *my* company - that's who pays my salary at the end of the day.

The client can terminate the contract, at which point I need to source more income for my company by securing more contracts so that I can keep myself employed. It isn't rocket science.

[Herring`]

Re: @Herring: Just a question

Who to sue - well the employer. See Pimlico Plumbing and other cases. I would judge that if you are signing a contract inside IR35, it's a contract of employment and illegal contracts don't stand up in court.

My understanding is that, if you get caught in IR35, you pay more tax as you have to cough up employer's NI as well.

[Roland6]

Re: @Herring: Just a question

>Who to sue - well the employer. See Pimlico Plumbing and other cases.

There is however a subtle difference, in the case of Pimlico Plumbers the issue was that Pimlico offered plumbers self-employed contracts but expected them to work as employees. Hence the plumbers had a case against Pimlico and had evidence & testimony to prove this was the case.

The problem or challenge with IR35 is that HMRC have determined the relationship to be employment based on whatever; your problem is evidencing before a court that the relationship actually was employer-employee...

[Herring`]

Re: @Herring: Just a question

The ironic bit, which I forgot to add was: if you were contracting for HMRC. If they deem you to be an employee for tax purposes then you demand to be an employee for all purposes.

If they were to try to push for all contractors to be inside IR35, then it would do a lot of damage to the sector. Either rates would have to rise sharply or many (including me) would look at going back to permanent work. Probably a mixture of the two.

Contract rates may seem like a lot of money, but the client is saving on all that HR bullshit that comes with employing someone. If rates did rise significantly, then employing contractors looks less appealing.

[Dr. Mouse]

Re: @Herring: Just a question

The problem is that, strictly speaking, your employer is still once removed from the client or agency: Either your Ltd company, or the umbrella company. So it is they who would need to provide you with sick/holiday/etc pay, and it still comes out of your gross earnings.

What is needed (and this has been said many times over) is a harmonisation between employment and tax law. If you are deemed to be "inside IR35", you become an employee of the client. They become liable for employers NI, and you for employee taxes on gross earnings. You gain the same rights as any employee. That way, fairness and shared liability is seen. In addition, companies would stop taking on contractors for roles which are clearly employee roles (permanent or temporary) as they wouldn't want to risk the increased tax bills (just as contractors don't, now).

[CommanderGalaxian]

Re: Just a question

That's the whole problem - HMRC claim their defintion of employment/self-employment for the purpose of collecting tax is perfectly ok to be different from (and irrelevant to) the defintion of employment/self-employment for the purpose of people being entitled to (employee) benefits.

[steviebuk]

So...

...you work with risk, work with no entitlement to holiday, work with no entitlement to sick pay and work with no entitlement to the same rights as perm people until you've been their 3 months then you still don't get full rights. But....fuck you! We're still gonna make you pay same tax as if you were there as a perm. We don't care that this scared off loads of contractors on government work.

[sabroni]

Re: So...

You are getting paid at least twice the "permie" rate though, something "conties" always seem to forget to mention.

Even after tax that means you get paid more for the same work.

And it's not like you don't use the facilities and services that the taxes pay for, is it?

I've done both types of work, just used an umbrella when contacting, still made excellent money.

[Roland6]

Re: So...

>You are getting paid at least twice the "permie" rate though, something "conties" always seem to forget to mention.

Even after tax that means you get paid more for the same work.

Err no. However, given you just used an umbrella I can see where you got this misunderstanding from.

Operating as a business, my company gets paid the going rate for consultancy work - yes the day rate is significantly higher than what my client would pay me directly if I were an employee. Now my company assigns an employee, ie. me, to the assignment.

As an employee, I (should) get paid a salary, but as I'm on a zero hours contract...

Naturally, there is a difference between what my business charges its clients and what it pays me. The only (pleasant) issue is deciding what to do with the (hopefully positive) difference between the two. With the umbrella company it is simply paid as income to the sole employee, as a company, it has greater flexibility - I can (and have at times) used these monies to employ others to either to help deliver a project or do some research - all of which helps to evidence that I am working outside of IR35...

[Anonymous Coward]

Re: So...

You are entitled to all of those things... from the company that actually employs you... which is you.

[Jon 37]

Re: So...

It's perfectly reasonable that everyone who gets paid £X should pay the same amount of tax, whether they are a contractor or permanent employee.

It's perfectly reasonable for contractors to demand higher pay from their employer in exchange for the lack of benefits and the job insecurity. The employer gets the benefit of not paying for sick/holiday/etc and being able to fire easily, so the employer can and should pay for it.

It's not reasonable to expect other taxpayers to pay more so the contractor can be pay less tax. The taxpayers don't get the benefits of the contract.

Of course, the way this should have been done was to fix the tax system properly, perhaps by taxing dividends as income (with an allowance for any corporation tax already paid). IR35 is an abomination of a law - it's a kludge, it's unfair, it's overcomplicated, and it's unpredictable.

[Dr. Mouse]

Re: So...

Contractors already pay a very similar amount of tax to permies, when you take into account the new dividend taxes. We pay around about 26% basic (20% corp tax, 7.5% dividend tax), where a permie will pay 32% (20% income, 12% NI). The big differences are in employer's NI and employent rights (if they were classed as taxable and a value put on them, you'd probably find actual pay and tax levels weigh in favour of the permie).

[Dr. Mouse]

Re: So...

In fact, as it is generally accepted that a contractor's rate is higher mainly to cover the uncertainy and the lack of employment rights, those things can be said to be valued at the difference between the rates of a contractor and a permie.

Let's say that a contractor charges twice the permie rate, and that for the permie we talk of earns £40k. This means the permie pays £5628 in income tax and £3789 in NI, for a total tax of £9417 or 23.5%.

The contractor earns £80k, and pays £16k in corporation tax and around £8k in dividend tax, for a total tax of around £24k or 30%.

If you were to take the difference as the benefit of stability and employment rights, this makes them worth £40k, and that puts the employee on a very attractive sub-12% tax rate.

It's not fair that such an amazing, valuable benefit is not taken into account when talking of tax. Employees get this benefit tax-free, whereas contractors must pay tax on giving it up. Looking at similar role/level of experience/ etc, the permie gets a much better deal in terms of tax.

[Anonymous Coward]

Re: So...

You are entitled to holiday and sick pay. YOUR company, of which you are most likely the sole employee and owner, pays it to you. You are not your consultancy company. The company money is not yours until you take it out paying the appropriate taxes. You are why IR35 exists.

[Anonymous Coward]

Re: So...

"You are entitled to holiday and sick pay. YOUR company, of which you are most likely the sole employee and owner, pays it to you. You are not your consultancy company. The company money is not yours until you take it out paying the appropriate taxes. You are why IR35 exists."

Not true. IR35 was aimed at all those 'disguised employee' companies like Uber etc.

If HMRC wants to think contractors are employed by the client, they cannot (rationally) then also state you are an employee of your own company. Or are you expecting the contractor to pay all taxes based on their day-rate and *also* pay employer/employee contributions/holiday pay etc. as well? One or the other dude.

[Dr. Mouse]

Re: So...

You are entitled to holiday and sick pay. YOUR company, of which you are most likely the sole employee and owner, pays it to you. You are not your consultancy company. The company money is not yours until you take it out paying the appropriate taxes. You are why IR35 exists.

That's the point, though. If you are found to be inside IR35 (i.e. the client should have hired an employee, but instead chose a contractor), then you are forced to draw all earnings as a salary. Your company must pay the employer's NI, and you must pay all income tax and NI on those earnings. There is nothing left to pay holiday or sick pay after that, or either your own expenses or the company operating expenses, like accountancy or insurances. There are also no consequences for the company who chose to take on a contractor for a staff role.

IR35 had very little to do with contractors themselves. It was aimed at people who were in a staff job, left, and came back the next day as a contractor doing exactly the same job. This was often at the employer's request rather than the employee's.

Contractors know that the money isn't ours until we draw it (at least all those I have spoken to). We keep some money in the company to use for company benefit, and/or to cover time out of contract. We pay a lot of tax, and a lot of additional expense in order to operate our own consultancy services. We accept the loss of employment rights and a lot of extra responsibility in return for greater flexibility and a higher rate of pay. We are not the problem, companies who take on contractors for staff roles are.

[Franco]

Entirely typical of HMRC and their mobile goalposts.

Despite how it is used in practice (which is against individuals) IR35 was advertised as being designed to stop companies chucking people off the payroll and in to contracts to save themselves money, which funnily enough seems to be exactly what the BBC have been doing for years, yet it's the individuals and not the corporation getting hit.

Contractors, professional bodies and the courts consistently tell HMRC they're wrong on IR35 but it makes no difference.

[701arvn]

HMRC's challenge is to make Contractors pay the tax they should, but at the same time keep the advantages to society of the limited liability company.

That and allow their rich mates to keep dividends at a low tax rate.

As pointed out above, just make dividends subject to income tax, it just looks like a tax break for the wealthy.

[Nematode]

@701arvn "HMRC's challenge is to make Contractors pay the tax they should,"

Erm, I and all the contractors I knew did/do pay the tax they "should". Actually, most contractors pay more in tax to the gumment than permies, across corporation tax, dividend taxes and tax on salaries (even low ones). The "big" differences are (i) NICS - and why the helll shoudl I pay big NICS when I don't get the same benefits when I'm out of work (or in my case, long-term sick) and (ii) deferring salary/dividends - but why can I not do exactly what the bigger companies do which is to even out the peaks and troughs of company income. It's not as if I am benefitting in tax because I don't take an income - since I am also not benefitting from the income itself. This whole thing is driven by (i) HMRC scratching around to maximise intake and (ii) jealousy of permies against the high rates contractors get. I always said, if you want Contractor rates, quit and become a contractor, see if you can hack it. Grrrr.

[Anonymous Coward]

"advantages [..] of the limited liability company"

"the advantages to society of the limited liability company."

Which are what, exactly, to the public at large in the 21st century western business climate (which for some reason I can't work out, ha ha, seems to be increasingly popular in Chinese boardrooms too).

Even back in the 19th century it was clear to some that the limited liability company was a bit of a one way street:

https://en.wikipedia.org/wiki/Utopia,_Limited [1] (btw, that's Utopia as in Gilbert and Sullivan, not as in Todd Rundgren and friends)

If corporate execs started having to act as though they had unlimited personal liabilities in return for being allowed unlimited personal incomes, maybe more of us might be able to buy better and more cost effective (albeit less profitable?) goods and services, surely? Risk/reward balance doesn't stop existing just because the people in and around the boardrooms choose to ignore it.

[1] "[it] satirises limited liability companies, and particularly the idea that a bankrupt company could leave creditors unpaid without any liability on the part of its owners. It also lampoons the Joint Stock Company Act by imagining the absurd convergence of natural persons (or sovereign nations) with legal commercial entities under the limited companies laws. In addition, it mocks the conceits of the late 19th-century British Empire and several of the nation's beloved institutions. In mocking the adoption by a "barbaric" country of the cultural values of an "advanced" nation, it takes a tilt at the cultural aspects of imperialism."

[Aristotles slow and dimwitted horse]

Fine HMRC...

Fine... but you can't have it both ways. If you want to tax me like an employee, then I'll stop paying you the £25k or so of Corporation tax I pay you every year that is in addition to my personal taxes.

[Dr. Mouse]

Re: Fine HMRC...

That's what would happen: You would be forced to take your entire gross earnings as PAYE income. As this is an expense, your company would make no profit (or even a loss, considering there may be other expenses which you are not allowed to take into account), so would pay no corporation tax.

[Aristotles slow and dimwitted horse]

Re: Fine HMRC...

Thanks for clearing that up. It's almost like I didn't know that that would be the case.

[Roland6]

Re: Fine HMRC...

>You would be forced to take your entire gross earnings as PAYE income.

Which brings us back to just what is a "personal services company"...

Because we need to clearly differentiate between those who want to simply be self-employed, but with the Ltd wrapper and those who, might be doing exactly the same work etc. but have aspirations to become a business with employees.

[CommanderGalaxian]

Re: Fine HMRC...

Complete bollocks logic. A gardner or painter & decorator most likely have no intention of employing others. The fact of employing others or desire to employ others is utterly irrelevant to determining self-employment status.

[Sir Runcible Spoon]

Re: Fine HMRC...

What about when I want to invest my company profits to grow another aspect of my consultancy?

[Roland6]

Re: Fine HMRC...

@CommanderGalaxian - Perhaps in trying to be concise I lost something and used the term "self-employed" in a non-obvious way...

My attitude is that if you are using an umbrella company where each month all monies received are, after expenses, remitted as income to the sole employee/worker, you aren't really trading (like a painter & decorator), nor can you really say you are in business because all monies are being paid out as salary and not being retained to grow/develop the business or pay for those contractual obligations such as substitution...In some respects, your status and mindset is similar to a temp. - just that you have a Ltd. wrapper.

HMRC have decided that those who trade through an umbrella company are effectively "professional services companies", however, what they are wanting is for all contractors to be classed as "professional service companies" which is causing problems as they try and create a definition that covers those 'one employee' Ltd's who are effectively temp's (ie. have no aspiration to either run a business or be employed by anyone other than themselves) and excludes those who aspire to run a business.

[Nematode]

Jeez. I'm retired now (thank God) but this issue of HMRC's stance on MOO still winds me up rotten. I never had a fear of losing an IR35 case but I did have a huge fear of having to fight such as case as HMRC are such [insert your own expletive here]. Of course MOO is relevant, and the judges, not HMRC, are right. It's the one big thing that makes the difference between a contractor and a staffie. Yes, two people may sit next to each other and appear ostensibly to be doing the same work (they might even be doing the same) but one can be sacked just like that, no process, no rights, the other can't. If there's nowt to do, the employer has to make the Staffie redundant. And the continuing division between Employment Law and Tax Law is against all principles of fairness. Everyone, GO NUCLEAR !! (old PCG members know that that means)

[Anonymous Coward]

I'm a permie...

And I do, to be honest, fück all work, whilst the contractors carry the burden. I do, however, moan incessantly about the fact that I believe the contractors on the team are all paid at least 10 times what I'm paid. Regardless of facts. In my review, I just leer at my manager's hot tits, knowing that the contractors don't get this chance. Mmmmm. Sweet. Yeah. Have I put anyone's mind at rest? Have I moved the debate on at all? I rather think I have.

[amanfromMars 1]

Checking Basics Reveals New Facts to Replace Fictions/Contrived Tales

“Where work is provided and remuneration is paid we will assume that there is mutuality of obligation and that a contract exists,...

There is the problem outed clearly in black and white, an assumption which doesn't bear forensic scrutiny at all well.