Understanding supervision direction or control is not for the faint hearted

This was the message from Adrian Marlowe, MD of the recruitment law and compliance specialist Lawspeed, whilst speaking at the Recruitment International compliance conference in London on 8th March.

Explaining the issues Marlowe said “from 6th April HMRC will be using a double test in order to crack down on the use of tax relief for travel and subsistence expenses  (“T&S”) within the agency supply sector. First there is a rule that disentitles claims for tax relief on T&S if the gross pay of an agency or umbrella employee varies to take into account expenses incurred. If this is circumvented by any mode of operation the employer must then overcome the second test which is based upon whether there is supervision direction or control as to the manner of the provision of the services (“SDCM”).

“Despite what HMRC says about the SDCM test there is no binding definition that determines exactly what it means and people should note that this tax test is entirely different from supervision direction and control used to determine employment status. There are however some ‘obiter dicta’ in various cases and HMRC intends to rely on those in establishing whether the employer intermediary can show that it does not exist. ‘Obiter Dicta’ is the legal phrase for side comments made by a Judge but which are designed to give pointers in a decision but which have no binding application. Under the new law the default  is that SDCM does exist in every case of agency supply unless the opposite can be shown.”

Responding to questions from the floor as to whether hirers should be asked by agencies to respond to questions about SDCM, Marlowe warned “there are three things to be concerned about here.

First despite looking at some related 200 cases, with only a handful of actual cases really touching upon aspects of the SDCM point, we as legal specialists would find it much easier to say when it applies than when it does not even though arguments may exist both for and against. It would therefore be difficult for a hirer to make a judgment call in this complex area not the least because the hirer’s representative would not be authoritative and is likely to have far less experience than we do.

Secondly anything that draws a hirer into a tax area such as this could unwittingly expose the hirer to unnecessary tax risk. Third, hirer answers to a questionnaire created by an agency/umbrella based upon its perception of the law is likely to be seen as self serving and unlikely to persuade HMRC sufficiently given that any attempt to circumvention of the law will probably be regarded as an attempt at tax avoidance in HMRC’s current frame of mind.”

As an example Marlowe referred to a supply teacher and a teacher’s assistant. “It would be easy to argue that a teacher’s assistant is under SDCM because he/she is being told the mode of work to deploy by the class teacher on almost a minute by minute basis. However a supply teacher is not necessarily in the same category. Here there are arguments for and against. The question is whether a supply teacher is allowed to get on with teaching using his/her own mode of teaching or whether anyone has the right to tell the teacher to do things differently, e.g. the head teacher could observe and comment (and have the right to) but does that amount to SDCM? Some would say a teacher is hired for the purpose of using his/her professional skills and thus is not subject to SDCM, others would say that a teacher is always subject to the right. There is then the question as to whether the subject matter, e.g. the national curriculum, is a project requirement which has no bearing on the issue of the mode of delivery, or the curriculum means there is SDCM.”

Marlowe continued “the point is that this area is very complex, and whilst HMRC has done a reasonable job in its guidance of explaining some of the issues through examples, they have had an uphill task from the outset which they have themselves created by using a test for which there is no precedent. The outcome is likely to be that cautious intermediaries will want to steer clear and braver ones will need a clear strategy for tackling cases where SDCM actually may not exist.

Marlowe commented that this is all part of a worryingly bigger picture in which HMRC regards any use of existing laws that permit tax relief within the agency sector as tax avoidance, yet by allowing some workers to still claim the relief, e.g. those operating through companies  outside IR35, is creating division and prejudice. It appears to want to run with the hares and hunt with the hounds, by encouraging the use of companies and claiming that the genuinely self employed are not caught. By definition this attacks the lower paid, but at the same time HMRC introduces unnecessary complexity causing problems for everyone.

Marlowe concluded “If anyone wishes to argue that SDCM does not apply in a specific situation with HMRC given our experience and background we at Lawspeed would be delighted to help. We also have various reports available on SDCM and risk which we can provide to any intermediary interested in this area.”

For advice on the SDCM, terms, compliance, to order a report or discuss internal processes contact Lawspeed on 01273 236 236.