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Contractors who work for London IT clients are having their contracts prematurely terminated, as part of the City’s nervous reaction to the verdict that an agency worker could be an employee. Banks, financial institutions and corporations are laying-off freelance IT contractors for fear of requests for employment rights following Cable & Wireless V Muscat, the PCG said yesterday. The Group’s warning mirrors disclosures obtained earlier this month by Contractor UK, which reveal one City client is cutting the duration freelance contractors can supply it with IT services. The financial company was one of “several client” companies seeking to create a “perceived differential between contractor and employee,” said Simon Petit, manager at Computer People. At the time, the moves were described as ‘the first ripples of the Appeal Court’s decision,’ but now, client companies are taking explicit action. John Kell, PCG policy officer said: “We are suddenly hearing reports about contracts being terminated early, simply because client HR and procurement departments are afraid of being deluged with claims for employment rights. “Mr Muscat’s case was not typical, and yet it could have far-reaching consequences for long-term contractors and the economy.” Part of the problem, he says, is the “absurd situation” where employment status and tax status operate independently of one another. This means a contractor can be taxed as an employee, even when they do not have, and do not want, full employment rights. As a result of the ambiguity, the PCG is calling for an independent review of the way in which employment status is currently assessed, “and its relationship to tax and employment legislation.” The call for review is even more urgent following claims by one leading tax expert that most contractors who fail IR35 will automatically have an implied employment relationship. Anne Redston, of the Chartered Institute of Taxation, says when an implied contract of employment exists, as in Mr Muscat’s case, the contract cannot be IR35-caught because IR35 only applies when no employment relationship exists. In her opinion, the Appeal Court’s judgment may mean that the majority of those who fail IR35 will now be found to have implied contracts of employment with their clients. Initially, legal experts claimed that the specific circumstances of Mr Muscat’s case meant that it would not have broader implications for regular contractors. Anne Redston’s analysis suggests, however, that the Court of Appeal judgment does not rest on the unusual aspects of the case, but in fact relies on factors that are common to many regular contractors. “If she is right, most contractors not employed on genuine business-to-business terms could be found to be employees,” the PCG reflected. “The tests for being a Muscat-style employee and for being IR35-caught are in some cases similar, but not completely the same. Further test cases will no doubt be needed.” Roger Sinclair, IR35 specialist at Egos Ltd, told Contractor UK, “The Muscat decision was a case which was decided on the basis of its own peculiar facts – essentially, it was an ‘F2M’ case [employee on Friday, contractor on Monday with the same client] which was handled ineptly at virtually every stage down the line. ”Knee-jerk reactions rarely offer a wise way to take decisions, and those who structure their relationships with third party contractors properly should have little to fear.” Meanwhile, the PCG is urging the government to acknowledge the problem and appoint an “independent commission” to assess options for clarifying employment and tax status, particularly for freelancers, the self-employed and small business owners. “We believe that genuine contractors, operating as external suppliers, should be left to go about their business; employers seeking to engage contractors as a cheaper form of de facto employee should not be allowed to continue to do so,” Mr Kell said. “Rectifying this ‘grey area’ will also remove problems that IR35 was intended to address and make it redundant.” He added that any commission should consult fully with the DTI, the Treasury, the PCG, the tax profession and other stakeholders. Jun 27, 2006 Email this article Printer friendly page Previous Page
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