'Self-employment tests' may extend to IT staff
Last year, HM Revenue & Customs issued a consultation paper entitled 'Tax relief for travel expenses: temporary workers and overarching contracts' aimed directly at umbrella companies and claims for travel expenses. The outcome of this consultation was that there would be a focus on compliance with existing legislation rather than additional legislative changes.
On 6 August 2009, HMRC issued briefing note 50/09, which provided a summary of HMRC's findings on its compliance work. It invited e-mail responses from workers and end clients with concerns about how a particular umbrella operates.
Before entering into an employment contract, contractors who wish to use umbrella companies should take independent professional advice to establish what they are legally allowed to claim for under the tax legislation. This is an area that HMRC is clearly focusing on.
The principal effect of Revenue Brief 50/09 is that we will see a targeted drive by HMRC to make sure that they visit all 'high-risk' businesses and carry out a compliance review to identify whether overarching contracts are actually 'sham' contracts to disguise a number of successive separate employments.
These compliance reviews will also look in detail at whether the terms of any travel and subsistence dispensations are being adhered to and if they are not, the dispensations will be withdrawn.
And in spite of commentators arguing to the contrary, we don't think going down the limited company route is really feasible for the vast majority of umbrella workers, as the risk of IR35 and running costs probably make this approach prohibitive.
For umbrella companies, the main action to be taken should be to ensure that their employment contracts will stand up to scrutiny and that, if they are relying on a dispensation, they are operating within its terms so there is no scope for HMRC to withdraw it. Umbrella companies must also be mindful of National Minimum Wage rules as those that reduce the salary and pay expenses instead may be falling foul of these rules.
Recently, HMRC also published a consultation document which purports to deal with the problem of 'false self employment' in the construction industry. HMRC believes that the best way to tackle this problem is to legislate against it by creating a 'deemed' employment income, unless criteria can be met for supplies of materials, provision of plant and machinery or provision of other workers.
As part of its scrutiny, HMRC are now said to be talking about having a new legal definition of self-employment, with which all contractors must comply in order to engage subcontractors.
If HMRC's proposals for construction workers are implemented, it would not require much additional legislation to extend the requirements to contractors operating as self-employed individuals or, indeed, to alter the 'relevant contract' definition in the intermediaries' (IR35) legislation.
It is worth pointing out that HMRC have recently lost a number of cases on employment status as the test is a subjective one, so it is a bit of a lottery before the courts with cases with similar facts being ruled on differently. This doesn't help either the taxpayer or HMRC as both sides are at risk where there is no certainty over tax treatment of workers.
It is quite conceivable that, if the Revenue successfully introduces the proposed objective tests to apply in the construction industry sector, HMRC would introduce different objective tests to other sectors which would give both taxpayers and the tax authority certainty on tax treatment.
Yet the concern is that the objective tests are likely to deem more workers to be employed than the current rules allow, so although we would have greater certainty, the net effect will be greater amounts of tax and national insurance being collected by the Treasury.
As the consultation on the construction industry rules closes on 12 October, it is conceivable that these changes will be announced in the next pre-Budget statement, due to be given by the Chancellor in November 2009 to take effect from 6 April 2010. If the construction industry changes come into effect on 6 April 2010, that would give the new rules time to 'bed in' and for the Revenue to then consult on other sectors. However, it is hard to imagine HMRC rolling out any rules to apply to other sectors, such as IT, before 6 April 2012. The reason for this is that other sectors would be more difficult to apply these rules to as the construction industry businesses are all already registered with HMRC as operating in that sector under the particular rules that apply to it, such as the Construction Industry Scheme.
Comment based on guidance provided by Paul Spindler and Tim Stovold, partners at chartered accountants Kingston Smith LLP.