Opportunity to profit from sound management
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
Guidelines
Opportunity to profit from sound
management - A person whose profit or loss depends on his capacity to reduce
overheads and organise his work effectively may well be self-employed (Market
Investigations Ltd v The Minister of Social Security). People who are paid by
the job will often be in this position.
The following paragraphs are extracted from the Employment Status Manual,
section ESM1035:
The Courts have concluded that a self-employed person
often has an opportunity to profit from the sound management of the task. Of
course an employee's income may also be related to his or her efforts or to
other factors and so may not be regular or constant.
An employee's income will depend on performance when paid
by the piece. It could also depend on how long he or she works and that, in
turn, could depend on outside factors such as the weather.
It follows that the Courts interpret the opportunity to
profit from sound management in a rather special way. What they have in mind is
the worker who quotes a fixed price for a job and whose profit or loss depends
on speed and efficiency and the capacity to reduce overheads and organise work
effectively.
A few words of comment are called for on the last sentence: it appears
purely speculative, and is (to the best of my knowledge) entirely unsupported by
any legal authority. I will go further than that: it represents an argument
the Revenue presented in the Hall v Lorimer case. They presented it as follows:
(the Revenue barrister said) '…the production
company in any given engagement controlled the time, place and duration of each
programme, that Mr. Lorimer did not provide any of his own equipment, that he
hired no staff to assist him in his work, that he ran no financial risk apart
from the risk of bad financial debts and of being unable to find work, that he
had no responsibility for investment in or management of the work of programme
making and consequently he had no opportunity of
profiting from the manner in which he carried out individual assignments.'
And by way of answer to that argument, the Court approved the following
comment from the Special Commissioner who first heard the case:
"Mr. Lorimer provides no equipment (i.e. he
has no tools) he provides no "work place" or "workshop" where the contract is to
be performed, he provides no capital for the production, he hires no staff for
it. No; he does not. But that is not his
business. He has his office, he exploits his
abilities in the market place, he bears his own financial risk which is greater
than that of one who is an employee, accepting the risk of bad debts and
outstanding invoices and of no or an insufficient number of engagements.
He has the opportunity of profiting from being good at
being a vision mixer. According to his reputation so there will be a demand for
his services for which he will be able to charge accordingly. The more
efficient he is at running the business of providing his services the greater is
his prospect of profit."
So, despite the Revenue's statement:
It follows that the Courts interpret the opportunity to
profit from sound management in a rather special way. What they have in mind is
the worker who quotes a fixed price for a job and whose profit or loss depends
on speed and efficiency and the capacity to reduce overheads and organise work
effectively.
it would appear that in fact what the Courts have in mind may be - and in
that case was - the opportunity to profit from being good at what you do,
and thus hiring your services out from time to time to the highest bidder.
A slightly more subtle point is that it appears the Revenue were seeking to
suggest that 'opportunity to profit from sound management' simply meant 'in
relation to the particular engagement'. However, the view expressed by the
Court in Hall v Lorimer and approved there by the Court of Appeal can only be
interpreted to mean 'in relation to the business as a whole'.
The position of the Contractor:
·
The conventional picture of the self-employed
tends to be of starting from scratch, and then gradually build up a business,
and having the opportunity to profit from sound management by acquiring new
sources of income, doing work efficiently or in less time, and containing
overheads.
·
The Contractor is in a slightly unusual
position. Instead of starting from scratch in the same way, (s)he will
generally make a move from employment straight into contracting, thereby
immediately securing a substantial increase in gross income.
·
(S)he has taken the decision to migrate from
the security of employment, to surrender the benefits and security of
employment, and to make the move to contracting as a career, and to accept and
manage the resultant risks him / herself. Indeed, it may be reasonably be
argued that by doing this alone (s)he has already taken advantage of a
significant opportunity to profit from sound management.
·
Wise choice of engagements, and wise
anticipation of future skill requirements, coupled with training as necessary to
be able to meet such requirements, may also be examples of ways in which there
is opportunity to profit from sound management.
Profit however is not simply income, but the balance between income and
expenses. Expenses still need to be contained, and profits will be eroded if
expenses are not managed soundly - ranging through
·
expenses over which there is a degree of direct
control (eg telephones, stationery, insurance, wise exercise of rights to
substitute, paying for administrative assistance in order to preserve potential
fee-earning time etc)
·
expense more in the nature of investment, such
as skill maintenance, training, and development (whether paid for, or in what
would otherwise be fee-earning time) - especially training where there is no
certainty that the investment will be recovered; equipment; reference
materials
·
taking steps to preserve profit by guarding
against the risk of loss
Where there is the opportunity to manage these and other such
items and thereby affect profit, there is opportunity to profit
from doing so soundly - to profit from sound management.
Note that it is the opportunity to profit from sound
management that counts - whether one does in fact 'soundly manage' may be quite
another question, and certainly not relevant here.
Perhaps oddly, it is also at least arguable that the opportunity to
structure one's affairs by negotiating IR35-friendly terms where it is proper to
do so could properly regarded as opportunity to profit from sound management,
since (1) doing so would appear to be management, and (2) it offers opportunity
to profit from doing so; such a proposition may be supported by Hall v Lorimer
,
where the incurring of expenses which would be tax-deductible by the
self-employed was held to be itself a pointer towards self-employment
Case law appears to suggest:
·
if a worker has significant opportunity to
profit from sound management of the business as a whole, then the relationship
is likely to be self-employment
·
'opportunity to profit from sound management'
may mean (1) from management of the task itself, or (2) from managing the
business as a whole - the opportunity to profit from being good at what you do -
and from building a reputation and a demand for your services, for which you can
charge accordingly
·
if a worker can increase his net earnings he
may be self-employed, but other factors need to also be considered; this may be
a pointer towards self-employment, but not necessarily conclusive in itself
·
it may be unlikely for the relationship to be
self-employment if there is no opportunity to profit from sound management
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 probably receive a salary and benefits package; and that such
salary package might well be reviewed from time to time, taking into account
performance. Additionally, the employee might receive occasional bonuses.
Beyond that, the employee has no apparent opportunity to profit from sound
management, and simply receives a set salary, regardless of effort, illness, or
other vagaries .
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 probably plan the growth and
development of the business, so as to continue to be able to take advantage of
the best opportunities available; investment in skill development and
equipment; and manage and control expenditure. By having the opportunity
to do such things, there is the opportunity to profit
from sound management, which the employee does not have.
do the facts here actually provide a helpful pointer towards either view?
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