Why Supervision and Direction are surely red herrings
If proposals were to be enacted on the basis of those in the now-closed consultation ‘Employment Intermediaries and Tax Relief for Travel and Subsistence,’ it would produce results with far-reaching adverse consequences, writes Paul Mason, national contractor manager at Abbey Tax.
Much (much) more harm than good
These consequences fly in the face of government pronouncements of the last 20 years in connection with a flexible labour force, the promotion of self employment and the government’s approach to the digital market.
These proposals for Personal Service Companies (PSCs) are likely to do more damage to those who by choice or circumstance find themselves to be self employed and have to incorporate to find work, than it is likely to save in lost revenue to the Treasury by seeking to tackle abuses in the ‘umbrella’ market.
We believe that these proposals will certainly reduce the incentive to be self employed and to accept the transient nature of contract work without the potential rewards. The proposals are too wide-ranging, using criteria which are too general and theoretical and take no account of how the contractor market actually operates. If they are applied as suggested in our analysis, below, any benefits accrued by tackling abuse, will be outweighed by destroying the contractor market.
This may, of course, be the aim of the proposals. But if enacted in their present form, it will leave contractors unable to reap the benefits of operating without the security of secure employment and make it more difficult for engagers, who genuinely need a temporary resource, to meet the challenges and demands which they face to stay ahead of their competition. It surely cannot be the aim of this consultation to damage the country’s economic fabric.
Much T&S misunderstanding already
In respect of issues surrounding Travel & Subsistence (T&S) generally, there is clearly a lack of understanding of matters such as the 24-month rule specifically. Even in future, where a PSC can demonstrate that there is a lack of Supervision, Direction or Control, we would not be surprised to find that many PSCs would not operate the 24-month rule as it was intended.
Unless the intention of the proposals is to effectively prohibit any claim for T&S relief by a PSC, these proposals in isolation will not suffice. Whilst we acknowledge that there is guidance on HMRC’s website in respect of these issues and we also regularly advise on these matters, we believe that in relation to PSCs, there is more that HMRC could do to explain the 24-month rule in particular. Indeed, we feel this would be in keeping with the general tenor of the House of Lords Select Committee recommendations for better guidance from HMRC on status/IR35.
The Proposal: Supervision, Direction or Control
We are very concerned that how HMRC considers the definition of the terms ‘Supervision’, ‘Direction’ and ‘Control’ provides insufficient clarity and the examples provided are much too simplistic. The wording of the consultation is reproduced below, in italics, with our comments underneath.
Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.
It is almost unheard of for a client to give a contractor a brief and then expect the contractor to return within a specified timescale with the finished article without their being some interaction with the client in the meantime.
Whether a householder is having building work undertaken at home or a commercial organisation launching a new product or service, there is always someone with the role of “Project Manager” (PM) whose role it is “to ensure that person is doing the work they are required to do and it is being done correctly to the required standard.” There is hardly a project being undertaken where there aren’t regular update meetings being chaired by a PM, whose responsibility it is to deliver the project, but that doesn’t mean that the PM has any control or knowledge/expertise about how the work is done. Furthermore, as a customer, would you not want to ensure that the work is being done properly?
The second sentence to the HMRC definition one can accept, but the first sentence effectively means that there are barely a handful of people in the UK not caught by this definition. That surely cannot be the intention of the legislation.
Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance, or advice as to how the work must be done. Someone providing direction will often co-ordinate how the work is done, as it is being undertaken.
This definition from HMRC is also unclear and the comments made about supervision apply here too.
How are “instructions, guidance, or advice” defined? At what point does the scope (the ‘what’) of the project become “instructions, guidance, or advice”? What if a retailer explains that in their sector, products are usually demonstrated using one particular method, or the proprietor states that the website needs to be released in several stages or explains that the website is part of a wider campaign and therefore these are constraints which need to be followed? Does the scope now involve ‘direction’?
Another example of changes in scope is demonstrated by the Tribunal Case, MBF Design Services Ltd  UKFTT 35 (TC). The contractors were involved in a project, based on integrated engineering such that a change made in the design by one contractor could immediately affect the work of the others, thereby changing the scope of the project. There was never any suggestion that MBF came under the client’s control because the key test is surely ‘how’ the work is undertaken.
Many organisations with several locations or different business units will have unified reporting methods in order for management to be able to compare like-with-like. This will inevitably constrain how a contractor might report his/her findings and one could argue that it influences ‘how’ the work is undertaken. But in reality, does the fact that there are physical or practical constraints as to where and when work can be undertaken or how it is presented, genuinely amount to direction?
Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.
This definition seems entirely reasonable and would constitute the test which we believe in reality determines independence – can the client exercise (or have the right to exercise) control? If the answer is ‘yes’, then this is a key indicator of employment.
In the consultation at page 14, it states:
“HMRC will consider factors such as the work being performed by the worker, whether the worker is able to decide when or where they carry out the work and whether the worker can decide how the work is done. Where there are procedures, methods and instructions which must be followed, it is likely there will be supervision, direction or control over the manner in which the services are provided. However, being required to comply with statutory requirements like health and safety procedures is not determinative, as all workers, regardless of status must comply with this.”
Nobody would disagree with the final sentence, but ‘when’ or ‘where’ the individual carries out the work is surely not necessarily relevant, nor indeed is the ‘what’. When our company enquires about ‘control’ via the working practices questionnaire, we do ask the contractor what input they have into the ‘what’, ‘where’, ‘when’ and ‘how’ of the engagement.
It is very rare that a contractor will define the scope of the project – it is after all, the client who has determined that they need a resource to meet their need; the ‘what’.
Where security or commercial interests are paramount, then it is unlikely that the client will want a contractor logging into secure terminals from offsite. The location may also be determined by other physical and practical issues such as where equipment is or where the people are located who can assist the contractor.
If the work has to be undertaken on-site, then the same factors may determine the timing, or at least determine how flexible the contractor can be with his or her working patterns.
Once again, the real test of independence can only be whether the client can determine ‘how’ the work is undertaken. If the engager can, as would be suggested by the definition of ‘control’, then the contractor is not independent.
Surely, ‘supervision’ and ‘direction’ are red-herrings; it is virtually impossible to find an engagement without one of these two elements - HMRC seemed to acknowledge that in the round-table discussion we had with them on 15th September 2015. Therefore the real test must be whether all three of ‘supervision, direction AND control’ are present, although one might argue that if there is ‘control’, then there will also be ‘supervision and direction’. So why not consider control – or how the work is undertaken – as the only test?
If the work is task-based and there are no specific project deliverables, then there is likely to be control. If the engager can provide specific project deliverables, which require outside expertise – even if there are internal staff doing similar work – which is for a limited time period and is not the replacement for an employed role left unfilled, then there will be no control, or no more than should be the case over an independent contractor.
Transfer of Liability
Both options for Transfer of Liability in the consultation make it the engager’s responsibility to confirm with the employment intermediary whether the contracted worker will be under the right of supervision, direction or control, to allow for the appropriate tax relief to be available.
Option 1 suggests that both the engager and employment intermediary will be jointly liable, but where the engager misleads the employment intermediary, it allows for a debt transfer of the amount owed by the employment intermediary.
Option 2 suggests that the employment intermediary is solely liable unless the engager has misled the employment intermediary; in which case HMRC can transfer the liability to the engager.
However, the 2014 House of Lords Select Committee Report on PSCs noted: “We acknowledge that businesses would generally resist being made responsible for IR35 assessment, finding the additional administrative pressure and liability as overly burdensome.”
It can be safely assumed that end clients/engagers will refuse to entertain Option 1. If the client becomes liable should the rules not have been operated correctly, the concern is that they will simply act in concert and operate on the assumption that all contractors are subject to a right of control.
This approach will, of course, exonerate engagers from any liability (and responsibility), such that the status liability continues to rest beneath them in the contractual chain. This seems to be hardly fair, or we suspect, the intention of these proposals.
The other reason that engagers will take this view is because ‘supervision’ and ‘direction’, as they are currently described, will exist in every single engagement that is likely to be offered.
HMRC, don’t make PSC contracting impossible
If HMRC are willing to work with control only – on the basis that it does not exist where there are specific project deliverables, which require outside expertise for a limited time period, and the role is not the replacement for an employed role left unfilled – then this would make far more sense. It would not only be a more realistic proposition – and one which could much more easily be tested – but would avoid rigging a market in such a way that genuine self-employment trading through a PSC becomes almost impossible.
As the Lords noted: “Serial contracting is a feature of the modern British workforce and is supported by both businesses and contractors.” If changes need to be made to the PSC market, then HMRC should surely follow the requirement of the July Budget to “engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment” and not pursue options which are designed to by-pass the legislation just because HMRC are not willing, or able, to enforce it.
If these ‘SDC’ proposals are implemented, we would also have two rather bizarre situations. Firstly, there will be two tests for employment status: those who are engaged via an intermediary and those who are engaged as sole traders/self employed. Secondly, there will be the interaction with IR35.
The test for those engaged via intermediaries will focus solely on supervision, direction or control. HMRC has already decided that personal service exists and presumably is ignoring mutuality of obligations altogether. The consultation contains a passing reference to financial risk and other factors to be considered, but it does seem that HMRC want to boil matters down to the one test.
However, those engaging the self-employed will still be able to consider the three key issues of personal service, mutuality and control, as laid down by Justice MacKenna in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968, as well as in-business and financial risk factors. How can there be two different tests?
We wonder whether part of the reasoning is that HMRC realises that end clients will not engage the self-employed because the status risk then falls upon the engager. This therefore restricts the options for those trading through PSCs to ply their trade as ‘self employed’.
Finally, there is the interaction with IR35. Under these proposals, an engagement via a PSC will be caught by supervision, direction and control and so the travelling expenses will be disallowed. However, the contractor may be able to demonstrate (in addition to any ‘in-business factors’) that there is no mutuality of obligations and may have sent a substitute; i.e. not caught by IR35. Are we saying that for the same engagement the contractor is both ‘employed’ and self employed’?
We have noted that in the Intermediaries Legislation (IR35) discussion document that HMRC would like to see IR35 boiled down to the same single test; presumably in an effort to reduce HMRC’s workload, it will effectively seek to apply the lowest common denominator, meaning that the Intermediaries Legislation will quietly become obsolete.
We recognise that there are abuses in the umbrella market, but HMRC has the Intermediaries and MSC Legislation to tackle these abuses; it just needs to police the market better, as it has been asked to do by the chancellor, and as was recommended by the House of Lords Select Committee Report. To widen these proposals to PSCs is taking the proverbial sledgehammer to crack a nut.