Supervision, Direction or Control: a contractor's need-to-know
Contractors, trade bodies, umbrella companies and now the UK’s chartered accountancy body. It seems everybody has something to say about ‘Supervision, Direction or Control,’ writes Andy Vessey, senior tax consultant at Qdos, an IR35 and status advisory.
And with good reason too. Because ‘SDC’ is not just going to become a reality for contractors’ expenses from April; it’s also on the cards as a way to reform IR35. That’s on top of its incorporation into the existing agencies’ legislation where it is used to outlaw ‘false self-employment.’
How quickly, it seems, that three words which just a few years ago were almost unspoken in the contractor market have come to the fore of three separate pieces of legislation that many fear will be the market’s undoing.
Here, exclusively for ContractorUK, we will explore what SDC is likely to mean in practice; how contractors can guard against it and why HMRC won’t be able to just run amok with it.
SDC: Know your enemy
Firstly, don’t let familiarity breed contempt. As a contractor in scope of SDC, you’re up against a mechanism which is, effectively, a dimension of the ‘Control’ test you already know about to determine your status under IR35.
In fact, SDC is one of the four fundamentals of the Control test, which encompasses what, when, where and how work is carried out. Well with SDC, it is the ‘how’ you need to be mindful of – are you supervised, directed or controlled in how the work you do is carried out?
To answer that question accurately, we need to look at what HMRC says that Supervision, Direction, Control entails. The below definitions are largely taken from HMRC’s guidance.
For you, the contractor, to be subject to supervision there must be someone overseeing you as you are doing work. You are supervised if the person overseeing you is making sure that you are doing the work that you are contractually required to do; this ‘overseer’ is checking that your work is being done correctly and to the required standard. In addition, if this overseer (or another person) helps you in order to develop your skills and knowledge, you can also be under supervision.
For you, the contractor, to be subject to direction there is someone making you do your work in a certain way. This ‘director’ achieves this by giving you instructions, guidelines or advice as to how the work must be performed. In addition, this director might co-ordinate the ‘how’ the work is done, as it is being carried out.
For you, the contractor, to be subject to control there is someone dictating to you what work you undertake and how you go about undertaking it. In addition, you are controlled if someone has the power to move you from one job to another. (Guidance on mitigating this aspect of control is given below in the section entitled ‘Steps you can take to stop SDC’).
Three ways the Revenue raises the SDC hurdle
These three definitions are only half the battle however, because there are three ways that HMRC makes the SDC test harder to pass:
- Any person – not just an end-user – can subject you to SDC for you to fail the test
- Any person merely has to have ‘the right of’ SDC over you for you to fail the test (in other words, SDC doesn’t have to be exercised – it just has to be present)
- The test uses ‘or’ not ‘and,’ so you don’t have to supervised, directed and controlled to fail the test; just one of them being present is sufficient for you to fail the test.
'DSC': Despondency, Simplicity, Clarity
These three twists in the legislation appear to have made some contractors despondent, as have the very broad comments made by HMRC in the (now closed) consultation document on SDC. In particular, HMRC claims: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.”
However, this is all too simplistic a view. Merely by giving a brief to a worker is not sufficient ground for the provider of the brief to be exerting SDC over the worker, as held in Staples V Secretary of State for Social Services. Additional case law that sheds light on SDC is explored in the sub-section, below, entitled Historical. But before getting overly despondent, it must also be remembered that HMRC have asked for comments about the definitions of SDC that they have provided. Moreover, in the consultation on SDC, HMRC makes it very clear that the overall worker's arrangements require a review of both the contractual and actual working arrangements, just like IR35. This clarity is to be welcomed.
Steps you can take to stop SDC
Where a contractor has never been subjected to SDC during their engagement, the contract takes on more significance in ensuring that it addresses the right of control at both lower and upper levels of the chain. Of course in the majority of cases, the contractor will not be privy to the upper level contract because of its confidential nature.
It is therefore of vital importance that the contractor insists that the agency insert a clause in the lower level contract that confirms that all contractual provisions are mirrored in the upper level contract, and that the contractor is entitled to sue where this is not borne out. It would have to fall to a legal expert to comment on the practicality or real-world possibility of this latter point but, as status experts, we recommend it.
What contractors then need is a SDC-specific ‘Confirmation of Arrangements’ document, as this is going to play a key role in verifying the matter of SDC on a practical level. Aimed at keeping SDC at bay by outlining how the features of SDC are not present, this CoA document should be completed and signed by contractor, end-client and recruitment agency. (We are developing such a document for future use by contractors and in support of its own insurance).
Other useful documents to be included and retained in both an ‘anti-SDC’ kit which will also double as an ‘anti-IR35’ dossier would be e-mail exchanges between you and the client which describe urgent services requested of you, the contractor, where those services are not defined in the contract and where it has not been possible to draw up a separate contract in time. This will help demonstrate that the contractor cannot be moved around at will by the end client, as referred to earlier. Contractors should also try to retain any documents that describe and detail the end-client's specifications and requirements of the services to be rendered, where possible. Have one of these anti-SDC kits (the contents of which can also form an anti-IR35 dossier) for every contract you execute.
If you want to fork out to get yourself a reactive layer of defence if either SDC or IR35 bites, then consider insurance. At the least, checking existing insurances is a must-do, because any HMRC inquiry based on the proposed withdrawal of tax relief on expenses for SDC contractors will, technically, be a PAYE investigation.
Lastly, but equally as important for peace of mind, familiarise yourself with case law. There’s fortunately quite a bit to help demonstrate that highly skilled contractors, specialising in their chosen field, are rarely controlled in the manner of SDC that HMRC is proposing
In Morren v Swinton & Pendlebury Council for example, the judge considered that when dealing with a professional man or a man of some particular skill and experience, ‘supervision and control’ was of little use as a test. Indeed, HMRC's own ESM7025 manual admits, “control over how a job is done can only be exercised where there is scope for it.”
More recently, in 2011, there were a number of tax tribunal cases that involved the control test. In Marlen Ltd, a Mr Hughes (a contractor) at JCB was briefed by a project manager who would outline exactly what was to be built. JCB's engineering manager said that a contractor would be under the control of project leaders who would brief the contractor.
But the reality was that the only form of control was overseeing the project and checking on progress. Mr Hughes had to report daily and took instructions from senior designers as to what they wanted. He was just working on only a small part of a project and his work had to be co-ordinated and fitted into the greater whole for it to be viable. This could only be achieved by reasonably rigorous direction and supervision by senior management. The degree of control exercised, therefore, has to be looked at in the context of what is being done and what is being produced. Outcome of the Marlen case: HMRC lost.
And in Primary Path Ltd, the judge reiterated that the question of control is problematic in the case of a person who is engaged for his specialist skills. A Mr Winfield was hired for his expertise to be part of a team for a particular project, and subject only to such supervision and direction as was necessary, for and in the course of the management of the project as a whole he was left to do the work as he saw fit. The level of control or supervision exercised, therefore, did not go beyond that which one would expect in the hiring of an independent contractor. Outcome of the Primary Path case: HMRC lost.
Taxman can’t be a law unto himself
It should be pointed out that tax tribunal cases do not set legal precedence. However they do offer a very useful signpost as to how the courts interpret the subject of control, which is intrinsic to SDC. The concern, of course, from many quarters revolves around how HMRC is going to interpret SDC, but the fact is that the department cannot do this simply to suit its own cause as the courts will not permit it.