Taxed but not benefiting

[WordIsBond]

On a different thread we have been discussing the link (or not) between paying tax at the same rate as an employee and having the same benefits as an employee.

To summarise and provide a platform here:

Thank you for doing this, Graham. This is a fair summary of the issues / views involved, I'd say.

Whilst we all here appreciate that some lessons can be learned from the past, the new rules will create a new world and therefore this is a forward looking thread and therefore no war stories from the past please.

It was suggested that a thread to discuss and develop this area would be sensible.

The reason I see this as a valuable topic is because HMRC / HMG have completely abandoned the pursuit of what makes most economic sense (for the economy at large) or what generates the most revenue, and instead chosen to aggressively pursue drawing more people inside IR35. (Note I did not say 'better compliance', because they have shown consistent bias.) Almost their entire argument has been based on 'fairness', and this issue shows that on their own standard of 'fairness', IR35 fails. Determinations being made by the client, IMO, helps to highlight that fact.

I'll have limited involvement here the rest of the week but definitely want to chime in tonight, at least.

A counter view has been advanced that even if the tax rules require that those deemed to be "inside" IR35 actually pay tax at the same rate(s) as an employee, in the same manner (deduction at source) this does not mean that they are employee taxes. If that is true then the link between employment law and tax law may not be as strong as they are thought.

This is technically true. Yet, here is part of the government's response to the consultation on public sector IR35 reform:

Where an individual would have been taxed as an employee had they been engaged directly, rather than through an intermediary, it is right that they should pay broadly the same tax as an employee. Individuals doing the same job should be treated similarly, regardless of whether or not they work through a company.

The technical distinction between 'taxed as an employee' and 'taxed the same amount as an employee because your "engager" has decided that you would have been taxed as an employee if you didn't have a company' may be of interest to a tax tribunal, but may be of less interest to an ET.

I'd also like to respond to a couple things from the thread that spawned this one. I'll do that in a separate comment.

[WordIsBond]

@Webberg, in the prior thread, you nested your responses to me within my comment, in bold. I'd like to respond to some of those comments directly (but as we agreed there, it was off-topic in that thread). I've maintained your bold to show what is yours vs what is mine. I'm splitting it up some.

B) An argument that the tax/benefits distinction is unfair is probably winnable, and HMRC's argument has consistently been based on 'fairness', so pointing out the unfairness of their solution has some moral and political force. (Whether it can gain any legal impact is yet to be determined.) I think that argument has more legs than most but it requires political buy in and probably a change of law and certainly a change of Gov't policy.

Yes, maybe. But since the tax/benefits distinction is not, as far as I know, clearly enshrined in legislation, it may be that an ET would overthrow it. Or, more likely, ignore it, using the client-determination as the grounds for saying any such distinction clearly doesn't apply in these cases. The interesting thing is that even if an ET only goes so far as to give serious consideration to the argument and refuses to discard it entirely, it will ratchet up the pressure on government.

C) The situation is changed, it is the clients who make the determination now. That adds more weight to the unfairness argument -- the client who won't give benefits also says you have to pay as much tax as their employees. You can actually present their determination that you are an employee for tax in an ET -- that's a new fact that was never there before, with unknown ramifications. But as I said above, the employer is just acting as unpaid tax collector. They really don't care if the tax arises by employment, deemed employment or operation of a wholly unjust law. All they care about is whether they might get punished for not collecting the tax. The link between collecting tax - a necessary evil and unavoidable overhead as far as they are concerned - and providing benefits to employees such as statutory sick/maternity pay, holidays, etc, is not a direct or causal one. Therefore the fairness argument is rather wounded?

If the employer/client were only the tax collector, you would be 100% correct, but that is not the only change that has come in. The client is not just the executioner carrying out the sentence, they are the judge and jury that determined the sentence as well. It is going to be hard for them to argue that you aren't an employee, so they don't have to give you holidays, when they've said you are for tax purposes (and no matter the technicalities, that's what they are saying). It is going to be even harder politically to argue that they should be able to get away with doing that.

[WordIsBond]

@Webberg, part two.

E) This also constitutes an indirect attack on IR35 by giving clients pause about throwing contractors inside. Without this counterattack, there is little reason for clients to take the risk of an outside determination that HMRC may challenge. This throws another item on the scale as clients weigh costs/benefits/risks. Agreed but how much it weighs is going to be interesting.

In my view, every client that makes an outside determination helps the market as a whole, as discussed below. So it makes sense for IPSE to pursue this line of attack even if it only results in 1-2% of determinations being affected.

F) If even a few clients are influenced to enter into real B2B relationships as a result of this, it begins to create the split market we need to see between inside and outside roles. If all clients make blanket inside determinations, contractors pay the price. If some go outside, it creates a more competitive market -- to get the best contractors, clients will either have to go B2B with outside determinations or pay more for inside, which is as it should be. I'll need to digest and think about this one.

This is not a legal/tax point but a point about market dynamics. If ALL clients issue blanket inside determinations, then IR35 determinations will have a small impact on the shape of the market, and so will have little impact on contractor rates. Contractors for the most part will just have to eat the loss -- they have nowhere else to go.

Some might take permie jobs but there aren't enough to go around. A lot of contractors will just have to pay IR35 taxes and suck it up. Some might retire early, taking a few contractors out of the market, some might go overseas, so it might change the supply-demand balance a little bit, but not much. Rates won't move much.

If 10% of contractor jobs stay outside, it's likely pretty much the same as if all roles are inside. But everyone will want those and those offering the outside roles will get one of two things -- either the best contractors, or lower rates. If it is 30% or more outside, you will definitely see lower rates for outside jobs. There will be enough outside jobs that people will be hesitant to take inside jobs, they'll think they have a chance at an outside role. So those who insist on offering inside roles will have to pay more (or get worse contractors).

In an ideal world, clients who want the control, and thus offer inside roles, should pay more for the privilege. I'd take an inside role if they offered double my usual rate. Or even 150%. 120%? Sure, if I liked the project, or if I wasn't sure I'd get an outside role. And if outside roles were more rare, maybe I'd accept a discounted rate to get one, too.

Contractors won't be as well off in this brave new world, but it will mitigate the damage somewhat if there are enough outside roles to drive a two-tiered market, one for inside and one for outside. But that won't happen if there aren't a significant pool of outside roles. So anything that increases the ratio of outside roles is helpful. If the fear of getting dragged into an ET (where lots of unpleasantness to the employer can happen because self-employment is not defined in legislation) makes even a few engagers think twice about casual 'inside' determinations, it is probably worth it for IPSE to pursue this.

[WordIsBond]

A few other comments I'd like to add to things in this thread.

So you're saying a contract can be inside IR35 and there still be no MOO. Supporting HMRC's view that MOO doesn't need testing

I would agree with the first sentence. Not the second.

I do not think case law would support the first sentence. If there is no irreducible minimum of MOO there is no employment, for tax or other purposes. I think that is fairly well established.

I'm trying to break the connections that many people make - in my view erroneously - that paying tax at the same rate as an employee, means that you are "employed for tax purposes".

The difficulty here is that though you are technically correct, HMRC / HMG have used language so close to the wording you are correcting that it is hardly surprising it is common. In my view, that also creates an opportunity, in that such language, which could never see the light of day in a tax tribunal, might well have impact in an employment tribunal where the determination is not made by legislation but by looking at things 'in the round.'

My view is rather that every earner in the UK is (or should be) taxed at the same rate and whether you have an employment contract or a services contract within IR35 makes no difference if the end result is that the payer has to follow an administrative process.

But not every business, even a one-man business. Is that correct?

[WordIsBond]

Let's not ignore the Winchester case, which partially aligned the method of engagement with workers' rights and may have set a wider precedent. Basically it is all a damaging and unnecessary mess and needs some serious decisions to be made.

The Winchester case is interesting but will not help at all on IR35 and will hardly help at all in an ET.

First, the Winchester case was narrow -- she was thrown inside on a contract where she had been working outside. This was not a new contract, so they could not say, 'Well, you signed up for it knowing it was an inside contract.' Effectively, they changed the terms of the engagement after it began. That made HMRC very vulnerable, much more vulnerable than new contracts signed after the 'reform' took effect.

Second, the Winchester case cited the IR35 determination as evidence, but it is of no use at all in IR35 cases. It COULD be attempted to argue that HMRC, by settling entirely, was conceding that it is their view that an inside IR35 determination should confer employment rights. That doesn't mean they were conceding the opposite, that the absence of employment rights means an outside IR35 determination. If A then B is not the same as if NOT B then NOT A. That shouldn't need to be said on an IT contractors' forum.

Third, because the Winchester case was settled, rather than ruled on by the tribunal, it provides no legal precedent at all.

Fourth, it arguably provides a moral precedent, that others in the same case should be treated the same. But see my first point above, there aren't that many in the same case. And, there is no legal force to the argument that 'Party A settled their dispute this way with Party B, so Party C should be forced to do the same for me.' It just doesn't fly.

Fifth, it probably would strongly benefit someone taking HMRC to an ET on a similar case, perhaps even if it is on a new contract. 'They treated Susan Winchester this way, they should treat me the same. Otherwise, it's discrimination.' They will point out the differences but it certainly won't be helpful to their cause, if someone else goes after HMRC, and they treat them differently than they treated her, even if there are some relatively small differences.

People got excited about the Winchester case, and it certainly is interesting and not harmful to the cause of contractors. But a lot of the excitement was because it was HMRC, and I really don't think that matters much in this case. HMRC are not parties to most cases in the Employment Tribunals, so what they may or may not have agreed to settle on an employment matter is not particularly important. It would be more interesting if it actually had bearing on tax, but I don't see how the Winchester case really does.

[WordIsBond]

OK, let's put aside specific descriptions and ask the question, what elements of an engagement that the FTT will consider for an IR35 case that the ET would not consider, and vice versa?

This, I think, is a very interesting question and gets right at the heart of this question. Can they be brought, either by challenge in a tribunal, or by change of legislation or government policy, to consider the same elements? And, can and will an ET consider an inside determination, and the reasoning behind it? The fact that the ET must determine by looking at the working relationship 'in the round' certainly seems to argue that there is room for them to consider the determination and its reasoning.

[WordIsBond]

I believe most commentators would say that there was an out of court settlement because HMRC, who were the client, could not afford to have any judgement which undermined their position. What's questionable is that those supporting the case claimed there was an important principle to establish, yet the appellant settled for what in reality was an insignificant amount. So much for establishing an important principle.

The view of 'most commentators' is irrelevant. That is entirely speculative and would gain you nothing in either an ET or FTT.

[WordIsBond]

Why should there be a) a correlation between employee benefit and tax break and b) any compensation when the contractor has chosen not be an employee? I know this is a common argument but for the reasons below, I think it may be false.

You said this in bold in the comment.

The reason there's an issue here is because, again, HMRC have been arguing for 'fairness' and that two people doing the same job should be taxed the same. If so, it shouldn't matter whether one person has chosen to be a contractor or not, should it?

But the contractor will pay more tax because the employee gets those benefits tax free. The contractor gets cash in lieu of benefits, but has to pay tax on it. That's not fair. Either the employee should have to pay tax on the value of the benefits, or the contractor should get tax-free treatment of the cash-in-lieu payment.

Do I believe this argument? No, because I believe chasing fairness is a fool's game. But if we're going to chase fairness then it really should be fair.

It's most obvious with pension payments. Under reform, if the client pays £10K into a pension for their employee, there is no tax on anyone. If the client pays a contractor £10K extra to cover his pension contribution, he's not going to have £10K for his pension unless he finds a friendly umbrella that will work with him.

[WordIsBond]

Under the proposed new rules the client is liable for the ErNICs, they merely add them to the rate to the agency who do the actual paying or worker and HMRC.

Or adjust the rate down before adding them to the rate to the agency, so it costs them nothing at all.

ERNI is a tax on employment and directly affects the funds available to pay employees. It's a nice fiction of governments to say it is the employer that pays it, but no employer who wants to stay in business neglects to consider it in determining what they will pay their employees. Or, in this brave new world, their contractors.

Make no mistake, if your client is paying ERNI on your behalf, it's dragging your rate down, probably by at least 10% if not the full 13.8%.

[JohntheBike]

The view of 'most commentators' is irrelevant. That is entirely speculative and would gain you nothing in either an ET or FTT.

well, clearly it wouldn't be an issue that could be presented in any court.