Payroll insight
engagement of an intermediary by a public sector body is ‘in scope’ of the new rules, HMRC produced their new ‘Check employment status for tax’ service, or ‘ESS’. It is important to remember that this is just a tool and that an organisation should not become over-reliant on this being the default option for all employment status decision making. It is far better to have a proper understanding of the employment status principles that should be considered before even beginning to use the ESS. We would liken the use of the ESS to the use of a ‘satnav’ in that you need to have some commonsense in understanding the route produced to reach your destination effectively. ● Office holders – One of the early questions asked in the ESS process is whether the worker (or their business) will perform ‘office holder’ duties for the end- client. This area has caused difficulties for some of our clients in recent months as to what is the actual definition of an office holder, and whether this applies in certain specific cases, such as independent social workers and best interest assessors. Despite our seeking clarification from HMRC, we have been provided with no clear instruction as to whether these types of worker are properly regarded by HMRC as falling into the ‘office holder’ role, which has proven to be very frustrating as these are roles which are prevalent in all county councils. ● Personal service – Another point worth exploring is that of personal service, i.e. whether the worker must perform the work themselves, or whether they can provide a substitute. The important issues to remember are: that the obligation or right to provide a substitute must be genuine; and the worker must engage and pay the substitute themselves. There is a danger in determining an out of scope decision based purely on a subjective agreement as to whether a substitute is permitted by the end-client – there must be a very real ability for the worker to choose and send their own substitute. The use of a substitute may not be applicable in all cases, as noted in the case of Narich Pty Ltd v Commissioner of Pay-Roll Tax ([1984] ICR 286). This was an Australian appeal to the Judicial Committee of the Privy Council and concerned lecturers for Weight Watchers classes. Their contracts indicated that the
lecturer had herself, or by a substitute approved by Narich, to lecture classes. Again, there was an obligation to provide and pay for a substitute, but presumably because the substitute had to be approved by Narich, the Privy Council did not consider that this clause was one which negated the requirement for personal service. In fact, the court found they were employees as lecturers were “tied hand and foot” as to how they had to deliver the lectures. ...a plan to modify or improve the current legislation or maybe even to extend the rules... ● Financial risk – A strong indication of an engagement being ‘out of scope’ of the IR35 legislation (and of employment status in general), is whether there is a financial risk which the worker takes in performing the job itself. Individuals who risk their own money by, for example, funding their own training costs, bearing their business running costs and paying for other overheads and materials, will be regarded as having a significant financial risk. Compare this to an intermediary worker who is remunerated at an hourly or daily rate and has no outlay of equipment or materials. In the latter case, this worker is more likely to be ‘in scope’ of the new legislation. This question from the ESS covers whether there is a cost to the worker for correcting any work that the end-client is not satisfied with. True financial risk comes from several factors, such as whether the worker can make a profit from the better use of their time and whether the worker will be responsible for correcting their work at additional cost to themselves, whether with time or materials. We have had queries from our clients relating to the section in the ESS referring to equipment and materials and what classes as significant. Materials would be significant if they ‘form a lasting part of the work’ or if equipment is bought and then left behind once the worker leaves. Small consumables, such as stationery, do not class as significant expenditure.
Vehicle costs contribute to financial risk, but for these to be relevant they need to be for a vehicle that is used as part of the work. A taxi driver or JCB operator would be ideal cases here. For intermediary workers who are office based, the use of a car is more likely to be necessary to travel to the work and is not an integral part of the work itself. The ESS confirms that commuting does not count as significant vehicle use. In the 2014 tax case of EMS v HMRC, financial risk was a relevant factor in determining that the worker was self- employed. In this case, he had purchased his own van and trailer, arranged his own insurance and did not receive holiday pay, sick pay or other benefits such as a pension from EMS. The worker also had the very real risk that his invoices may not be paid as his invoicing was done in arrears. HMRC developments Recently, some of our public sector clients have received a series of fourteen questions from HMRC, querying the operation of how they manage their off-payroll engagements. It is not clear why these were issued and/or how the information will be used. Earlier this month we also noted that HMRC have contacted various public sector organisations again, this time using an independent research agency to help them assess: employment numbers; the costs of administering the new legislation; and the impact this has had on the supply of contractors This would imply that the legislation, as it currently stands, still requires further attention. We are left considering whether this could be part of a plan to modify or improve the current legislation or maybe even to extend the rules to the private sector? Q release issued by the Inland Revenue, now HMRC, outlining the legislation that would be introduced to tax ‘disguised employment’ at a rate similar to employment. Essentially, IR35 applies to workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client. Using ‘IR35’ is shorthand when referring to this legislation and the requirements. What is ‘IR35’? ‘IR35’ is the number of the press
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| Professional in Payroll, Pensions and Reward |
Issue 34 | October 2017
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