Old Chestnuts reheated
- a
'Freelance Informer' legal article from Roger Sinclair
I guess it must be something to do with the time of year,
because old chestnuts are resurfacing and discussion about them is becoming
reheated.
The particular one which has been dropping into discussion
groups and out of my email is a result of suggestions that one might defeat IR35
by arguing that the agent Is the client for IR35 purposes; that the relationship between individual and
agency clearly could not be employment even if it were contractual; and therefore, hey presto, IR35 clearly
doesn’t apply to anyone working through an agency.
Sorry chaps, the legislature were ahead of you on that
one. The flaw in the argument is that it
presupposes that if you can show that the work is carried on for the purposes
of a business carried on by another, and if you can show that relationship
could not be employment, then you are home and
dry. It is in a sense a Boolean error; that’s not what the
legislation says.
As always, when answering legal questions, we need to start
from the beginning. The legislation
(para 1, Schedule 12, Finance Act 2000) says that where:
(a) an
individual ("the worker") personally performs, or is under an
obligation personally to perform, services for the purposes of a business
carried on by another person ("the client"),
(b) the
services are provided not under a contract directly between the client and the
worker but under arrangements involving a third party ("the
intermediary"), and
(c) 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.
then (subject to the various other
considerations set out in that Schedule), the income from the contract will be
caught by IR35.
Certainly it will generally be true to say that the
services are being carried on for the purposes of a business carried on by the
agency – the hiring in and then on of such services is the very kernel
(chestnuts again!) of
an agency’s business. And it will often be
easy to argue that the relationship there, if direct, could not have been
employment. Indeed, it was to counter
this ‘abuse’ ( as some might say) that s134 of the
ICTA 1988 was introduced – back in 1988.
That was the section which resulted in the industry structure being
adopted whereby contractors generally contract to agencies through their own
limited companies, and not personally.
But, just because the services are being provided
for the benefit of the agency’s business does not mean they may not also be being provided for the purposes
of the business of another – the client – as is generally also the case. And therefore we also have to consider
whether that relationship too would have been employment, were it direct.
And sometimes, the party the agency contracts with
will be a consultancy, which will itself be contracting on the services to its
own client – for the benefit of whose business the services are also being
provided – and in this situation we may have to iterate the question of the
nature of the relationship yet one more time.
Overall, it seems to me to be quite clear that you cannot
avoid the legislation simply by showing that there is one party whose business benefits from the services and where the
relationship is clearly not employment;
often, several parties in the contract chain are businesses benefiting
from the services; we have to consider
the question in (c) separately in relation to each party to whom (a) and (b) may apply – and it’s only if we can come to a
‘no’ answer in relation to each that we can say we are in the
clear.
Financial
risk, and opportunity to profit from sound management
In my article of 1st
June 2001 I discussed PI (Professional Indemnity) insurance, and recommended that
taking out such insurance was a valuable IR35+.
I have recently seen a ‘pass’ opinion on
reconsideration by the Revenue, in which they expressly acknowledged that in
that case, taking out such insurance was ‘indicative of someone who is prepared to take on the
full responsibilities of the true freelance, and not just assume that it is
something the client or the agency should provide for him’. This was a significant deciding
factor in this case;
and, equally interestingly, the contractor had not even taken out the policy until after
the end of the contract in question.
In the second case, a client of mine had been
disputing his position with the Revenue, and they have finally acknowledged him
to be outside IR35;
the most significant deciding factor in the Revenue’s mind here
appeared to be his contractual responsibility for correcting defective
services.
It is interesting to see how these two particular
angles of the individual-client relationship – both falling under the umbrella
of financial risk - have been taken
by the Revenue as significant non-employment pointers.
The first – PI insurance - is what I term a
‘bootstrap’ opportunity - one which does not require the cooperation of any
other party, and which can therefore have the effect of picking oneself up by
one’s own bootstraps. In the
circumstances of this particular case, it was not just that, but an opportunity
taken after the event.
The second is
one which does require the cooperation at contract-time of other parties – but
one to which they are hardly likely to object to being inserted into the
contract. Do bear in mind though that
these are not hollow words, and if you accept that contractual risk, then you
must be prepared for it to turn round and bite!
16th November
2001
I'd really appreciate your
feedback on this FAQ - so mail me
and tell me what you think of it, if it's been useful to you, or let me know of
any specific problem you have where I may be able to help.
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