Employment Tax Expert

An engineer working on a contract basis for Airbus UK won his appeal against HMRC’s determination that he should be taxed as an employee under IR35 rules rather than as self-employed.

Following a hearing in Bristol in November, the First Tier Tribunal found in favour of MBF Design Services, the trading company operated by Mark Fitzpatrick. In February 2009, he appealed against HMRC’s decision that his employment status for the years 2001-07 fell within the terms of the Social Security Contributions (Intermediaries) Regulations 2000 and Income Tax (Pay As You Earn) Regulations 2003.

In April 2003 Airbus took on Fitzpatrick and his company MBF under a contract via intermediaries GED-Sitec and Morson Human Resources at an hourly rate that increased if he worked more than 35 hours in a week. The tribunal noted that the “request for services” to which the contract related included a seven-day notice period and a stipulation that substandard service or attendance would give Airbus a legitimate claim to withhold payment.

The Tribunal notes that the contract agreed between Morson and Airbus named 53 individuals and appeared to be based on one normally used for the purchase of goods, with Fitzpatrick’s “quanity” indicated as 42,500 hours at his usual hourly rate.

The third contract between Morson and Airbus also included a clause setting out the client’s right to immediate cancellation of the contract, which was crucial to the tribunal’s decision that the terms were inconsistent with the mutuality of obligation that exists between employee and employer.

During the course of the hearing, one of HMRC’s witnesses, an Airbus design manager, admitted that his statement had been prepared by HMRC and for all those people shocked by this, don’t be, this employment tax expert has seen first hand evidence of HMRC manipulating circumstances to suit their agenda. The Tribunal whilst not doubting his honesty, were not impressed with his evidence.

Noting that in the theoretical circumstances of a contract existing between MBF and Airbus, the judges ruled that the arrangements were typical of a contract for services. On site working was not a conclusive indicator of employment, the judges ruled. The nature of Fitzpatrick’s design work meant it had to be done computers at Airbus’s premises computers, in a similar way that electricians or plumbers frequently work on client sites.

Airbus’s right to cancel the contract without notice indicated a lack of mutuality of obligations, as did a series of occasions during computer failures where contractors were sent home without pay and employees had to remain on-site. Rather than seeking promotions, the contractor had to renegotiate with Airbus if he wanted better terms.

The Tribunal concluded there was insufficient control to demonstrate a contract of service. Any checking and approval of design work was an inevitable necessity of the project work MBF had undertaken.

All herald the end of IR35, the complex and utterly futile attempt at raising extra revenue by re categorising self employed individuals as deemed employees – not quite! Although the Small Business Minister, Mark Frisk said in an interview with the Daily Telegraph that “Individuals selling their services through small companies have their taxable income policed by the so-called IR35 legislation.This will now be abolished. We want to make sure that we could undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant.But we want to make sure whatever we change is a lasting settlement. One of the problems with IR35 is that it’s a constantly changing set of rules.”

However, no sooner had he made this statement than people behind the scenes were scurrying around stating that he had NOT said it would be abolished. Now I like plain speaking so when I hear “This will now be abolished” I don’t think there are many areas of confusion but here we go again spin, retraction, review, consultation these are now what those immortal 5 words actually mean, so watch this space because no one who is self employed is off the hook

So in an effort to simplify the tax position of self employed individuals, the Coalition has announced that they are to review IR35, which in theory is good news. Far too much time and money has been taken up with HMRC pursuing employment status reviews that have led absolutely no where. The latest case being that of Novasoft – it only took a mere 8 years to resolve and guess how it started – readers of this blog will as this employment tax expert has warned about it since it began – that helpful little offer by HMRC to review self employed contracts free of charge. All those people who think they can get something for nothing take heed – this whole case stemmed from an unsuspecting person naively thinking that this was the route to go because of course HMRC are completely impartial aren’t they?
Well a mega lesson has been learnt here – the individual may have finally won but it cost him £’000′s and 8 years of his life – a high price to pay, so where do we go from here – well just be very careful reviews are planned, timescale not mentioned and even worse HMRC are carrying on blindly opening tax investigations into new IR35 cases so if you are concerned about your employment status contact the experts because you don’t want to be the next statistic

Announcing that you have a cunning plan to avoid Employers NIC is one thing, telling the world it has HMRC approval is another thing altogether but this is the latest idea by TMS for commission-only  individuals. Now it strikes this employment tax expert that if you were coming out making bold statments regarding guaranteeing someones self employed status that you would cover your bases and realise there is more to employment status than just a contract and trying to ensure that both parties stick to it – we all know what clients are like in practice, something happens from a commercial perspective, so the nature of the relationship changes, do they immediately ring to chat through the contract!!!

So if we are looking at a red rag to a bull from HMRC’s perspective, what will make it even worse:

• Converting existing employees to self employed under this scheme – employment status is not a matter of choice, it is based on the FACTS of the relationship
• Stating that they have received approval on a pilot case – HMRC do not and will not give blanket approval for contracts, it is down to the working practices of each individual case and they will look at them be assured of that (see the comment below from an HMRC spokesman)
• Marketing it so openly and blatantly as cutting payroll overheads and increasing the earnings of the individual  – many would suggest that they are walking the tightrope of planned tax avoidance and we all know HMRC’s views on “agents” using these methods

So where does this leave potentially naive clients – right in the firing line – how much would you pay to be well and truly on HMRC’s radar courtesy of all the publicity? Brace yourselves for some really interesting employer tax compliance visits or tax investigations now that HMRC are well and truly “involved”

And finally,

An HMRC spokesperson said: “HMRC does not give approval to specific business models. In some circumstances, we do provide advice on the tax and National Insurance implications of arrangements when asked to do so. In such circumstances, we look at the facts surrounding that particular example, but as circumstances vary, HMRC would not give that model approval.”

At last the results of the consultation exercise, False Self Employment in the Construction Industry have been published and we seem to be back to an old style consultation – we ask for your views then when we don’t like the answers we’ll try and ignore them. However, HMRC appear to have left almost all parties unhappy with their initial proposals. Summarised below are details from the consultation:

• Nothing is going to happen yet and nothing will happen until the industry picks itself up, certainly not before the Olympics in 2012. So be prepared for employer compliance reviews, tax investigations and employment status reviews to continue

• The simplistic approach of the government having three tests has been widely criticised and they have conceded that further consultation will be required

• There is also a lot of criticism that any simplistic approach away from case law is only being geared at the Construction Industry, what about other industry sectors?

• The government have indicated that they will look into organisations purporting to get round the rules such as umbrella companies, managed service companies and labour style agencies, which is no bad thing as they are so blatantly flouting the rules and taunting HMRC (never a good idea for them or more importantly their clients)

• Interestingly, the Trade Unions aren’t happy as they could potentially see a lot of new members but the government proposals actually mean that although subcontractors would suffer PAYE/NIC they would not be regarded as “employees” but “deemed employees” which means that they would have no employment rights or benefits. This has been widely criticised because it would actually create “false employment” and the employment law side of this has not really been addressed

• There is a General Election due, probably around 6^th May, which could mean a different party in power. The Conservatives have not indicated that they will pursue what is effectively a witch hunt in the Construction Industry

So we’re back to watch this space but be aware that HMRC are out there looking at your self employed arrangements