Professional May 2017

Payroll insight

provide a substitute has to be ‘unfettered’, the end client may face some difficult questions from HMRC as to why they accept such a right when there may be requirements (e.g. Disclosure and Barring Service, Safeguarding) preventing such substitution. It’s also important to note that, when an intermediary is engaged via an agency, it is usually the agency and not the ‘worker’s business’ that provides the substitute. Another ‘Yes’ or ‘No’ question follows, asking whether the worker‘s business has paid someone else to do a significant amount of the work. The nature of the engagement should make this obvious, but this might have to be referred back to the worker. Clearly, arrangements requiring a ‘helper ‘are much more likely to be out of scope of IR35, but this is not conclusive. Having covered substitution, the questionnaire moves onto the question of control over the worker. Can the client move the worker away from the task or project that they were engaged to do? If the end client has this right that’s a pointer towards employment, but not if a new contract needed to be negotiated and agreed first. Next, another critical question: can the client tell the worker ‘how’ the work should be done? If the worker has to follow standard procedures which lay down how the work is to be done then it’s a strong indicator of employment. However, consultants can sometimes be bought in because of their specific expertise and given the scope of the work and deadlines but left to do the work in their own way. There are four choices here; if none of them precisely match the actual circumstances, you must choose the ‘best response’. This is followed by questions on when and where the worker does the work. Does the worker or the end client decide the schedule of work or is this responsibility shared? Similarly, can the worker decide or does the client stipulate the location where the work takes place. It is interesting that, if selecting that the end client decides the ‘how, when and where’, the ESS continues to the next question whereas, if the worker is said to be making the decisions in these three areas, then the ESS cuts to ‘out of scope’. The questionnaire then asks about costs such as materials, equipment and

expenses which the worker is unable to claim as an expense under the contractual arrangements. In order to correctly identify any costs, it should be borne in mind that they would need to be incurred to meet the specific engagement terms. From the initial version of the questionnaire HMRC has now added ‘not relevant’ as an optional response to this question. ...a back-up questionnaire to

of cases, otherwise one would wonder why you would be completing the ESS at all. The penultimate question asks whether there are managerial duties performed by the worker, including hiring workers, dismissing workers, delivering appraisals, deciding how much to pay someone, or other line management duties. Persons engaged in senior establishment posts as interims will often have such responsibilities. These workers are squarely within the ambit of the new IR35 rules. Finally, the questionnaire asks if the worker interacts with customers and, if so, how the worker describes themselves to the customers. If the worker is ‘working for’ the end client this can tip the balance of the outcome towards employment, while an answer that the worker is ‘acting on behalf of’ the end client is less conclusive. After all the questions are answered the ESS should state that the worker is in or out of IR35. Unfortunately, there is a third outcome: ‘Unable to determine the tax status of this engagement’ with the responder invited to contact HMRC for advice. Understandably, these inconclusive outcomes are giving public bodies cause for concern. Although not always the most pragmatic solution, the cautious approach of determining ‘in scope’ is the only way to fully mitigate the tax risks. As ‘in scope’ will give rise to significant additional costs in secondary National Insurance contributions and apprenticeship levy, it may be good value to bring in a tax professional who can guide the parties through the necessary changes to a contract that are needed to mitigate the risk, while emphasising the importance that the terms are accurately reflective of the actual relationship. The original ‘trial’ version of the ESS took a long time to complete and many of the questions were ambiguous, so HMRC tried to make the new version more user friendly. In doing so, HMRC may have gone too far the other way. Determining tax status is a complicated process at the best of times and a check list is never going to be an ideal method. Public bodies are advised to have a back-up questionnaire to cover all those questions not asked by the ESS, to use when the ‘unable’ outcome is determined. Remember to look at the engagement as a whole, not just a selected few issues. n

cover all those questions not asked by the ESS...

In our testing of the ESS, this question has appeared to be ‘pivotal’ in determining whether the intermediaries legislation applies. For this reason, public bodies should question whether the ‘vehicle’ or ‘other expenses’ boxes should be ticked, given the circumstances of the engagement. Unless the existing contract stipulates that the work is itinerant and that the worker must have a suitable car, motor insurance for business use and a valid driving license (and can prove that these requirements have been checked), then caution is urged. The questionnaire now asks about how the worker is paid. The majority of consultants are paid on a daily rate. Where the worker negotiates a fixed rate for the whole job this points towards the worker taking a financial risk, which would support a finding of ‘out of scope’. However, one would expect this commercial arrangement to be supported by clearly stated performance standards and performance monitoring. Needless to say, if the invoice provided by the worker calculates the fees by reference to time, HMRC will see through the ‘fixed rate’ response. The financial risk element is amplified by a question about putting unsatisfactory work right. If that is the responsibility of the worker without additional reward there is a risk and, again, suggests ‘out of scope’. If the worker continues to get paid for correcting the work, or doesn’t have to correct it, that’s more akin to employment. The next question asks if benefits are provided to the worker. One would expect this to be answered ‘no’ in a large majority

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Issue 30 | May 2017

| Professional in Payroll, Pensions and Reward |

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