Sainsburys Bank IR35 Decision – Contractors Can No Longer Use PSCs

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Sainsburys Bank IR35 Decision
Sainsburys Bank IR35 Decision

Sainsburys Bank IR35 Decision

The Sainsburys Bank IR35 Decision has been announced over the past few days. Virtually all contractors have been told that they have tested inside IR35. This is despite the fact that overall, at all companies, only 31% of contractors who sit the test fail it.

It is no great surprise to the contractors who work there as the Sainsbury’s retail side had come out with a similar decision. Indeed, a statement for the Sainsbury’s retail side said that they expected that only a handful of contractors would test outside IR35.

Contractor Questions About Sainsburys Bank IR35 Decision

  1. What are other UK banks doing about the IR35 changes?
  2. What did the Government Expect from its IR35 changes?
  3. Why are companies blanket banning contractors using PSCs?
  4. How are companies getting round the ban on blanket assessing contractors?
  5. How did Sainsburys Bank IR35 Decision come about?
  6. The Right of Substitution and Sainsburys Bank IR35 decision
  7. What Financial Risks do contractors have?
  8. How could Sainsbury’s Bank Change Their Working Practices for Contractors?
  9. How did tribunals assess supervision, direction and control?
  10. Why the Sainsburys Bank IR35 decision to test all their contractors?
  11. What the Government must do now on IR35

What are other UK banks doing about the IR35 changes

The Sainsburys Bank IR35 decision means that they have joined all other banks to declare so far in no longer taking many, if any, personal service company contractors. Banks who have effectively banned Personal service company contractors are:-

  1. Barclays Bank
  2. Lloyds Bank
  3. HSBC
  4. RBS
  5. Tesco Bank
  6. Morgan Stanley

Sainsburys Bank have now joined those.

Indeed the banking sector appear to have capitulated almost entirely.

What did the Government Expect from its IR35 changes

When the Government made the IR35 rule changes, which will come into effect in April 2020, they hadn’t even intended this to happen.

They intended that hiring companies would decide contractors IR35 status rather than the contractors themselves.

Previously, if contractors got their IR35 status wrong they would be pursued by HMRC for back tax, interest and penalties. Of course, as we well know, HMRC lost 80% of those cases at employment tribunals. That’s even though they had a choice of all the personal service company contractors in the country to pursue. The employment tribunals consistently rule in favour of the contractors.

Why are companies blanket banning contractors using PSCs

Now it is the companies who hire contractors who will have to face penalties. And those major companies are capitulating under this threat.

What was supposed to happen was that companies would use HMRC’s Check Employment Status Test (CEST) IR35 test to decide contractors status.

If they passed the test (which 54% do) they would be allowed to continue operating via a personal service company.

If they failed the test (which 31% of contractors do) they would have to either pay PAYE via the hiring company or their agency or join a PAYE umbrella company.

The Government and HMRC said that contractors would have to be tested individually and not blanket assessed.

HMRC promised that they would stand by the results of the tests even if it was later shown that the contractor was inside IR35.

How are companies getting round the ban on blanket assessing contractors

However, those companies deciding that they would no longer take PSC contractors are effectively getting round this by making their contractor positions inside IR35.

According to a source at the bank “The contractors who are at the bank but work under “group” have still to find out their status but the bank direct contractors were emailed today.”

Sainsburys have gone even further than other companies by deciding to test them all and then tell virtually all of them that they have failed.

Sainsburys retail went even further by telling their contractors beforehand that they would virtually all fail.

How did Sainsburys Bank IR35 Decision come about

Sainsburys Bank have failed virtually all their contractors for pretty much the same reasons.

They told their contractors that:-

Having assessed the working practices we have determined that your engagement falls inside IR35 and as such is considered employed for tax purposes for the following reasons.

  1. You have never sent a substitute to do the work and if you were to offer a substitute we have the right to reject them. Neither have you paid another person to do a significant amount of the work.
  2. You do not have any significant financial risks, including not correcting defective work in your own time at your own cost.
  3. The work you provide is ultimately supervised and monitored by Sainsbury’s with Sainsbury’s reserving the right to have a level of direction and control in the delivery of that work.

According to our source “Everyone that I checked with had those same 3 bullet points despite our current contracts stating otherwise.”

So, most Sainsbury’s contractors assessed are being failed for virtually the same reasons.

These are highly contentious and don’t reflect decisions at lower employment tribunal hearings.

The Right of Substitution and Sainsburys Bank IR35 decision

Let’s just take Substitution.

Perhaps the most crucial ruling in the case of Lime-IT and Lisa Fernley versus HMRC was that it had to be taken in good faith that the contractor would provide a substitute, as stated in the contract, if there was a need for it.

The client, in this case Marconi, had the right to refuse any substitute, according to the details of the contract.

This means that for this clause to kick in that, first of all, a contractor is no longer able to perform the tasks stated in the contract, which is unusual in itself.

Even if this happens, the client has a right to refuse the substitute.

What is the only way contractors could be found inside IR35 via Substitution

The only way that the contractor could be found to be inside IR35, according to this, is if the contractor could no longer do the work, that the client wanted a substitute and the contractor either couldn‘t or wouldn‘t supply one.

It is only in the breach that HMRC could prove that the contractor had no intention of supplying, or couldn‘t supply, a substitute.

Otherwise, according to the Special Commissioner, unless there was evidence to the contrary, the substitution clause in the contract had to be taken in good faith.

In law, you have to show that someone broke the law (or contract). You cannot make the assumption that the contractor would not have sent a substitute.

For full details of the Lisa Fernley / Lime-IT case see Lisa Fernley v HMRC

What Financial Risks do contractors have

As regards financial risks recent tribunals have accepted that contractors do have financial risks. For instance, if contractors decide they don’t want to go PAYE and want to continue to use their personal service companies, Sainsbury’s Bank can get rid of the contractor forthwith.

They won’t have to pay a penny in redundancy money. They don’t have to give them any further work like they would an employee.

The contractor would then have no income at all until they found a new contract. That’s a pretty significant financial risk.

Why did an employment tribunal decide contractors have financial risks

At the Paul Hawksbee employment tribunal case the tribunal decided that there was financial risk to Paul as his contract renewals depended on the success and future success of the programme.

Employees don’t have that financial risk. This is very good news for contractors everywhere as their renewals depend on their performance. This is not something that permanent employees have to worry about.

How could Sainsbury’s Bank Change Their Working Practices for Contractors

As regards Supervision, Direction and Control, the third point, that is disputable according to recent tribunal results. However, if they wanted, Sainsbury’s Bank could change their working practices so that any work, how it is done, where it is done, what equipment to use and the estimate for the work could be agreed with contractors rather than imposed on them.

How did tribunals assess supervision, direction and control

In the Paul Hawksbee case, although the hiring company Talksport controlled the ‘where’ and ‘when’ the work should be done the ‘how’ was considered far more important. The tribunal considered that Paul Hawksbee had a great deal of editorial autonomy on how the work should be done.

This is similar to how contractors operate.

In the Kaye Adams tribunal case it was stated that the BBC could dismiss or suspend Kaye Adams if she did not fulfill her contract in any way. This is no different from a goods supplier returning something to the supplier that was faulty. The judge decided that the BBC did not control her and that she had a contract for services with them.

Why the Sainsburys Bank IR35 decision to test all their contractors

Why Sainsbury’s Bank and Sainsbury’s Retail have bothered to test all their contractors and then to fail virtually all of them for reasons that are disputable is unknown to their contractors. It has virtually the same effect as blanket banning contractors using personal service companies.

It must have cost them a lot of time and money for virtually the same result as a blanket banning.

Perhaps they did this on legal advice.

It would be very interesting to see some of these ‘verdicts’ tested in court.

What the Government must do now on IR35

The Government intended that companies would assess their contractors as being inside IR35 or outside. They even said that they had to be tested individually. There could be no blanket assessments.

They had not intended that companies should virtually blanket ban contractors using personal service companies.

The Government need to step in and stop this unintended consequence before this does great damage to the UK economy.

Boris Johnson and Sajid Javid should consider that any downturn in the UK economy and downturn in profits at our make companies will be blamed on their pet project Brexit.

Any extra tax they get from IR35 (and it is worth less than a tenth of a penny on income tax) will be lost by less tax being paid by companies on lower profits. They will hire fewer people which means that those people won’t pay any tax and may get unemployment benefit

For this Brexit reason alone they need to tell companies that they cannot blanket ban contractors. The gates of hell are about to be opened.

What would you do if your client company banned you from using a personal service company? See our poll at the top right of this page.

One of our readers tells me that ”It does work on a mobile. Just open the menu to view as a Desktop site”.

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