Another UK government limb that can't get IR35 right: Court service pays taxman £12.5m Her Majesty's Courts & Tribunal Service has been forced to pay the UK taxman £12.5m due to incorrect assessments regarding the employment status of contractors under controversial IR35 rules. Disclosed in the court service's annual report [PDF], the payments were a result of a challenge from Her Majesty's Revenue & Customs ( …
I expect it's all rather friendly and not at all ike it would be with HMRC vs a real trading company. The result is: department budget has to be increased, but oh look, HMRC has more money coming in than expected, and it may get to set precedent in the courts
Of course. i get it now!
Everybody involved makes money. Barristers (and their offspring and associates)..it's all upper echelon that play with the spoils.. Recirculating (laundering) cash (cleaned) back to the richest. none of it would be seen in taxpayers hands, That journey is only one way .
People don't seem to understand that Check Employment Status Tool (CEST) is essentially a lube that helped ram the legislation in. Nothing else.
It was supposed to give a notion that this tool will somewhat help protect genuine contractors from being caught by the legislation and only affect the so called disguised employees.
The problem is that the way the relationship is classed comes from the contract. If a company wants a worker to be inside IR35 then they write a contract that puts the worker in scope. The individual circumstances of a contractor don't matter at all.
Since you only have a penalty if you wrongly declare the worker out of scope, there is a huge incentive to make sure each worker is in scope.
In that regard the CEST tool, sort of, can let you check if the legal team got the contract right.
To put a worker in scope, the contract needs only a few things - and usually a fettered substitution clause will suffice.
"If a company wants a worker to be inside IR35 then they write a contract that puts the worker in scope. The individual circumstances of a contractor don't matter at all."
Not really. If a contract puts you inside IR35 - i.e. makes you an employee - then you are an employee - that's actually really always been the case for all practicle purposes (from even before IR35) - regardless of your actual working conditions.
The problem is really the opposite of what you describe - if your contract puts you outside of IR35 - HMRC are free to disregard your contract AND then you will have to prove your working conditions put you outside IR35 - even if any reasonable person would regard then as barn door conditions that illustrate self-employment.
Essentially the tool hinges on substitution, and as we've seen from recent court cases that clause means hee haw if you can't actually exercise it (can't remember the specific case, but HMRC won an appeal recently because the substitution clause couldn't be exercised although it was in the contract). There are also a couple of cases coming up where the importance of MOO is key and CEST continues to ignore that assuming it exists in all engagements.
if you can't actually exercise it
It is assumed that if you have not exercised it then likely you can't. At least this is a HMRC position. They also look individually at each engagement - if you have exercised it with your previous client, it won't count for the current one if you haven't.
They have even gone further - if you use someone as a substitute, that a client could find themselves to replace you, that also wouldn't count.
They basically want small business to be taxed on revenue (as it is essentially what IR35 is) and eventually cease to trade to make more space for companies like Infosys.
It's a tricky one, because the vast majority of contractors won't exercise it unless they have to. In my own case if I have a few months off then a 6 month contract, I probably won't have any time off in that whole 6 months.
It's never been tested in court (that I know of) but I'm pretty sure substitution clause being invalid unless used wouldn't hold up. Wish I could find the case I was thinking of that was recent, but I did find on searching my emails that Kaye Adams had won her case and had not only never used a sub but thought she couldn't, even though the clause was in the contract.
Source:
https://www.contractoruk.com/news/0014950kaye_adams_ruling_substitution_will_be_comfort_contractors_lawyer.html?utm_source=NL&utm_medium=News&utm_campaign=IR35
These are criteria for successful substitution:
- the substitute must have carried out a significant part of the original worker’s remit, performing all of the tasks assigned to the original worker over the duration of the substitution period.
- the tasks undertaken by the substitute must be of sufficient breadth that the substitute would not just be considered a helper, eg: a replacement worker who delivered a training day would be a helper rather than a genuine substitute.
- the substitute was not someone from a pool of workers regularly used by the business
- the substitute was not interviewed or subject to any form of selection process other than confirming they had the skills do undertake the role.
- the substitution must have occurred during the current engagement and the current role only. Examples of substitution from previous engagements or roles would not necessarily indicate no requirement for personal service in the existing engagement / role.
I am not sure if it is in the document above, I can't find the source, but I read that if, for example, during a 6 month contract, if you even had a day off and have not provided a substitute, then that means (in the eyes of HMRC) that you essentially can't provide one and thus you are in scope.
See my post above about Kaye Adams, she was presenting her own show and had the right of substitution. Plus with films there's always a second unit, the main cast is rarely in every single scene etc so it's not like it would mean a complete shutdown.
IME if I want a couple of days off during a contract it usually means shuffling things about a little so nothing gets delayed, or timing days off with other contractors like the PM. I've only seen subs requested in the case of longer term issues, but that's just my experience.
It has caught out a lot of people at the BBC. Remember that IR35 has been around for 22 years now, the only bit that is new is the requirement for "employers" to deduct tax at source.
But if a top creative were to employ their own crew out of the money they receive, and they were solely responsible for recruiting them; that would help to keep them out of IR35. That is essentially how Channel 4 has always done things.
Remember that IR35 has been around for 22 years now, the only bit that is new is the requirement for "employers" to deduct tax at source.
That's incorrect though. While the rules about how the tax should be paid depending on the nature of engagement have indeed been in place for a long time, a few key things changed that turned it into a completely different beast.
The client is now a sole entity deciding about the nature of the engagement and liability of getting it wrong sits only with the client (and fee payer).
Now regardless whether you are truly running your own business providing services, it is ultimately up to the client to declare whether indeed they engage with a business or in fact a disguised employee and there is nothing contractor can do about it. The CEST / appeal process was shoved in to make it look like it will not affect genuine business and make MPs easy about voting it in.
The penalty is only when the client declares that the engagement is of a business nature and HMRC deems it's not, using its convoluted and unclear set of rules (as we can see even multiple government "limbs" couldn't get right).
The original idea, to prevent an employee being forced to become a contractor, so that the employer can avoid Employer's NI and an employee can pay slightly less tax in exchange for no job security has been turned on its head. It is actually now encouraging companies to turn employees into "contractors" and declaring them in-scope of IR35. By this move you can strip the worker of all employment rights and protections while also avoiding Employer's NI.
This was sold to general public as a necessary change to tackle tax avoidance, but the true nature of this change is to remove independent contractors from the market and provide big corporations with truly flexible workforce that is not a subject of employment law and which cannot unionise.
My speculation is that the big brains in charge thought this will attract big corporations willing to set up factories, IT sweatshops and turn the UK into Shenzen of Europe. You know they no longer will have to worry about unions or minimum wage or those pesky things like equal pay.
Given that now the client is liable for getting it wrong, they certainly won't want to have to commit time and money onto something stressful, uncertain and possibly dragging on for years. And there is that simple option that lets them avoid all of that potential pain - simply declaring the worker in-scope.
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- the substitute was not someone from a pool of workers regularly used by the business
- the substitute was not interviewed or subject to any form of selection process other than confirming they had the skills do undertake the role.
These two put the big SI's within IR35.
For government contracts they tend to put people forward, who are interviewed by the client and put through the clearance/selection process so that they can be listed in the pool of approved workers that get as called upon to provide absence cover etc...
The number of contractors that have decide to go to employed status willingly seems to be growing for two main reasons.
Employers running scared of HMRC and don't want the risk of a fine because of incorrectly categorised contractors. My employer had quite a few contractors, and gave the predictable ultimatum before April. Join us officially as an employee (or else).
The contractor themselves - doors are being bolted shut in front of them, and there is no benefit to contracting for the extra few quid it gives, and zero benefits. Government departs and banking (mostly the latter) seemed to taking the hardline of no IR35, period). Those who still want to contract are either very well paid (to justify it), or have gone abroad.......
Where I was most contractors shown the door before April. Neither company or contractors wanted to risk the implications of going permanent. My last assignment was training a remote outsourced replacement in India. I got a cushy permie job in the public sector. Reasonably paid and lots of benefits, hours and work not very demanding. Not quite sure how this pulls in more tax for HMRC but there you go.
Reasonably paid salary with lots of income tax and employee and employer NI.
Yes, big consultancy is going to still charge £500-2000 a day for a £60k a year worker, while offshoring all the profits. Certainly a win for HMRC.
It is actually the NI where they gain rather than the tax.
NI and income tax are in different "buckets", but for quite some time now, if there is money missing in one bucket, they can fill the gap from another. This is quite pointless distinction now and should have been simplified long time ago.
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