THE HMRC GUIDE TO BECOMING SELF-EMPLOYED
I have just been reading an interesting HMRC document that
tells people how to stop being an employee and become self-employed. They did not actually give it the above
title. They called it “Intermediaries Legislation
(IR35)”. Accordingly some readers may
have ignored it because they have no clients within IR35. But IR35 looks at a notional contract
between the worker and the end user. If
that notional contract would be an employment contract, IR35 applies. It clearly follows that the guidance must be
equally valid if there is no intermediary; if what needs to be looked at is an
actual contract (written or oral or partly written) between the worker and the
end user.
To be honest I just glanced through it myself when it was
issued. I thought Part 1 fairly silly
and with no basis in law, and did not look at Part 2. But Part 2 is the really interesting bit.
Part 1 lays down a number of tests to determine whether a
person is employed or not and allocates points to signify how important HMRC
regards each. I set out below the tests
and HMRC points. I have also added my
own points based on case law.
The Points System
HMRC
View My View
Do you have business premises
separate
from your home 10 1
Do you need Professional Indemnity
Insurance 2 negligible
Has your business had an
opportunity in the last
2 years to increase your income by
working more
efficiently (tip: if you agree a
target delivery time
and deliver earlier you can answer
“Yes”) 10 negligible
Do you engage any workers who bring
in at
least 25% of your yearly turnover
(tip: if you
agree to produce a report and your
wife will
type it, answer “Yes” as you will
not generate
any income without her labour) 2 2
Has the current client engaged you
as an
employee within the last 12 months
with no
major changes to your working
arrangements
(tip: choosing where and when to
perform the
work is probably a major change) (15) negligible
Does your business both
a)
Have a regularly updated business plan
(yes, that is
really the test even though
very few
businesses have one), and
b)
Does your business have a business
bank account
identified as such by the
bank (tip: don’t
let them label it “No 2
account”) 1 negligible
Do you have to bear the cost of
having to put
right any mistakes (tip: put it in
the contract
as HMRC don’t understand that in
practice
virtually everyone – obviously,
outside HMRC –
including employees, is expected to
do this) 4 negligible
Have you had any bad debts
exceeding 10%
of your turnover in the last 2
years (I don’t
understand the relevance of that
either) 10 negligible
Do you render an invoice before
being paid
and negotiate payment 2 negligible
Do you have the right to send a
substitute 2 negligible
Have you ever done so within the
last 2 years 20 45
48 48
Whilst I do not want to go too far into Part 1, the reason
why I feel that HMRC’s points system is ridiculous is that the law on
employment status is very clear, albeit that its application is far from
easy. There cannot be a contract of
employment unless
a)
the contract imposes an obligation on a person to provide work
personally,
b)
there is mutuality of obligation between the purported
employer and employee, and
c)
there is some element of control, i.e. the ultimate authority
over the purported employee in the performance of their work resides in the
employer.
It is only if all 3 of these elements are present that one
moves to the next stage and stands back and asks if the facts point most
closely to the employment. This legal
basis was reaffirmed most recently in the Employment Appeal Tribunal in Quashie
v Stringfellows Restaurants Ltd (UK EAT/0289/11/RN). Having a real right to send a substitute (and proving that it is
a real right by having done so) accordingly means that there is not an
employment as head (a) above is not met.
A test that allocates a mere 22 out of 48 points to the lack of an
obligation to perform personal services accordingly does not conform with the
law. However I have no objection to
HMRC laying down a non-statutory “safe harbour” test of employment as long as
everyone realises that the test is simply a concession and not a purported
interpretation of the law. It is at
least interesting to see what factors they take account fo and teh degree fo
importance they attach to each.
Part 2 gives some examples.
This is the real goodies. Take
Emma. Emma works for X Ltd for 18
months on three successive 6-month contracts.
She works for nobody else during that period. They are fixed price contracts.
If Emma works overtime (which obviously implies fixed hours) she is paid
extra but has to negotiate the extra payment.
She is highly skilled and has no right to send a substitute. Before engaging Emma, X Ltd has checked her
background and interviewed her. Emma is
highly skilled and X Ltd gives her a completely free hand over how and where
she works. In practice X Ltd provide
all of the equipment Emma needs. Emma
reports to a manager of X Ltd every Friday afternoon. She tells X Ltd “out of courtesy” if she cannot attend for any
reason.
Is Emma an employee?
She looks like one to me. I ran
her details through HMRC’s Employment Status Indicator. This told me that Emma is an employee. There is a low indication of substitution, a
medium indication of control and a medium indication of financial risk. I agree.
But this new HMRC publication says, “If the end client had contracted
directly with Emma, she would have been self-employed”.
Juanita has worked for a single client for 8 years. She is paid by the hour and the client would
not accept a substitute as her services are so highly specialised. The client directs the scope of the project
which Juanita has to deliver and by when.
The end client provides all of the equipment. Juanita works as part of a team.
The client has to give her notice if they want to terminate the
agreement.
Before reading the guidance I would have felt embarrassed in
trying to argue that Juanita is self-employed – but the HMRC view is that her
circumstances are borderline and they need more facts.
The other examples are equally informative. It seems clear from these that HMRC have
significantly relaxed their view on when a person is self employed.
Incidentally, although I personally find the HMRC points
system fairly ridiculous it is worth noting that if a client scores more than
20 points on their scale, he is regarded as low risk. They say that if when they open an IR35 review if the worker has
kept a copy of his scorecard and evidence to support the answers, they will
close the review and go away unless the information given was inaccurate. HMRC’s “Your Charter” states that a taxpayer
can expect HMRC to treat him even-handedly.
This must mean that they will treat someone who works direct for a
client no more harshly than someone else doing similar work but who seeks to
reduce his tax bill by working through an intermediary. Accordingly a self-employed individual who
has completed the questionnaire and established a low-risk status must be
entitled to tell HMRC of this and expect them to go away.
2 Comments:
Hi Robert, just came across this post while researching into ir35. I'm thinking of becoming a full time freelancer and I've got to say that based on the ir35 info I've found so far, it's a very scary topic. It seems to be based more on the whimsical judgement of the HMRC more than any real guidelines, but I appreciate all the advice.
Do you have any information on the differences between sole traders and limited companies?
You’ve got some interesting points in this article. I would have never considered any of these if I didn’t come across this. Thanks!. inspiration
Post a Comment
<< Home