The Court of Appeal’s decision in broadcaster Kaye Adams’ long-standing case against HM Revenue & Customs (HMRC) could ultimately create more cases of blanket bans on freelancers and contractors if a less complex IR35 status test is not created, according to a tax expert.
Penny Simmons, a Legal Director and tax expert at law firm Pinsent Masons said that the latest decision by the English Court of Appeal on the application of the IR35 tax rules highlights the complexity of the test for determining employment status for tax purposes, and as such could increase the “difficulties” for businesses when determining whether contractors should be taxed as employees.
The Court of Appeal re-confirmed that determining whether an individual is an employee for tax purposes under IR35 is a “multi-factorial” test and it is important to look at all the information “reasonably available to both parties” when making a decision.
Although this decision may be welcomed by individual contractors, it is unlikely to be seen as a positive development by businesses who are now responsible for making status determinations when engaging contractors through personal service companies (PSCs)
Penny Simmons, Tax Expert, Pinsent Masons
“The need to look at all the information ‘reasonably available’ and not just at the facts regarding the nature of the contractor’s specific engagement with the business is particularly onerous. It may be difficult for a business to assess whether it has collected sufficient information about how the contractor carries on its business and this issue may be compounded when the contractor is engaged indirectly through an agency,” said Simmons.
The court confirmed that ‘mutuality of obligation’ between the parties and the right of control are necessary for there to be an employment relationship. Once established, all other relevant factors need to be considered before a determination can be made.
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Complex IR35 test leads to blanket bans on contractors
Simmons argues, however, that the more complex the test, the greater the compliance burden on business when applying the rules.
This determination once shared by tax and legal experts with their clients could ultimately put companies off, including agencies, from hiring freelancers that are not obliged to work through umbrella companies.
According to IPSE research, the umbrella company industry’s unregulated status is proving costly and with little to no benefit for freelancers. Left unregulated there will arguably be more cases of loan charges, phoney outfits, pocked contractor holiday and sick pay, as previously reported by The Freelance Informer.
Despite the recent growth in the use of umbrella companies, IPSE’s research found that over 7 in 10 (74%) freelancers are dissatisfied about working via an umbrella company, with 1 in 2 (50%) very dissatisfied.
When asked why they are dissatisfied, 8 in 10 (80%) umbrella company workers cited the fact that they have to cover the liability for Employer’s National Insurance, and where applicable, the Apprenticeship Levy, through a reduction in their day rate.
The report also found that the majority (70%) of umbrella company workers believe that they have lost their independence and ability to work however they wish since joining an umbrella company.
The fundamental problem here is that people are being forced into pseudo- employment relationships they do not want.
Andy Chamberlain, Director of Policy at IPSE
“Since the IR35 changes came in a year ago, thousands who proudly consider themselves to self-employed are being pushed into umbrella companies under disadvantageous conditions, often without even a choice over which umbrella company they use.”
A rising number of unregulated umbrella companies have been launched since March 2021 and the number of contractors forced to join them smacks of another loan charge crisis, according to research from IR35 Shield.
The continued push for contractors to go through umbrella companies is only creating a pseudo-employment brain drain for the UK economy.
British highly skilled talent will increasingly be compelled to move overseas to more contractor-friendly markets and the UK will continue to hire offshore talent with little benefit to the Treasury’s purse or the nation’s digital economy agenda.
Will a replacement IR35 test make all parties happy?
Simmons said that it was “interesting that the court appeared to indicate that the IR35 employment status test may be overly complex, noting that it would be ‘desirable if, there were one clear test or approach to determining whether a person was an employee’”.
“It is hoped that this decision may provide further impetus for the government to review the employment tax status test and introduce a replacement that is easier for businesses and contractors to understand and apply with certainty,” she said.
“The more complex the test, the greater the compliance burden on business when applying the rules. This increasing compliance burden, coupled with the tax risks for a business if they make an incorrect IR35 status determination, may result in more businesses refusing to engage with contractors through PSCs, which may exacerbate existing challenges across labour supply chains.”
Following contractor feedback to the government about unfair umbrella company practices and the negative impact that Off-Payroll rules have had on the greater British economy, we could see a call for a replacement IR35 status tool. What remains to be seen is whether “less complex” actually means fair for all parties involved, especially for freelancers, and who will ultimately make that determination and when.
Scrap IR35. Treat Ltd Companies the same irrespective of the number of employees. If the Contracting Ltd raises an invoice and the Client pays it then its a B2B relaltionship. If the Employer pays PAYE and the worker accepts this, then it’s Employer/Worker relationship. Anything else goes to Tribunal. Introduce a tax on Outsourcing to Overseas Ltds. This will bring back jobs to the UK.