Debt Transfer Provisions
This article, on debt transfer provisions, is provided by Adrian Marlowe of recruitment law specialist Lawspeed
With the onset of the MSC legislation it has become of paramount importance to employment businesses supplying contractors to ensure that they are not caught by the debt transfer provisions.
There is a specific risk under the MSC legislation that, wherever a worker has been referred by an employment business to a specific provider which the worker then uses, the worker‘s company could be regarded by HMRC as caught by the MSC legislation.
Unexpected Tax Bill
Where the legislation applies, the company must treat all its payments to the worker as employment income and account for PAYE and employer and employee National Insurance to HMRC on each payment.
Where all payments are not made on this basis, not only may the worker receive an unexpected tax bill, but liability for unpaid tax sums can be transferred to the referring employment business.
A provider offering a tax advantageous regime, perhaps suggesting that company operations could be undertaken outside IR35, or through offshore arrangements, to worker companies is unlikely to recommend payment of tax in the way required by the legislation, and therefore poses a particular risk of debt transfer.
Umbrella Companies Outside the Scope
In contrast, an ‘umbrella’ company that pays its agency workers only by way of employment income is outside the scope of the MSC legislation and therefore offers no risk to an employment business that refers workers to it.
The question then is how to identify an organisation that offers no risk to employment businesses, and the formation of the AEMC addresses that issue.
Audit Scheme Abandoned
Whilst it is accepted that some contractors will wish to continue using providers that offer services more suited to independent businesses, the legislation is not framed to make any clearly identifiable exceptions, although the legislation does not apply to companies merely receiving accountancy or legal advice.
This issue was considered recently by HMRC until it was recognised that any informal arrangement that allows certain types of provider to operate without sanction even though they may fall within the strict definition of the law, may be unlawful.
The discussed ‘audit scheme’ was abandoned for that reason.
Law Catches More Contractors Than Intended
Given the way the legislation is drafted it may be that HMRC now realises that it catches more operators, and therefore their customer worker companies, than was originally intended.
However only Parliament can change the law and there are many legal precedents supporting the principle that HMRC must follow the law as stated without favour.
HMRC Obliged to Enforce The Law
Any audit scheme would clearly have raised the hopes of employment businesses, recommending a particular non employment provider, that debts could not be transferred if the provider had passed the audit standard because the employment business had acted ‘in good faith’.
As things stand, in fact the legal position is that they would have been exposed in any event as HMRC is obliged to enforce wherever the law requires it to do so.
True Validation Not Possible
The suggestion that the marketplace demands some kind of provider validation process is fine but the rule that HMRC must enforce would apply just as much to any alternative scheme which seeks to validate a provider as safe to recommend under the MSC legislation, as true validation is simply not possible in the absence of formal legal HMRC approval.
No one else can be the arbiter if it possible that the legislation may apply.
Datagate Services v HMRC: New Year brings victory for common sense
The Special Commissioners have reached their decision in the case of Datagate Services Limited v The Commissioners for Her Majesty‘s Revenue & Customs and have decided in the contractor‘s favour.
This is a significant result to welcome in the New Year and is likely to attract considerable attention. This is only the fourth ever IR35 victory for a contractor at this level and follows what was a worrying trend of four successive losses, most recently the Island Consultants case which was lost at the end of last year.
Findings of Fact
During the course of the two day hearing the Special Commissioner, Mr Adrian Shipwright, heard evidence from the contractor Mr Bret Barnett of Datagate Services Limited, Mr Simon Wycherley of MBDA (the end-client) and Ms Nicole Hartland, also of MBDA and made the following findings of fact:
1. Datagate entered into a contract with the agency (latterly Technology Project Services International Limited (TPS)) for the supply of services to MBDA.
2. The contract excluded an employment relationship, and the contract contained features that you would not find in an employment context.
3. The Special Commissioner set out clauses in the contract of material importance relating to intention and, most importantly, Datagate‘s right to provide services to other parties during the currency of the engagement.
4. Datagate was paid by the hour plus VAT.
5. TPS had an arrangement with MBDA for the supply of services.
6. As in the case of Ansell Computer Services v. David Richardson (HMIT) (SpC 425) (2004) the work had to be carried out by a particular person primarily for security reasons.
7. There was a right to substitute subject to security clearance. This right was not exercised.
8. There was no provision for a minimum number of hours.
9. Mr Barnett had discretion as to when to work and discussed time off with the team leader as a matter of courtesy.
10. Mr Barnett worked with the relevant team but was provided with ‘˜discrete sections of work‘, namely projects.
11. MBDA wished to learn from him.
The Special Commissioner then reached the conclusion that Mr Barnett‘s relationship with MBDA ‘˜was that of a professional consultant providing independent services when looked at as a whole‘.
In making these findings of fact, the Special Commissioner focused primarily on Ansell and the overall test of whether Mr Barnett was in business on his own account within the context of the engagements with MBDA and the other circumstances.
The Special Commissioner also referred directly to the well known factors set out in the Revenue‘s Employment Status Manual.
HMRC Arguments Dismissed
The Special Commissioner placed considerable importance on whether there was an ultimate right of control by MBDA over Mr Barnett. However, as in the case of Ansell, the Special Commissioner took account of the strong security requirement as the projects concerned were defence-related and concluded that any right of control was not akin to that expected of employment.
Similarly, the Special Commissioner dismissed HMRC‘s argument that the provision of equipment by MBDA was indicative of employment within the security context. At the hearing the Special Commissioner commented on the strong similarities with Ansell.
Illogical HMRC Arguments
During the hearing Mr Michael Faulkner for HMRC argued that a right of control existed over Mr Barnett as to the hours to be worked and that the work itself had to be ‘˜agreed‘ with MBDA.
This line of argument is clearly illogical and the Special Commissioner did not regard this as an important factor in the outcome of the case.
The Special Commissioner provided useful comments on the issue of financial risk. During the hearing Mr Michael Faulkner for HMRC argued that Datagate was not exposed to significant financial risk.
The Special Commissioner concluded that this argument is ‘˜somewhat circular‘ and the fact that Datagate would lose its main source of income if the contract was terminated demonstrated greater financial risk than would be expected in a relationship of employment.
No Right of Control
Equally, the Special Commissioner found that Mr Barnett could profit by sound management by organising his work effectively.
The Special Commissioner placed an interesting interpretation on this test by accepting that Mr Barnett was able to organise his work to give himself the benefit of more free time rather than simply provide services to other clients concurrently and thereby profit financially.
Mr Barnett gave compelling supportive evidence that MBDA did not have a right of control as to when the work was done.
Mutuality of Obligation
Although the decision does not specifically address the fundamental issue of mutuality of obligations, the Special Commissioner found that Datagate was only entitled to payment for work done and the work was project based (in a similar manner to Ansell) and so not integrated into the end-client‘s business.
This emphasises the importance of defining the work as a discrete project at the outset and follows Lime-IT and Ansell, the importance of which has consistently been highlighted by Lawspeed from the inception of IR35.
It is important to note that the contract with the agency TPS defines the work to be completed and, unlike Synaptek, did not place an obligation on TPS or MBDA to provide work to Datagate and Mr Barnett during the currency of the agreement or after completion of the services.
Right of Substitution
The Special Commissioner also considered that there was no requirement for personal service in the contractual documents and that Datagate had a right to substitute and engage helpers.
As the conclusion was reached with the benefit of evidence from both the end-client and Mr Barnett (unlike Lime-IT), the decision does not provide further guidance on the issue of whether a substitution clause in a contractual chain involving an agency is enforceable in respect of the end-client.
Not a Contract of Employment
In addition, the Special Commissioner did not accept HMRC‘s argument that the existence of a right to terminate a contract is equivalent to a right to give notice under a contract of employment.
This argument is in any event illusory as TPS and MBDA were only obliged to pay Datagate for work done.
Intention of the Parties
Interestingly, the intention of the parties was also considered as a relevant factor despite the requirement in the IR35 legislation to assess the hypothetical contract between the worker and the end-client.
Even in respect of regular employment status arguments, case law on this subject has indicated that the intention of the parties would normally only be relevant in borderline cases, so it is somewhat surprising for intention to be considered in this case.
Mr Michael Faulkner for HMRC sought to rely on generic information regarding working arrangements supplied by the end-client, as is consistent with present policy.
At the hearing it became clear to all present that the evidence of Ms Nicole Hartland on behalf of MBDA was based on a document concerning employment at MBDA and did not inform of Mr Barnett‘s specific working arrangements as a contractor.
Therefore this was irrelevant and the Special Commissioner made his views clear on this subject in the decision.
This is welcome and it is hoped HMRC Status Inspectors will now rethink this approach and concentrate on seeking evidence from end-client representatives who are fully aware of the contractor‘s specific working arrangements.
Agency Irrelevant to Relationship
As with Lime-IT the presence of an agency in the contractual chain did not affect the assumption that MBDA was the end-client for the purpose of the hypothetical contract.
It is also interesting to note that the hearing was attended by several other HMRC Status Inspectors, presumably as a training exercise.
Welcome Reassurance to Contractors
Martyn Valentine, who handled the case with James May at Lawspeed said, ‘in conclusion, this decision has many interesting aspects, particularly the Special Commissioner‘s application of Ansell.
Following the disappointing result in Island Consultants, this decision will provide welcome reassurance to contractors that it is possible to operate outside the IR35 legislation and overturn status decisions by HMRC.
This illustrates yet again the importance of ensuring that the true working arrangements are reflected in the contractual documents and that the work is set out as a discrete project to minimise the key factors of control and mutuality of obligations, and to distinguish the contractor‘s work from the end-client‘s business.’
Datagate Dogged for 4 Years
Mr Barnett of Datagate said, ‘my case began over 4 years ago as an employer compliance review which escalated to an IR35 status investigation. Initially I handled the enquiry myself, but when complexity of employment law became apparent I sought professional help.
‘James May and Martyn Valentine at Lawspeed dealt with the Revenue on my behalf, and instructed John Antell who presented my appeal at the Special Commissioners.
‘The appeal was attended by representatives of the end client as well as Lawspeed.
Giving Confidence to Other Contractors
‘The fact that IR35 has eventually been found not to apply is a great weight off my mind and will hopefully give others confidence that it is possible to remain outside IR35 as long as working practices are sound and well documented.
‘I believe that the help and advice I received played a large part in my eventual success, and due to the vague and poorly defined nature of the IR35 legislation, I’d recommend anyone similarly affected to seek advice from Lawspeed as early as possible.’
This article, on Debt Transfer Provisions, was prepared by Martyn Valentine LLB (Hons) Legal Consultant at Lawspeed Limited, experts in IR35, contract, recruitment and employment law.
For advice on all aspects of contracts including commercial terms and IR35 status call 01273 236236 or visit www.lawspeed.com for further details.