Tax & IR35 News - Contractor Weekly

Stripper Revealed to be Employee

2012-05-23T08:21:47Z

Ms Nadine Quashie, former lap dancer at Stringfellows in London, who lost her unfair dismissal case at an employment tribunal in 2010 because it found her to be self-employed, has now won her appeal at the Employment Appeal Tribunal.

In December 2008, Ms Quashie claimed she was unfairly dismissed but Stringfellows said her services were terminated for misconduct, i.e., drug dealing. This followed an 18 month relationship that started in June 2007.

Prior to working as a dancer at Stringfellows, Ms Quashie had worked at another lap dancing club called 'Secrets' on a self-employed basis and it was generally understood within the industry that this was the normal employment status. Before she started lap dancing Ms Quashie had studied finance and accounting at Thames Valley University for 2 ½ years but did not complete the under graduate course. During her time at university she had also been a women's rights officer.

Employment Tribunal ruling

In the original ruling, the Employment Tribunal found that Ms Quashie was required to provide her work personally and could not provide a substitute.

Stringfellows also exerted sufficient control over the dancer which was a pointer towards employment. Ms Quashie had to abide by the rules set out in the 'Welcome to Stringfellows: Cabaret of Angels' booklet. This included being required to work one Saturday and one Monday twice a month, working one night a week at 'Angels' and being required to turn up to Thursday meetings or face being fined for not doing so. She was also required to comply with the 'Angel' image and dress code, being required to perform a number of free dances on the stage/podium/pole or facing a fine for not doing so. The nightclub told her what to do on stage and compelled her to give free dances at midnight, with further fines being imposed for failing to do so.

Where an agreement was reached with a customer that was worth over £300, this had to be authorised by a manager and a manager could even overrule a sum on the basis that they wanted to retain the club's reputation and look after their customers.

As well as having to comply with numerous other rules, Quashie also had to seek permission to leave the club if intending to leave before the end of a shift.

A 'House Mother' took care of the dancers' well being and needs such as minor dress repairs, ironing, make-up and hair. This person would ensure that the dancers were well turned out in their appearance and were properly dressed (seems rather paradoxical!) to maintain the standards of the club. The dancers themselves would provide their own costumes.

Dancers were responsible for paying the 'House Mother' and also the DJ, hairdresser and other facilities provided at the club. An upfront fee of £15 each night, known as a 'tip out' fee, would be paid by the dancers to the 'House Mother' before they commenced their shift. When dancers came into work they would have to report to the 'House Mother'.

All dancers were paid in 'Heavenly Money', which is a form of voucher that avoids actual cash being exchanged between dancer and customer. The club would make certain deductions which included:

A commission fee; 20% for sums below £300 and 25% for sums greater than £300;
House fee of £65 per night; and
Fines; £25 per hour for being off rota; £10 for being late for a stage dance/song; £50 - £100 for being late for a meeting and £25 for missing a free dance.

Cashiers would convert the vouchers into cash and place this in an envelope for the dancer to collect the next day or when they next attended the club.

The Judge however found that there was no mutuality of obligation as the essential element of the wage/work bargain was not present.

Stringfellows were not obliged to pay Ms Quashie anything and indeed did not pay her anything; rather she paid the club to dance at their venues. Often she would go to work and earn nothing because she had not earned sufficient 'Heavenly Money' vouchers to cover the cost of the 'tip out' fee, house fines and commission.

There was no contractual obligation on Stringfellows to provide work and Quashie was not required to work a set number of nights per week but was required, if rostered, to work one Saturday and one Monday every two weeks in a month and one night a week at Angels.

The judge also found that there was no mutuality of obligation in the periods Ms Quashie was not dancing at the club. Although she did need to notify Stringfellows when she went on holiday so that they could arrange their rotas, she was never required to obtain permission to take holiday and it was clear that there were periods when she was not dancing at the club. During such periods she was not required to attend work and Stringfellows were not obliged to pay her anything. Furthermore, Ms Quashie was at liberty to work elsewhere during those periods.

Although she could be fined for not turning up, Quashie was not under any obligation to dance at the club.

She was not retained, not paid holiday or sickness pay or any other type of payment and could stay away for as long as she liked.

Quashie had a degree of financial risk in that she provided her own equipment (presumably stagewear) and sometimes incurred a loss. This, along with an absence of mutuality of obligations, pointed towards self-employment which the judge settled on.

Employment Appeal Tribunal Decision

Judge McMullen, QC, found that the original Employment Judge had erred in her conclusion that Ms Quashie was not an employee on each night she performed work and in the intervening stages when she was on the rota to perform work, on holiday and at all stages in between.

The wage/work bargain could have been satisfied if Quashie had agreed to dance in exchange for accommodation, free meals, fees paid directly to her university, or even for payment of 1p a night! She could make the bargain to dance to Stringfellows tune if the club agreed to let her be seen at the club so as to enhance her reputation, or to keep her hand in, or even for networking.

There was an expectation on both sides of continued engagements and that certainly existed between the dates on the rota.

There was an obligation to turn up each Thursday for a meeting without pay otherwise face penalty. Added to this was the obligation to dance two Saturdays and two Mondays each month.

Ms Quashie could not take an extended holiday because any period of non-attendance that lasted over four weeks would have meant that she would have had to audition again.

Ultimately, the Judge found that Quashie was an employee working under an umbrella contract which would have given her a year’s continuous employment with the club and enable her to pursue a claim for unfair dismissal.

Cross-appeal

Stringfellows had also lodged a cross-appeal on the grounds that the notional contract was illegal because Quashie had made false claims to HMRC on her tax return and child benefit claims. Her tax returns showed income from self-employment and according to counsel for Stringfellows made the following declarations to HMRC:

(A) In June 2009 she gave HMRC an estimation of her income on which they relied of:

£0 between April 2007 – April 2008 whereas according to her own accounts and earnings data she made a profit of £49,274 plus net commission of £7,020.
£25,000 between April 2008 – April 2009 whereas her accounts showed a profit of £30,901 to August 2008 plus further earnings of £13,530.

(B) She declared a profit in the year to April 2008 of £9,825 whereas this should have been £49,274 plus further earnings of £7,020.

(C) Her accounts set out the following expenses that she could not explain to the Tribunal and were considered by counsel to be grossly excessive for a dancer:

£1,040 premises;
£2,274 motoring;
£4,613 depreciation and loss of profit.

In addition the Judge also found that Ms Quashie was asserting losses based upon net weekly pay of £2,200, roughly equating to £140,000 gross per annum.

The Judge said that these stark figures required a more careful analysis together with an explanation as to how a person partly trained at university in accounts and law came to put forward such figures.

The cross-appeal was allowed and will be heard together with Ms Quashie's unfair dismissal claim by a fresh three person Tribunal.

Do Tax Amnesties Work?

2012-05-23T07:56:27Z

As part of the government’s £917 million spending review investment to tackle tax evasion, avoidance and fraud, HMRC set up a task force initiative to target high risk sectors.

Each specialist team carries out an intensive campaign with a view to uncovering tax owed but not disclosed to the Revenue. HMRC's campaigns provide opportunities for people to voluntarily put their tax affairs in order. They do this by identifying a group to target and gathering information and intelligence that can be used to encourage and influence that group to make a disclosure. Once a campaign closes, HMRC then uses that same information and intelligence to follow up action that can include criminal investigations, aimed at those who choose evasion.

HMRC state that campaigns launched so far have produced a yield of nearly £510 million from voluntary disclosures and over £120 million from non-compliance follow up from a large number of civil interventions, including over 18,000 completed investigations. There are also just over 20 criminal cases in progress.

Before the recent spate of campaigns HMRC offered offshore tax amnesties in 2007 and 2009 which raised a combined tax yield of over £500 million.

Accountingweb recently published a table monitoring the progress of all campaigns to date which is reproduced below:

Target/ Industry	Period	Areas	No. of checks	Voluntary disclosures/ prosecutions	Tax gain (£)
Medical professionals	Jan - June 2010	All	4,000	1,500/Not known	13.1 million
Plumbers	Mar 2010 - Aug 2011	All	1,000	600/14	4.57 million
VAT non- registered	May - Dec 2011	SE	40,000	851/Not known	9 million plus
Restaurateurs	May 2011	London, NW & Scotland	531	45/29	634,050 (13.5 million expected)
E-traders	June 2011	All	32,000
Fast food outlets	July 2011	London	85	85/Not known	10 million (18 million expected)
Tutors and coaches	Oct 2011 - Mar 2012	All
Second home owners	Nov 2011	London
Scrap metal dealers	Nov 2011	Scotland			3 million expected
Fast food outlets	Nov 2011	Scotland			6 million expected
Builders & construction traders	Nov 2011	NW & N Wales			3 million expected
Fraudulent repayments	Nov 2011	London		Not known/3	4.5 million expected
Landlords	Nov 2011	NW & N Wales		Not known/3
Electricians	Feb 2012	All
Property transactions	Dec 2011	Greater London			7.5 million expected
Construction & building	Feb 2012
Direct selling	Feb 2012
Missing returns	2012 - 13	SE			2.5 million expected
Home maintenance trade	2012
Rag trade	2012 - 13
Motor trade	2011 - 13
Market traders	2011 - 13

According to the table therefore a total tax gain of approximately £37 million has been yielded from campaigns to date. It is uncertain how the tax gain has been measured but nevertheless there is a disparity between these and HMRC's claims.

The target is to raise an additional £7 billion each year by 2014/15 so there is still work to be done.

2020 Tax Commission's Vision

2012-05-23T07:51:44Z

The 2020 Tax Commission, which is a joint project between pressure group Taxpayers' Alliance and the Institute of Directors, published its final report containing recommendations for the future structure of the UK's tax system. Its findings are a culmination of gathering evidence over a period of 18 months and signal the start of a new campaign.

In a 400 page report, the Commission sets out its radical and, what it believes to be, realistic reform of the tax system, and calls for the abolition of eight taxes and the creation of just one Single Income Tax. The recommendations are as follows:

Taxes should be cut to 33% of national income;
Marginal rates should not exceed 30% and the personal allowance should rise to £10,000;
Taxes on capital and labour income disguised as business taxes should be abolished and replaced with a tax on distributed income;
Transactions, wealth and inheritance tax should be abolished;
Other consumption taxes to remain for the present time but transport taxes should be cut; and
Local authorities should raise half of their spending power from local taxes.

Other highlights from the report are:

Income tax and Employees/Employers NIC should be merged into a single tax on labour income, with rates levelled down to protect certain groups from higher bills;
Corporation Tax and Capital Gains Tax should be replaced with a single tax on capital income – dividends, interest and rent – at a rate of 30%;
Stamp Duty and Inheritance Tax would be abolished;
A Fuel Duty cut of 5p per litre and the abolition of Air Passenger Duty.

The 2020 Commission claims its proposals would result in substantial tax cuts for households and provide a significant boost to economic growth. For example, a two earner household with an income of around £28,000 would enjoy a tax reduction of approximately £3,400. These measures, it claims, will result in taxpayers being treated more fairly and taxes becoming lower, simpler and transparent.

Plumber Sinks Because of Tax Evasion

2012-05-23T08:13:10Z

Peter Mack, a plumber from Ringwood, Hampshire, has been given a four month jail sentence, suspended for 12 months for tax evasion. The conviction follows HMRC's recent campaign targeted at plumbers, gas fitters and heating engineers.

Last year HMRC launched a tax amnesty, the Plumbers Tax Safe Plan, whereby those in the plumbing and gas heating trade could volunteer unpaid taxes to HMRC in return for certain assurances.

Needless to say, Mr Mack, was not one of those and following an HMRC investigation it was discovered that he had set up his own plumbing business in 1997 after leaving full time employment but failed to register this with the Revenue and make a declaration of his income.

Over a 14 year period Mack evaded £88,000 income tax and VAT as follows:

1997-2004: £28,000

2004 - 2010: £50,000

2010 - 2011: £10,000

Once interest had been added to the arrears the total came to £112,000.

Mr Mack was arrested in July 2011 and last month pleaded guilty to fraud of £40,000 at Southampton Crown Court. Having already received £40,000 from Mack, HMRC will seek to recover the remaining tax through civil proceedings

In addition to the 12 month suspended sentence Peter Mack was ordered to pay £1,800 costs and to carry out 100 hours of community service.

This latest conviction follows that of West Midlands plumber, David Williams, who was jailed for 12 months back in March, after evading tax and NIC totalling £91,000 during 10 years of trading.

With other recent arrests of plumbers and ongoing investigations, HMRC is clearly signalling that it is serious in cracking down on tax evasion.

IR35 Scenarios Boldly Go Nowhere

2012-05-16T07:36:20Z

Following the publication of the Business Entity tests and six IR35 scenarios last week, HMRC has come under fire for not delivering the certainty to contractors that it had promised and that everyone had hoped for. Some of that criticism is justified especially in respect of the example scenarios.

The scenarios, which can be found on the HMRC Legislation Guide (PDF) , have been developed to illustrate when and why IR35 will apply to an engagement and when and why it will not. There are six in total, two outside of IR35, one within IR35, one borderline, one in and outside of IR35 and one where the main contract is within IR35. Unfortunately there is nothing new contained within these scenarios that contractors will not have already seen or known about.

The criteria that is used for deciding whether or not each of the fictional contractors is outside or inside of IR35 are the usual suspects that HMRC have relied upon over recent years, namely, control, personal service/substitution and financial risk. Ignoring the obvious and taking the six scenarios as a whole we can deduce the following:

Length of Engagement

At best this is a neutral factor. The scenarios illustrate contract periods ranging from 18 months – 8 years but attach no real importance to their length.

Mutuality of Obligation(MOO)

MOO is given very little mention or inference. HMRC still appear to want to brush this important status factor under the carpet as they always have done. Although its relevance has moved down the pecking order, recent Tribunal cases have attached some importance to this criteria, with the notable exception of Judge Nowlan in the JLJ Services Ltd case.

Basis of Payment

Stage payments and premium rates for working unsociable hours appear to be acceptable although HMRC set these within the context of a fixed price contract knowing full well that the majority of contractors are remunerated by way of an hourly, daily or weekly fee.

Control

Being told what to do by an end client is not unusual, although this will be dependent on the nature of the services.

Periodical progress meetings is a reasonable expectation of an end client.

The fact that a contractor is highly skilled and cannot be told how to perform the services is still to be ignored by HMRC as demonstrating a level of control being exercised by the freelancer.

Right of Substitution

A genuine right of substitution still remains the golden bullet in arguing employment status.

HMRC consider it unlikely that a specialist contractor will be able to find a substitute with the right skills. How presumptuous and back to Judge Nowlan again!

Financial Risk

An end client providing specialist equipment to enable the services to be carried out is a weak pointer towards IR35.

Professional indemnity insurance and paying for training are weak pointers towards self-employment but HMRC do now accept that employees do not usually have to carry insurance or pay for their own training.

Integration

Although HMRC accept that a contractor mentoring end client employees is a usual way for those employees to learn it does, however, also point to the freelancer being part and parcel of the organisation and is a weak pointer towards IR35.

The scenarios do at least enable contractors to delve into the psyche of HMRC and understand where they are coming from although not always agreeing with their rationale.

HMRC Getting Better?

2012-05-16T08:06:26Z

HMRC claims it is on target to meet its objectives to provide a better service and has made a Joint Understanding Agents Project statement outlining its progress in this area.

In a mutual understanding exercise, HMRC officials spent time with accountants to understand service delivery from their side of the fence, whilst practitioners and charities examined HMRC's post-handling processes, the way in which bereavement cases were processed and PAYE coding matters.

Last September objectives were set for 3, 6 and 9 month intervals and the Treasury Select Committee suggested that HMRC should work with professional bodies, tax charities and businesses to improve the experience of dealing with the Revenue.

HMRC say that they are currently on course with all its recommended improvements and up to 31st March had:

Provided clearer P35 guidance to employers;
Initiated an e-mail pilot to 15 advisors, to be expanded to 200, and that feedback has been positive;
Set up a single point of contact for self-assessment and PAYE aspects of bereavement cases in Cardiff;
Commenced with online measures with a view to better communication of HMRC changes;
Embarked on a study of bulk mail processes and deadlines;
Made improvements to the processing of form 64-8; and
Assembled and analysed feedback on HMRC telephone services

The next 6 and 9 month improvement targets are:

Ensure that incoming post is channelled more effectively;
Improve the exchange of information on pensions between HMRC and the Department for Works and Pensions;
Options for faster repayments; and
Establish an online tool to enable agents to gauge expected response times.

Millions Still Paying Excessive Tax

2012-05-16T08:02:31Z

Around 3.5 million taxpayers are due to be informed by HMRC that they have paid too much tax which will result in an average refund of £379 each.

HMRC will also send out about 1.6 million letters next week to people advising that they have underpaid tax by, on average, £537. These underpayments will be collected by way of a reduction in individuals PAYE code numbers thereby increasing the amount an employee pays in tax each month.

Despite criticism of the department following least years PAYE fiasco and putting into place measures to reduce landing unexpected tax bills on people in the future, the number of people receiving letters from HMRC has marginally increased from 2011. The Revenue has explained however that this is due to changes in benefits-in-kind provided by employers, individuals having multiple jobs, changing jobs or receiving a pension in addition to employment income and splitting their personal allowance between the different sources of income.

The process of issuing tax underpayment/overpayment letters has, however, begun two months earlier than last year which should enable the whole process of clawing back and refunding tax by October.

HMRC claim that they are improving the PAYE system by the introduction of Real Time Information (RTI) which will enable employers and pension providers to report PAYE payments as and when they occur.

Jack of All Trades

2012-05-16T07:53:18Z

A recent First Tier Tax Tribunal case involved one of those rare occurrences of HMRC arguing strongly that a taxpayer should be treated as self-employed and not employed as the individual had claimed.

The Facts

Mr Coffey was, for many years, a partner in 'Coffey Builders' until his retirement due to ill health.

Within the period spanning 6th April 2003 - 5th April 2006, Mr Coffey had been involved in the refurbishment of Dr Selvarajan's clinic in Bolton, despite having retired in 2003 and instructing his accountant to de-register the business from VAT. During this time Mr Coffey claimed that he supervised the building works for which he received a weekly amount of £500 regardless of hours worked and apparently included holidays and other absences. No invoices were raised for this remuneration.

No estimate or quotation was prepared and no written contract drawn up. During the project however, Dr Selvarajan's lenders had insisted on a Builders Contract being drawn up which Mr Coffery signed as the contractor. He also signed a document as Coffey Builders responsible for health and safety, in addition to various liability insurance documents.

Materials, tools, equipment and sub-contractors were all paid for by the doctor who had opened accounts at local builders' merchants.

Whilst there was no disagreement that Mr Coffey did not possess a right of substitution, he claimed that he was not permitted to engage helpers. Dr Selvarajan however stated that all labourers who worked on the project were found by Mr Coffey and that he did not know the full names of the workers, their home addresses, rates of payment or qualifications.

It was alleged by Mr Coffey that although Dr Selvarajan was a GP, he knew a great deal about building work and was therefore able to take on the role as principal contractor, with Mr Coffey being hired as an expert in an advisory capacity.

In January 2006, HMRC opened an enquiry into the accounts and returns of Coffey Builders, covering the tax years 1998/99 – 2005/06 and ultimately raised assessments to recover additional amounts of tax for those years.

HMRC also raised an NIC's assessment on Dr Selvarajan but these showed no contributions due, presumably to allow the doctor to appeal against the decisions and thus ensure he would be a witness in the dispute with Mr Coffey.

The Decision

The Tribunal found the evidence of Dr Selvarajan to be more credible that that of Mr Coffey.

Control

As a GP the Tribunal found that he simply did not have the relevant knowledge or experience to control such aspects of the project as finding labourers or fixing their rate of pay. They found that Mr Coffey did have such experience and that it was wholly unlikely that his role would be so limited. It was found as a fact that Dr Selvarajan had not directed Mr Coffey in his task nor was the builder subject to appraisal or monitoring by the doctor. It was therefore concluded as fact that Mr Coffey had far more control over the building project than he accepted.

Whilst the refurbishment project was in progress, Mr Coffey undertook separate building jobs which the Tribunal inferred as him being able to dictate his hours and days of work to allow him to do so.

Despite his ill health and intended retirement, Mr Coffey was still willing and able to undertake work as a builder which supported the Tribunal's view that he was engaged by the doctor as much more than an advisor and that this was one of a number of “one-off” jobs undertaken after retirement.

The documents that Mr Coffey signed reinforced the Tribunal's view that his role carried with it significant responsibilities and control. Mr Coffey had explained that he had simply signed the documents without checking them, prior to their completion and after the work had commenced. In the absence of any written agreement the Tribunal considered the documents provided an indication as to the intentions/standpoint of the parties. The titles under which Mr Coffey had signed his name, such as 'principal contractor' and 'planning supervisor' were pre-printed so there could have been little doubt as to what he was signing.

HMRC relied upon a handwritten note made on a diary page, which contained a list of names and amounts, as evidence that indicated Mr Coffey dictated and controlled the workers' payments. The Tribunal was satisfied that this was further evidence that Mr Coffey, rather than Dr Selvarajan, had a significant degree of control over the project.

Intention of the Parties

Mr Coffey contended that from the outset it was intended that he would be employed to manage and advise on the project and that Dr Selvarajan would take responsibility for PAYE deductions. The Tribunal rejected this as there was no credible explanation as to why Mr Coffey would suddenly change his lifetime's habit of trading.

Financial Risk

That Mr Coffey was paid a weekly fee of £500 did not cause the Tribunal to describe it as an employees wage/benefit. Indeed there were periods where the payment differed.

One of the documents that bore Mr Coffey's signature indicated a potential liability to rectify defective work. The Public and Employers Liability Insurance in respect of Mr Coffey's work as a builder covered part of the period of the project for himself and up to 8 workers. The Tribunal considered these documents indicated a significant degree of responsibility, financial risk and management of the project by Mr Coffey.

Integration

The notion that Mr Coffey should be viewed as part and parcel of the GP practice was found to be misconceived by the Tribunal. They could not see how Mr Coffey could be deemed to as an integral or even ancillary part of the practice. The assertion that a construction project had any part to play in the running of the main organisation as a medical clinic was rejected.

The Tribunal concluded therefore that Mr Coffey was self-employed throughout the period of the engagement with Dr Selvarajan.

IR35 New Order

2012-05-09T12:18:36Z

This week has seen the publishing of the new 'business entity' test by HMRC. These tests and the IR35 operational approach was the subject of discussion at a meeting of IR35 specialists from both profession and industry, and HMRC, held yesterday, which Andy Vessey was a participant.

None of the questions really come as any great surprise and are variations/expansions on well known historical themes. It is, however, the allocation of points to some of the answers to these questions that do appear imbalanced.

The tests that are guaranteed to put a freelancer at the bottom of the risk pile are those that evidence an actual lack of personal service, i.e. engaging assistance, invoking a right of substitution or sub-contracting out work.

The detailed tests together with the associated scoring system is reproduced below:

Test 1	Business Premises test	Does your business own/rent separate business premises which are separate from your home & client's premises?	Yes = +10
Test 2	PII test	Do you need professional indemnity insurance?	Yes = +2
Test 3	Efficiency test	Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently e.g by finishing the work/project earlier than projected but still receiving the full agreed payment? For example you originally agreed with the client/engager that the work would take 3 months & cost 10,000 but you finished in 2 months & still received the full 10,000 at the end of the 2 month period.	Yes = +10
Test 4	Assistance test	Does your business engage one or more workers who generate at least 25% of your business turnover annually?	Yes = +35
Test 5	Previous PAYE test	Have you been engaged on PAYE employment terms by your current client/end user within the last financial year with no significant changes to your working arrangements? If you are doing the same work you should answer yes to this question. Current engager also includes working at a different location owned by your engager or working at a different company but which is connected, e.g part of the same group.	Yes = -15
Test 6	Advertising test	Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months?	Yes = +2
Test 7	Business Plan test	Does your business have a business plan with cash flow forecast that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank?	Yes = +1
Test 8	Repair At Own Expense test	Would your business have to bear the cost of having to rectify any mistakes?	Yes = +4
Test 9	Client Risk test	Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover?	Yes = +10
Test 10	Billing test	Do you invoice for work carried out prior to being paid & negotiate payment terms?	Yes = +2
Test 11	Personal Service test	Does your business have the right to send a substitute?	Yes = +2
Test 12	Substitution test	Has your business hired anyone in the last 24 months to do the contracted work you have taken on? This could be demonstrated by sending a substitute in your place or by sub-contracting, but in both cases your business remains responsible for the work & for paying the substitute or sub-contractor. You can still pass this test if you had to notify the end client of the name of the individual you sent as a substitute.	Yes = +20

Scoring:

High risk = 0 - 10 points
Medium risk = 10 - 20 points
Low risk = 20+ points

Why has the 'Business Premises' test only been attributed 10 points? A business operating out of premises distinct from a contractors' residence is a major financial commitment and, if actually owned, investment. Ownership of such a business asset has always been viewed as a firm indication of a genuine business being operated and it surely deserves greater weighting being attached to it.

Advertising costs in excess of £1,200 represent significant expenditure for a small business, yet it only achieves the same score as the 'Billing' test. Whilst the two activities are indicators of business activity, the importance attached to invoicing is disproportionate in comparison to committing business revenues to advertising.

These pilot tests are designed to help freelancers gauge their IR35 risk exposure and whilst everyone would wish to fall within the low risk category the reality maybe that medium risk is the best that can be achieved. One incidence of a substitute being used, however, would appear to vault a contractor to the desired side of the risk fence. As HMRC are focusing their attention on high risk cases perhaps a medium risk score isn't all that bad, particularly if there are other positive factors, outside of this test, in the contractors' favour. Furthermore, HMRC will not be using the 'Business Entity' test as part of their risk criteria for selecting cases for review.

HMRC emphasise that it is important that the 'Business Entity' test should not be viewed in isolation but rather in conjunction with the associated guidance, which is available on HMRC's website (see business entity test guidance). There is a danger that taking the test out of context, i.e. without reference to the guidance, will result in a skewed and distorted view of the essence of each test and the resultant scores.

In addition to the 'business entity' test a number of other initiatives are to be piloted which are designed to reduce uncertainty and provide greater certainty for the majority of freelancers. These are as follows:

Six Scenarios

These will help explain when IR35 would and would not apply and the reasons why. They will also explain factors that should be considered when contemplating whether IR35 applies.

Guidance

Explanations will be provided as to how the piloted products work and also what a personal service company needs to do if they are caught by IR35.

IR35 Helpline Improvements

Both HMRC's helpline and review service will be manned by specialist staff who will be independent of the Revenue's compliance teams. Whilst HMRC will aim to reassure contractors that there will be no reporting of information to any other part of the department, there will be many that will still remain sceptical. At yesterday's meeting however, the HMRC officer with responsibility for the contract review service based in Northampton maintained that once a contract review was concluded, for whatever reason, then the papers are simply put away.

Contractors will be able to speak to specialist staff to review their contracts and if deemed to be outside of IR35, will be issued with a certificate containing a unique number which will be valid for 3 years. This can then be produced upon any subsequent IR35 review causing that review to be suspended to allow time for the previously supplied information to be considered. Provided this is the only area of risk and the original information provided is genuine, then the review will be closed.

For anyone wishing to have their contract reviewed by HMRC it is worth noting that for the Revenue to give a conclusive opinion they may well need to contact the end client.

HMRC will not give an opinion on contracts that have been drawn up but not yet enacted.

In conjunction with these initiatives, HMRC will also pilot a new operational approach:

Three new specialist teams, consisting of approximately 12 members each and with a specialist status inspector attached/embedded within them. These will be based in Salford, Croydon and Edinburgh, although reviews undertaken by these teams will not be geographical;
New risk assessment process targeted at those who are in 'disguised employment'. The risk assessment will be done outside of the three specialist teams but following the advice of IR35 specialists;
Within the opening review letter sent to a contractor will contain the question, 'Have you considered IR35? If so why do you consider yourself to be outside of IR35? Please provide evidence to support this answer.' Where such satisfactory evidence is provided then HMRC will hope to close down the review at an early stage and there are also plans to exempt that business from an IR35 review for the next 3 years. HMRC have already targeted those high risk businesses that will be the first recipients of this letter in approximately 2 weeks’ time.
Where satisfactory evidence demonstrates that a contractor is 'in business' then HMRC will bring any review to a close, and
In order to reduce delays in IR35 enquiries, HMRC will use their powers at an early stage to obtain information necessary to progress the enquiry. This could mean that third party information will be sought sooner rather than later.

All in all, probably not a bad effort but the proof of the pudding will be the eating thereof and judgement will have to be reserved until April 2013 when we learn of the end of term report. It is possible that another meeting will take place mid term to enable feedback as to what works and suggestions as to how HMRC's processes can be further improved. Contractor Weekly would therefore welcome reader’s experiences of these initiatives, good or bad, to help continually improve the administration of IR35.

What is your score on the test? Share your result in the comments section below.

IR35 and the Civil Service – Again!

2012-05-09T12:57:28Z

Apparently Danny Alexander, Chief Secretary to the Treasury, has written to the Chancellor to inform him that there are more than 2,000 senior civil servants using personal service companies rather than being employees.

The barometer used for measuring these figures appears to be those paid at least £58,200.

Margaret Hodge, Labour MP, was shocked by this revelation and said, “This is endemic across the civil service.”

So once again the media and politicians display their ignorance about taxation and, in particular the use of personal service companies. Have they stopped to think that these 2,000 may not be high flying civil servants pursuing a long standing career within the service? They are likely to be contractors engaged on short term contracts by government departments wanting to avoid and discharge their employment obligations. It appears that 40% have been providing their services for more than 2 years, although it is not known if these are single contracts or a number of smaller, renewable ones. If they are contractors, then can they really be classified as civil servants??

It is hypocritical of the government to point the finger at these individuals and accuse them of avoiding tax and NIC's when it is their own departments that have been responsible for hiring these contractors on self-employed terms. They need to take a long hard look at themselves, and maybe they are (?), rather than using contractors as a scapegoat. If they are genuinely concerned then they simply need to seek a ruling from HMRC, then jobs a good un'!