Review of working practices
The scope of the Taylor review (Good work: the Taylor review of modern working practices) was indeed a wide one: its breadth or ambition is perhaps demonstrated by the title of its concluding section, Seven steps towards fair and decent work with realistic scope for development and fulfilment.
Two principles identified in these steps, which are particularly relevant in the debate over ‘disguised employment’ and its taxation, were:
- that the intermediate status, between employed and self-employed, of ‘worker’, was distinct and should be retained (with the proposal that such status be re-named ‘Dependent contractor’); but that ‘we should be clearer about how to distinguish workers from those who are legitimately self-employed’.
- that ‘we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people’.
The government responded to the Taylor review in February 2018. One overarching element of this response was that ‘it should be easier for individuals and businesses to determine whether someone is an employee, a worker, or self-employed, and [the government] is committed to improving clarity and certainty in this area’.
A consultation, Employment status, was published at the same time and is ongoing. Its stated purpose includes considering employment status for both employment rights and tax, ‘including the [Taylor] review’s recommendation for greater alignment between the two, in order to tackle this issue holistically’.
Related to the second principle, that taxation should be made more consistent across employment forms, one of Taylor’s more specific recommendations was that the level of national insurance contributions (NICs) paid by employees and the self-employed ‘should be moved closer to parity’.
A modest step in this direction was of course proposed by Chancellor Philip Hammond in his March 2017 Budget, by way of an increase in Class 4 NICs’ self-employed rates, though quickly withdrawn after the ensuing political furore. It is noteworthy that the government’s response on this specific recommendation included the comment ‘we have no plans to revisit this issue’.
Alongside this, the government published three other consultations, Increasing transparency in the labour market; Agency worker recommendations; and Enforcement of employment rights recommendations.
The first two of these focus on, respectively, ‘increasing transparency’ between employers and individuals (by which is meant bringing clarity to the rights and responsibilities of both parties, with a recognition too that with the rise of so-called atypical working, workers do not have access to all the information they need to fully understand their rights); and how to increase transparency of contractual arrangements for agency workers (including how umbrella companies or intermediaries could be brought within the scope of the Employment Agency Standards Inspectorate).
The final consultation (enforcing employment rights) sets out the government’s intention to enforce a wider range of basic employment rights on behalf of ‘vulnerable workers’.
These latter consultations deal essentially with ‘employment law’ matters, a couple of the many interesting points raised are:
- the government’s stated commitment to provide a right to request ‘a more predictable contract’ for all workers, including those on zero hours contracts and agency workers; and
- the proposal to make it easier for people in atypical work to establish ‘continuity of service’ giving access to key employment rights, by extending the qualifying ‘break in service’ period (including considering whether the criteria applying to this need to be amended).
IR35 and the 2018 tribunal cases
The Ackroyd case, with public sector body the BBC as ‘employer’, obviously pre-dates the Finance Act 2017 changes (the tax determinations in Ackroyd covered a number of tax years up to 2012-13). However, the legislative test for whether arrangements are caught by IR35 remains the same, pre- and post-April 2017.
As is well understood, what has changed in these public sector cases caught by IR35 is the person liable to account for income tax and NICs: such responsibility was shifted from the ‘intermediary’ (invariably the worker’s personal services company (PSC)) to the ‘client’.
It is this shift in responsibility that has led to the apparently significant increased tax take, clearly changing the approach by public sector ‘clients’.
That is not of course the end of the matter; it remains open for the PSC and worker to seek an adjustment to their tax liabilities on the basis that IR35 is simply not in point.
Indeed, technically it seems PSCs could take action to recover from the client: ‘You contracted to pay an amount X, you in fact paid over less than this (on the basis that IR35 applies, but we say that was erroneous), we demand payment of the balance lawfully due (plus interest and costs)’ – though such an approach is hardly realistic, at least while the engagement with the client is ongoing.
The legislative test under IR35
The central element of the legislative test is whether ‘the circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client …’ (Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)), s49(1)(c) or, for public sector bodies from 6 April 2017, s61M(d)).
It is then clarified in the statute that ‘the circumstances’ referred to ‘include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.’ This sentence refers to ‘the contracts’, in the plural.
This would seem to confirm that one is to look at the effect of all relevant contractual provisions – not just to the contract between client and intermediary, but also to any obligations imposed by contract between, say, intermediary and worker, if relevant to the arrangements for the provision of the services in question.
In both Ackroyd and MDCM, in applying these statutory provisions, the decisions refer to the need to ascertain ‘the hypothetical contract’ between client and worker.
Employed or self-employed?
Historically, HMRC have published leaflets or factsheets, including for example ES/FS1 (Employed or self-employed for tax and National Insurance contributions).
These days taxpayers and their advisers have HMRC’s ‘Employment status tool’, but this is much criticised. It can in fact be helpful instead (or as well) to have to hand the HMRC’s approach as explained in ES/FS1.
This factsheet stated that an individual was likely to be treated as employed ‘if he or she answered ‘yes’ to most of the following questions’:
- do you have to do the work yourself?
- does someone tell you where to work, when to work, how to work or what to do?
- can someone move you from task to task?
- do you have to work a set number of hours?
- are you paid a regular wage or salary?
- can you get overtime pay or bonus payment?
- are you responsible for managing anyone else engaged by the person or company that you are working for?
The last of these questions was added later, it did not feature in the predecessor HMRC leaflet, IR56.
The HMRC view also expressed in ES/FS1 was that, conversely, an individual was likely to be treated as self-employed ‘if he or she answered ‘yes’ to one or more of the following questions’:
- can you hire someone to do the work, or take on helpers at your own expense?
- can you decide where to provide the services of the job, when to work, how to work and what to do?
- can you make a loss as well as a profit?
- can you agree to do a job for a fixed price regardless of how long the job may take?
HMRC went on to warn that special rules applied to ‘certain occupations and jobs’.
In the current version of HMRC’s Employment Status Manual, at ESM0515, HMRC says that ‘although there is no exhaustive list, the factors to be considered [in determining whether there is a contract of employment] include the following:
- personal service
- financial risk
- basis of payment
- mutuality of obligation
- holiday, sick pay and pension rights
- part and parcel of the organisation
- right to terminate a contract
- opportunity to profit from sound management
- personal factors
- length of engagement
- intention of the parties.’
These sorts of questions or factors, in the approach by HMRC above, perhaps largely derive from a combination of what are two influential cases, Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) 2 QB 497, and Market Investigations Ltd v The Minister of Social Security (1969) 2 QB 173.
The Ready Mixed Concrete case particularly discussed ‘control’, while Market Investigations focused on, or put the question to be answered in terms of, whether the individual performing the services was doing so ‘as a person in business on his own account’.
One later case often cited is Hall v Lorimer (1993) BTC 473, where a professional vision mixer worked for 22 television companies in his first 14 months in business and had 580 separate engagements over 800 days in four years.
In finding that the taxpayer was, as he claimed to be, ‘self-employed’, a significant feature of the case was the number of engagers and the fact that the majority of assignments lasted only a single day.
When the Hall v Lorimer judgment first came out, there was a view too that the judgment also suggested it may be easier for an individual exercising a professional skill to claim to fall on the ‘self-employed’ side of the line.
Hall v Lorimer is still important, and undoubtedly relevant to many individuals working in the same or a similar way. However, it has its own very distinct set of facts, and there will certainly be a good many IR35 cases where it perhaps does not provide much assistance.
The case does though, like some of the other cases, emphasise that it is nevertheless not appropriate to adopt a mechanistic or ‘checklist’ approach; different factors will have different significance and weight in each case.
As Nolan LJ confirmed in the judgment, having considered all the relevant factors, it is necessary to stand back from the detail and make a qualitative assessment of the facts as found.
Ackroyd and MDCM cases
These two cases have of course their own fact patterns. In the period covered by the tax determinations, Christa Ackroyd’s PSC was engaged by the BBC to provide her services under a long, fixed seven-year term. The services were those of a highly experienced news and current affairs professional, presenting TV programmes the form and content of which she also helped shape.
In MDCM the contracts to which the PSC was party, albeit technically open-ended, were in practice necessarily for a far shorter period (more one of months). The services in question were construction management services supplied to the construction industry. It was explained that on some construction projects with tenanted buildings occupied during the day who had a right to quiet occupation, the construction work needed to be done at night, with the need for a night shift manager.
The tax determinations in MDCM related to arrangements whereby the worker Mr Daniels, through his PSC, provided services as night shift manager to a construction company.
In the tribunals’ respective analysis in these two cases, one interesting aspect is the seemingly different approach to the question of ‘control’.
In Ackroyd, the tribunal was at pains to emphasise it accepted that how interviews were conducted was a matter for Ackroyd, and that she was expected to use her professional judgment; that she had a lot more freedom and flexibility to take on other engagements compared to colleagues who were employed by the BBC; that she was able to use her journalistic skills to identify and develop stories however as she chose; that she had a ‘high degree of autonomy’ in carrying out her work and in identifying the stories she wished to follow.
Nevertheless, the tribunal was not satisfied that control of Ackroyd’s work pursuant to the hypothetical contract lay with her; it considered the BBC had ultimate control in how, where and when she carried out her work. That was, for the tribunal, one of the most significant factors in making the required ‘overall qualitative assessment’ of the circumstances (and, in the end, finding for HMRC).
In MDCM, the tribunal said it agreed that the client directed what Daniels had to do during the shift. However, ‘that was no more than telling [him] what needed to be done on site by the contractors which [he] supervised’, which followed from the particular stage reached in the work programme for the building. There was no evidence that the client controlled how Daniels would carry out his role in fulfilling the work programme, and Daniels’ evidence was that during the shift he could organise matters as he saw fit and his supervisor would only visit once a week.
The tribunal said the client ‘did not exercise any more control on the site than they would over an independent contractor’. This was one of the key factors, again in the overall qualitative assessment, for the tribunal ending up finding for the taxpayer.
Thus the approach of the two tribunals on ‘control’ was arguably different. While ‘control’ is not everything, in the overall qualitative assessment, it does seem to be one of the more significant factors.
It may therefore be that an important element in future tribunal decisions in other IR35 cases (or indeed in Upper Tribunal decisions on appeal) will be whether tribunals lean towards the Ackroyd tribunal’s ‘ultimate control’ (or right to control) approach, or the MDCM tribunal’s more ‘day-to-day control’ approach; if indeed these are fair descriptions of the respective approaches.
But it should not be forgotten that one of the other factors that counted against the taxpayer in Ackroyd was that this was a long-term contract (providing for work on 225 days a year) which the tribunal did seem to see as rather akin to a ‘full-time job’, even though the tribunal considered that Ackroyd was only ‘to an extent part and parcel’ of the BBC.
Certainly, if you are (long-term) ‘full-time’ and ‘part and parcel’ of the business, that might normally be expected to make arguments that you are not ‘under the client’s control’ rather harder to sustain.
Finally, one other, there is a separate angle arising from the Ackroyd and MDCM tribunal cases.
In MDCM, the tribunal found that (lack of) ‘control’ pointed towards self-employment, while the requirement for personal service and lack of financial risk pointed towards employment. It went on to say:
‘However, we find that the nature of the payment arrangements, a flat rate per day with no notice period and no entitlement to any employee benefits [such as pension contributions, sick pay, holiday pay] are inconsistent with employment. Further, Mr Daniels was not treated as an employee.’
This seems to have enabled the tribunal to find, on balance, the hypothetical contract would not be an employment contract, and so decide the case in favour of the taxpayer.
Once again, it will be interesting to see the way in which tribunals might find or attach significance to these further elements.
IR35 and the wider world of disguised employment continue to make news. Indeed, an ICAEW Note (Representation 40/18, Modern Working Practices and Off Payroll Working), issued just last month, points out that the waves emanating from IR35 changes to the off-payroll regime for the public sector, apparently extend to problems with how to account for fees in workers’ PSCs in a way that complies with both the Companies Act 2006 and with financial reporting standards.
In summary though, there is the question of reform in this whole area in the medium term (clearly a major project, arising out of the Taylor review); at the same time, and more immediately, the perhaps more pressing question of whether practitioners will get a firmer steer from the tribunals and/or the Courts as to how the latter will approach the ‘control’ issue, in applying the IR35 legislation. Straddling both of these is the question whether the off-payroll working rules for the public sector should be extended to the private sector.