The Government Targets Self Employment – Again
Same target – different weapon ! But how will this affect IR35 ?
On the 20th July HM Government launched a new consultation paper“False self-employment in construction: taxation of workers” ( see note1 at the end of this document for a link )
For Professional Contractors and Freelancers in ManagementConsulting, Finance, Sales and Marketing, IT and Training it would beeasy to imagine this is not important for you, but stay with this,because I think you will see how it can affect your business !
I have had the pleasure of studying the whole document to look atthe connection between what HM Government are aiming to do in theconstruction industry and to see what potential impact that has forother business sectors.
In the meantime I am grateful to Annabel Kaye at Irenicon whoseTweet ( see link 3 at the end of the document ) alerted me to anarticle by Liz Bridges at the Joint Taxation Committee For Construction( see link at note 2 at the end of this document ).
It is easy to think that Twitter is a waste of time, and indeed itcan be, but there is also some very good information out there and somepeople who are keen to share it.
So lets take a look at what is in the consultation paper, in mycommentary the numbers in brackets refer to the numbered paragraphs inthe actual consultation document:-
1. The Government identifies a problem
As always there are the words that you would expect. The scope of the consultation is
“to ensure that construction workers engaged in an employment relationship are taxed appropriately”
And false self-employment is defined as:-
“where workers are treated as self-employed for income tax and NICsdespite the fact that the way in which work is carried out on a day today basis demonstrates that there is an employment relationship.” ( 1.2)
This is essentially the same problem the Government see in otherbusiness sectors and they have targeted these with IR35, LimitedCompany Contractors, Managed Service Company Regulations, TemporaryWorkers Directive etc..
So it is clear from the outset that what is in this consultation is important for any freelancer in any business sector.
2. The size of the problem
The paper discloses that the Government is targeting thislegislation at the 300,000 subcontractors that provided labour onlyservices without the supply of materials and who are registered underthe current CIS scheme.
The estimate is that all these people will end up on PAYE after thelegislation is brought in, and that this is one third of the onemillion active subcontractors.
This shows that the Government is quite willing to impose legislation at very specific targets. (2.5)
3. Flexible Labour Force
Having identified the nature of the problem the consultationmaintains that the Government comes form a place that wishes to ensurethat “any legislation was targeted and that the industry retains aflexible labour force supply” ( 1.1 )
And
“should not have an adverse impact on those genuinely carrying on abusiness and the test has been formulated to achieve this” ( 1.5)
It is easy to be skeptical about these words, but previouslegislation for IR35 and the Managed Service Company Regulations bothmade that point, and it is still clear by the end of this consultationdocument that people genuinely in business have nothing to fear.
4. Tax law but not employment law
Once again Government is seeking to introduce tax law but want thatto not impact on employment law. In my view this can only lead toconfusion, but I am not sure we have seen a workable solution tocombine the two yet !
“This measure will only deem a worker to be in receipt of employmentincome for the purposes of income tax and NIC’s and will not conferemployment law rights on a worker” (1.6)
5. The Governments attitude to a solution to their problem
I think this paragraph is important. There is plenty of descriptionin the paper about what the Government has done to address the problem,and many examples of how this has not worked.
So this is their latest solution to an ongoing problem, but justtake a look at how wide and far reaching their wording is, and this isjust the introduction paragraphs !
“The Government has concluded that the best way to address thisissue for income tax and NIC purposes is to introduce legislation whichdeems workers within the construction industry to be in receipt ofemployment income unless one of three simple, clear and easy to applycriteria….is met” (1.4)
The stated intention might be to simplify matters, but so far allthe legislation in this area has not had the desired affect and in manycases has confused matters even more. I often wonder if it would justbe easier to define self employment in legislation and have done withit, but this does not seem to be the Government's view.
6. Worker
I think it is significant that the paper continually uses the word “Worker” and not “Employee”.
The term worker appears to be used whether the person is subject toPAYE or self employed tax basis, so we can clearly see that Governmentis trying to legislate for tax and NIC without affecting employmentlegislation which would only apply in full affect on an “Employee” anda “Worker” is afforded only partial rights.
This is a whole different area of expertise and one I do not feelcomfortable about commenting on. I will be keeping my eyes on whatappears from legal commentators.
7. Testing Employment Status
The consultation paper recognizes that case law has been developedin order to determine how a worker should be treated but that HMRCCompliance activity has shown that in practice:-
“these engagements will also display other features which are closer to employment” (2.7)
And
“Workers and engagers have a financial incentive to attempt toportray their employment income as self –employment in order to reducetheir tax and NICs liabilities. However there are also non-taxpressures which can influence the decision, such as costs for employersof holiday pay and pension contributions.” (2.4)
Furthermore, having worked on the basis that Engagers and Workersseem to conspire together to agree a contract of self employment evenwhere the conditions of engagement are of employment the Governmentalso recognize that:-
“It is a relatively simple matter to present an engagement asself-employment.” (2.9) and there are “specialist advisory firms” tohelp with this.
But more importantly the Government believe that:-
“In many cases, these contract terms bear little resemblance to theactual conduct of the work or the conditions under which it is carriedout” (2.9)
And
“Where both the worker and the engager decide that self –employedstatus is the desired outcome, then it is very challenging for HMRC tobuild a full and accurate picture of the true terms of the engagement”( 2.10)
And HMRC give an example where
“Due to the contradictions in the evidence, the difficulties inestablishing the actual facts and the time and costs that would beinvolved, HMRC decided that it would not be worthwhile to pursue thematter further” ( Box 2.C )
This really does seem to me to be a classic example of Governmentproducing unworkable legislation in the past then and then unveiling anew solution in the guise of yet more targeted and potentiallyunworkable legislation, sigh……..
It also seems that even where an Engager and a Worker actually agreethat it is true self employment the Government want to question that,how this can be consistent with their statements that try to supportthe notion that genuine self employed persons in business on their ownaccount have nothing to fear, I am not so sure, but I can see how theGovernment would like to support that as well as protect the vulnerableworkers.
8. Intermediaries
I think it is very expected to find the use of the word“Intermediaries” thrown into the consultation and this word now seemsto cover:-
• Limited Companies ( 2.12)
• Umbrella Companies(2.13)
• Self Employed Model ( CIS registered payment mechanisms ) ( 2.13)
It is interesting to note that consistent with the Governmentapproach in the Managed Service Company Regulations and the lastconsultation paper on Umbrella Companies and Expenses, the consultationpaper points out how certain companies advertise the tax and NICbenefits of being self-employed encouraging workers to join these“schemes” ( 2.15 ).
It is clear that the Government objects to this. Umbrella Companiesand Offshore Scheme providers in general continue to advertise in thismanner and so do some “Accountancy Service Providers” offering LimitedCompany solutions. It is obvious that this will attract Government andHMRC attention either sooner or later.
9. Nothing has worked in the past !
The Governments view is that nothing has actually worked in the past:-
“Despite these measures, there has been no obvious lasting reductionin the problem of false-employment in the construction industry” (4.1)
Special reference is made to the ESI – the Employment StatusIndicator Tool – provided by HMRC to assist engagers to test employmentstatus and the paper repeats that:-
“HMRC have stated that they are prepared to accept the opinion provided by the tool as binding” (4.2)
It is clear from this that this tool ( which is specifically NOT for IR35 tests ) will remain and be relied on by HMRC.
It is also interesting to note that the past efforts that have not worked to control this problem have included:-
a) restructuring of compliance activity by HMRC into specialist teams that resulted in:-
“compliance activity on its own could not provide a solution” (4.4 )
There are already specialist teams for IR35, Umbrella Companies andOffshore Schemes, no doubt their compliance activity is seen in thesame light.
b) Letters to engagers and subcontractors that
“may have persuaded some to comply but has had a limited positive impact” ( 4.5)
Certain Accountancy Service Providers and Umbrella Companies havereceived these too, I am advised, and some have ceased operations.
c) Declaration on the CIS form that
“had an opposite effect on other engagers, who have taken steps to protect the arrangements that they have in place” (4.6)
This brought to mind the IR35 and MSC questions on both the P35 and Self Assessment Tax Return.
The Government has therefore concluded that:-
“deploying a significantly higher level of compliance activity forthis industry compared to others, with the additional cost of resourcesthat would be involved, is not a viable long-term solution” and so“legislation to deem income received by workers in the constructionindustry to be employment income is the best way to tackle thisproblem” ( 4.8)
It does not seem a huge leap to me to suggest that the Governmentmay well come to the same conclusion over their target market for IR35and Managed Service Company Legislation.
10. The Government Solution
I think that it is important to understand where the Government is coming from in terms of their solution, in particular:-
“The Government believes that the introduction of legislation, whichmoves away from the current case law approach and applies specificcriteria to the engagement of workers in the construction industry, isthe best way to address the issue of false self-employment” (5.10)
So it is clear that the Government is fed up with losing statuscases based on case law ( IR35 in particular as well as Construction )and so is introducing legislation to override the case law arguments,although their view is that the criteria they are seeking to introduceare based on case law anyway ( see 5.14)
For Professional Contractors and Freelancers relying on case lawhistory to determine IR35 status, it is clear that after this proposedlegislation is introduced then the way status for IR35 is determinedmay well be reviewed.
Two other important features of the solution from the Government is that:-
a) “It is the activity that the worker is actually performing forthe engager to which the criteria would be applied, regardless of whopays the worker” ( 5.5 )
b) “the person responsible for making the payment to the worker will have to apply the statutory criteria” (5.6)
11. The basis of the Deeming Criteria
First point to notice about this is the use of the word “deeming”,to be very close to the words “ deemed payment” for the IR35legislation, so you can see where the Government sits on this.
So the actual “Deeming Criteria” according to the Government need to be:-
“simple and easy for the payer to apply” (5.8) and
“The purpose of the legislation is not to deem a worker’s income tobe employment income where it is clear that the worker is carrying on abusiness and would otherwise be treated as self-employed” ( 5.10 )
This last paragraph if you take it as its written without beingskeptical is entirely consistent with the repeated phrases in all theManaged Service Company Regulations, IR35 and the Agency Regulationsguidance and consultation documents.
The Government still wish to insist that where genuine self employment exist workers will be taxed as self employed individuals.
All Professional Contractors and Freelancers I think should takethis to heart , if you are running a Limited company then you need tobe in business on your own account in your heart too.
I think it is unwise to play at this, so anyone in business on theirown account would be wise to do it properly, this is really commonsense but things to think about are business cards, accounts, vatregistered, registered office address at home, separate bank accounts,website, advertising, multiple income streams, training and investment,professional development, insurance, mobile and telephone in businessname etc. etc…
12. The Deeming Criteria
So finally we get to the actual criteria which are reproduced in full:-
“The Government believes that the following three criteria meetthose requirements and are reliable indicators, within the context ofthe construction industry, or a worker being in receipt ofself-employment income:-
1. Provision of plant and equipment – that a person provides theplant and equipment required for the job they have been engaged tocarry out. This will exclude the tools for the trade which it is normaland traditional in the industry for individuals to provide forthemselves to do their job;
2. Provision of all materials – that a person provides all materials required to complete a job; or
3. Provision of other workers – that a person provides other workers tocarry out operations under the contract and is responsible for payingthem
A worker will have to meet ONE or MORE of these three criteria inorder NOT to be deemed to be in receipt of employment income” ( 5.11and 5.12)
I am not going to try and see how this legislation could be appliedto knowledge based workers at all, this would not be useful and is notthe point of this article. If HMRC wanted to target knowledge basedworkers they would need yet more targeted legislation, that is clear.
13. How it fits in with other legislation
This new legislation has to fit within several other pieces oflegislation that all Professional Contractors and Freelancers will beaware of , and this consultation document also suggest that there maybe an extension of the Debt Transfer Provisions to cover thislegislation too, so Staffing Companies and Agencies will once again bea huge controlling force in the adoption of the new rules ( see 5.17)
In the order of application then this is the hierarchy to be applied:-
1. Managed Service Company Legislation ( 5.22)
2. Deeming Provision
3. Agency legislation ( 5.23)
4. IR35 ( 5.21)
Conclusion
So in conclusion I think firstly we have to remember that this isconsultation, but that we should expect an announcement in the PreBudget report at the end of the year and legislation for the next taxyear 20010-11 to be announced in the 2010 Budget.
Secondly, we should be aware of how this legislation is targeted,how it side steps and case law arguments on status, and how it imposesthe obligation on the organization paying the worker.
Thirdly, we should be aware that the Government says that theyare still committed to people who are genuinely in business on theirown account and seek to work in a manner that is befitting of a selfemployed individual. Those who choose this lifestyle and do it properlyshould therefore have little to fear over this new legislation.
Finally it is certainly clear that real Professional Contractors andFreelancers and those clients who truly want to engage them will haveto change their working arrangements, and in my opinion that is nochange to how we all need to be working within the existing regulationsand case law with IR35.
References
1. The HM Treasury Consultation Document
2. Liz Bridge at the Joint Taxation Committee For Construction
3. http://twitter.com/AnnabelKaye