With an ever-increasing raft of litigation focussing on IR35 and following the recent First-tier Tribunal case of Christa Ackroyd Media Ltd (TC 6334), it is essential that contractors re-evaluate their working arrangements to ensure they are compliant with an ever changing and expanding IR35 tax code.
Despite HMRC continuing to have a poor record of success at court, the administrative and financial burden of an IR35 investigation should not be underestimated. With this in mind we explore HMRC’s current activity in this space, the progression of IR35 reform in the private sector and most importantly how contractors can ensure they remain compliant.
How can contractors identify issues with their PSC?
In the case, it was accepted that Ms Ackroyd was in fact contracted to provide services for the BBC as a contractor. Whilst on the face of it the contract should take precedent, this is not how IR35 provisions are applied. The test instead is that of the ‘hypothetical contract’. The key questions is that if you had contracted directly with the end client would you be regarded as an employee. To decide this, the court will look at a range of factors some of which are explored below.
Status: Is someone else carrying on a substantially similar role as you, but as an employee?
Taking the Ackroyd case in point, Christina’s co-presenter, Harry Gration, was originally freelance, but in 2006 he became an employee. Whilst Ms Ackroyd held seniority over Mr Gration and therefore had more autonomy for the purpose of the SDC test, it is clear that she was carrying out a substantially similar role as another employee of the BBC. This was an important consideration for the court and it gives a good insight into HMRC’s approach to both cases and the wider intent for developing IR35. In short if a contractor working through a PSC is carrying on a sufficiently similar role as an employee the HMRC thinks they should be taxed in the same was as that employee and therefore the contractor is at risk of an IR35 investigation.
The guidance is therefore; If you work with employees of the end client, but you are not one, you should review your working arrangements.
Supervision, Direction and Control: Who is in control of your day to day activity?
In many examples we see contractors who work in highly confidential and system led environments. Here there are strict protocols as to the technology to use, the privacy requirements, access, working hours and in some instances clothing. Where there is a high level of control exercised by the end client there is an increased likelihood that an employment arrangement exists. Whilst this test is subjective and largely considered to be somewhat outdated, it remains an important test in litigious proceedings and contractors should continue to be mindful of this.
Duration: How long is the contract?
Do you operate with multiple short-term assignments or with very extended arrangements? We commonly see contractors who have been engaged with the same end client for three years or more, which raises considerable questions over IR35 status.
Exclusivity: How many clients does your PSC have?
The more engagements your service company has the more it is likely to be operating a legitimate ongoing concern. Conversely, contracts preventing you engaging with other companies will raise considerable alarms for the purposes of IR35 testing.
How can contractors ensure compliance?
The Taylor Report on Modern Working Practices signalled an introduction to new schools of thought in the way freelancers interact with their end client’s and the UK Tax system.
Contractors should, therefore, expect significant change in the coming months, to what is currently considered sound working practice. It is clear that the gloss of PSC’s is beginning to crack and they are anticipated to be the next focus for HMRC’s targeted approach to ensuring contractors pay more tax.
Freelancers who wish to ensure they are not subject to HMRC enquiry and associated penalties should, therefore, look to more conventional models of employment which ensure that tax is deducted in a compliant and consistent fashion. Whilst umbrellas provide this function they are often costly and lack both control and flexibility. Worker Co-operatives prevent this loss of control as they are, by their very nature, owned by contractors themselves. This ensures flexibility, control and ownership which, of course potentially offers the advantages that dividends bring. More information on worker co-operatives including The Contractor Co-operative can be found at www.thecontractor.coop
In assessing risk, contractors operating in the modern tax environment must ensure that they develop an understanding of all aspects of the arrangements they use. Unfortunately, the days of allowing a scheme operator to take care of your affairs in return for a take home rate of 85%+, are gone.
Contractors are encouraged to ask pertinent questions of their prospective employers, such as the method of payments, ensuring the employer is onshore and if a scheme is purported to be approved by HMRC (a premise which does not exist), what qualifies this statement. Increasing knowledge and requiring transparency from employers will ensure that the risk of issues further down the line are significantly reduced and should they arise, contractors will not be beholden to the scheme operator that put them there.
Contractors need a shift in mindset to take back control of their affairs and protect themselves as HMRC seek to widen their net across ever more areas of the contractor market.
For more information or to speak with one of the team contact:
Chris Mattingly | Chief Executive | email@example.com | 020 3468 0009
Rhys Thomas | Director | firstname.lastname@example.org | 020 3468 0009