Are agencies to be liable for contractor tax – IR35?
He’s “not self employed”, therefore he must be “a worker” said the Court of Appeal, in the recent Pimlico Plumber case. In reaching this decision, the hare has been set loose and the HMRC hounds will soon follow. If the plumber is a worker HMRC may consider that he should have been paid on a PAYE basis, not gross, leaving Pimlico liable for all the unpaid NICs and PAYE for many of its “workers” for its many years of existence.
So how could this impact on the contractor tax IR35, and thus on the contractor supply sector?
Firstly, from a contractor’s perspective, it should make little difference as the position is just as confusing as it was before Pimlico. Having said that the Court highlighted the enormous difficulties that exist in assessing ‘employment’ under English law, so emphasising the confusion.
With different meanings under different pieces of legislation, someone can be employed for one purpose, purpose (a), and not employed for another, purpose (b), yet find arguments that work for purpose (a) being levied to support arguments relevant to purpose (b). Thus, arguments that a hirer is not ‘a client or customer’ of a contractor business as discussed in Pimlico could be used to support the proposition that the hirer is a deemed employer for IR35 purposes. Yet there is no law that says that if the hirer is not a client or customer of a business the individual representing the business must be an employee of that hirer.
Accordingly as things stand the uncertainties that currently exist in assessing IR35 status will continue, but outcomes are likely to be affected by the new government proposal to extend the off payroll public sector rules (IR35). If implemented, contractors may find that the way they pay tax is taken out of their hands, as the proposal is that the hirers and agencies should be liable for employment taxes on the contract rate unless the contracted work arrangement is actually outside IR35 as decided by the hirer and/or agency.
How they decide is to be assisted by the online tool CEST, an HMRC creation that seeks to assess status, and which has come under continuous criticism since its launch last year. There is little doubt that this tool is flawed, not the least that it purports to assess status on facts that cannot be known at the time it is used, namely before the assignment starts, and without any assessment of the contracts in play. When advising the Association of Recruitment Consultancies (ARC) in its challenge to CEST and the public sector off payroll rules in 2017 we pointed to this and the fact that outsourcing decisions to a piece of software (HMRC claims that CEST uses artificial intelligence) is potentially unlawful.
As liability will fall to the payer of the contractor, contract supply agencies are in for a shock if not prepared in terms of process for assessing IR35 status, suitable administration, and readiness to negotiate new pricing with both hirers and contractors each of whom may be seeking a different result. Hirers that could be exposed to liability will as always pass the risk to the agencies, and contractors will want to be paid gross as before. Mayhem may well follow.
There is a much simpler solution. As proposed by the Association of Recruitment Consultancies. Read more…
This article was written by Adrian Marlowe, MD Lawspeed.
Adrian, a highly experienced lawyer, founded Lawspeed in 1997. He is responsible for developing our extensive portfolio of products and services, including the widely used Lawspeed contract templates. Adrian is an expert on “recruitment law” and specialises in contracts, regulatory compliance, employment status and dispute handling. He is chair of the trade body the Association of Recruitment Consultancies, the only lawyer lead recruitment trade body in the UK. Adrian and his co-director Ravi devised Standards in Recruitment as a vehicle for helping drive up standards and compliance in the industry.
Adrian is our lead in discussions with the government over regulatory evolution. Apart from assisting with client support, Adrian’s primary role is research and development into methods of business delivery, our latest service Proterms being his most recent project. Adrian heads our IR35 lawyers team.