Limited company and umbrella contractors are outside the scope of the False Self-Employment legislation, due to a technicality.
So, thankfully HMRC’s new guidance on how the Onshore employment intermediaries: false self-employment legislation should be implemented won’t actually affect the vast majority of contractors. But it does provide some valuable insights into how HMRC views supervision, direction and control that can provide contractors with some lessons about control in the context of IR35.
Contractors should be doubly grateful that they are not affected as the guidance is also sufficiently ambiguous that it is potentially at odds with the source legislation. Agencies are going to have a nightmare when they have to start reporting from 6 July 2015, as they “must be able to prove to HMRC, if asked, why the workers wasn’t treated as an employee”.
The guidance goes on to say that: “From 6 April 2014, a worker must be treated as an employee for Income Tax and National Insurance (NI) purposes if the worker…is, or can be, supervised, directed or controlled by someone as to how they do the work.”
That’s a worry, because this is not exactly what the source legislation says. It says that “a worker must pay income tax and National Insurance Contributions (NICs) via PAYE if…the worker is subject to supervision, direction and control as to the manner the services are provided.”
The legislation continues by saying that PAYE applies: “If the agency cannot show there is no supervision, direction and control as to the manner the services are provided.”
You could interpret HMRC’s guidance as saying that the worker must be treated as an employee if there is supervision, direction and control present. On the other hand, the legislation is quite clear that the worker must be treated as an employee unless the agency can prove the absence of supervision, direction and control.
So, which is it? Proving something is there is much easier than proving the absence of something.
To illustrate how absurd this has become, here is a real life analogy. You could bury a coin in your garden and you could prove it is there by finding it. But if you didn’t bury the coin, you couldn’t prove it wasn’t there unless you did a serious amount of digging. You can only come close to proving the absence of something by searching everywhere for it and concluding that you just can’t find it. That’s a lot of effort.
Extrapolating this analogy, will agencies now have to search every garden and conclude whether they did or didn’t find a coin in any of them? How big does the search have to be? What depth of digging would be considered enough for HMRC?
Is it going to be enough for agencies to simply report to HMRC that: “We investigated the worker and the client and to the best of our knowledge could not find any evidence of supervision, direction and control.” Will HMRC then turn up and say: “Sorry, but you didn’t look hard enough as we think it clearly does exist”? The situation could become farcical.
The most likely outcome is that either agencies will default to treating all workers as employees and apply PAYE, and leave it to the worker to sort out the mess. Or they will create a checklist on which the supervision, direction and control decision will be based. And verbally the worker might be told that if they choose yes for questions (a), (e) and (h), then they can get paid gross.
There is another aspect of the guidance that provides a valuable lesson about how HMRC is starting to think about supervision, direction and control. And remember that control is a key element of determining whether a contractor is caught by IR35.
HMRC advises agencies that they: “Should ask the worker to keep any documents that prove they weren’t, or couldn’t be, supervised, directed or controlled as to how they did their work.” OK, thanks for the suggestion, but what kind of documents, exactly?
Thinking about it, having this kind of documentary evidence could almost prove without question that a contractor is outside of IR35 because supervision direction and control could not have possibly applied. And it would not be that hard for a contractor to generate.
For many contractors, it might require doing something sneaky like sending an email to their client project manager saying something along the lines of: “Regarding the design and implementation of the functionality agreed at the meeting, did you want to get involved and tell me how to build this, or shall I just get on with it and deliver the result?”
Our experience is that most project managers hire contractors precisely so they don’t have to get involved. So the response is almost certainly going to be: “Just get on with it and show me when it’s done.”
That would prove pretty conclusively that the contractor was not being told how to do something. In fact, there is probably no better way of providing evidence for the absence of control than asking for direction and being told it won’t be given.
Contractors can heave a sigh of relief that they won’t be put through the pantomime that self-employed sole-traders and partnerships will suffer is seeking work through agencies. They can also learn from the experience of their less fortunate fellow flexible workers, and send those sneaky emails just in case HMRC turns its attention on them.