IR35 detailed comment

Expenses generally

The issue

The issues here would appear to be whether there is anything either in the contract, or in the actual relationship between Individual and Client, in relation to this factor which

·         helps towards a decision on whether that relationship, had it been direct and without a company in between, would have been an employment contract - a contract of service - or a contract for services, or

·         would be inherently inconsistent with a contract of employment.

Legal issues, and the Revenue Guidelines

The Revenue's guidelines are silent on this point.

The following paragraphs are extracted from the Employment Status Manual, section ESM1019 & 1041:  [1]

'You should bear in mind that control over where work is carried out is only a pointer towards self-employment, which must be considered in the context of the overall contract. Working practices are becoming more and more flexible and many employees now work from home. You should not accept that a worker is self-employed just because he or she does not work at the engager's premises. This is particularly true where the engager covers any expenses that the worker incurs as a result of working out of the office.'

'…where an individual is paid entirely by commission but has to meet expenses to undertake the work this could be a pointer towards the existence of financial risk which is indicative of self employment.'

In Hall v Lorimer, the fact that Lorimer incurred business expenses of some 25% of his total turnover, and which would have been deductible if he was able to show that his income was not employment income (but would not have been deductible, were he an employee), was considered a significant factor in the decision that he was carrying on his own genuine and independent business (it was probably also a factor in the Revenue's decision to pursue the case!):

'Mr. Goldsmith submits that the Special Commissioner was not entitled to attach significance to Mr. Lorimer's risk of having no engagements because as was pointed out in the Lee Ting Sang case, this is a risk faced by casual employees who move from one job to another.  That is so, but the risk of bad debts and outstanding invoices is certainly not one which is normally associated with employment.  Moreover, the income and expenditure accounts annexed to the stated case reveal that Mr. Lorimer incurred very substantial expenditure in the course of obtaining and organising his engagements and as an incident of carrying them out.  For example, in the period from 1 February 1985 to 30 April 1986 his expenses, including the cost of running his car or otherwise travelling in the course of his work and of running his office from home, amounted to £9,250 against fees received of £32,875, though it may be that the figure for fees included some reimbursement of expenses.  All of those expenses, as Mr. Allcock QC representing Mr. Lorimer told us, without contradiction, were considered to be deductible if Mr. Lorimer were assessed under Schedule D.  In any event they would seem to me to be quite different in nature and scale from those likely to be incurred by an employee.'  [2]

Comment

what would the position be likely to be in relation to this factor for a hypothetical employee?  Logic and experience suggests that a hypothetical employee would not incur any such expenses, other than those reimbursed by his employer, and in relation to travelling to and from work.

what would the position be likely to be in relation to this factor for a hypothetical obviously self-employed person or consultancy (eg Andersens, or by PWC, or EDI?)  Logic and experience suggests that a hypothetical obviously self-employed person or consultancy would have general overhead expenses, not recoverable from an engager.  Additionally, expenses attributable specifically to the services might be charged on to the Client, or might be absorbed as part of the general overhead.  Further, and unlike the position in the case of the employee, expenses for travel to and from the Client site might also be charged on to the Client.

do the facts here actually provide a helpful pointer towards either view?

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This page was last updated on 3^rd March 2001.

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