Dragonfly shot down in cold blood. By Steve Gretton

If contract worker submitted two rates (and this was part of the contract), one B2B, and a higher one for deemed employee (=within IR35), worked as non-IR35 then was subsequently and many chargeable hours later deemed to be IR35, would there be a legal case for her to claim the higher within-IR35 rate retrospectively - since the tax was being claimed on an IR35 basis retrospectively ?

There has to be some kind of quid pro quo, apart from the tax take, for having disguised employee status ...?

1. A client is only going to work to one rate, and that is the one in
the contract.

2. IR35 has been politically engineered. Disguised employer is
not tax-liable employer (as in the 1970s) . Tax cases have already been
fought and lost attempting this line of argument (AFAIK the first one was
a contractor who argued disguised employee = expect the benefits
afforded to normal employees) .

The notion being suggested is that for a client who is adamant on
disguised employment, a contractor may be able to obtain B2B
terms on the basis of it being financially cheaper to the client.

Of course this cannot work for contractors whose mindset is 'try to
get highest possible rate first, ask questions later on what to do with
the money' . A degree of planning (acceptable minimum
contract worth after tax, company operating costs, assignment
logistic costs, pension contribution goals etc) is required.

Although if spelt out as you did, there would be no misunderstanding.

But it is not the contractor who is being dishonest. It is :

- the client, who wants disguised employment (especially as
often happens, when the contractor is used for a long time) but
doesn't want to suffer any of the consequences thereof.

- the government, who fully knowing the situation is exactly
the disguised employment of the 1970s, goes for the contractor
and not the client.

- the agency, who being told that the client expects a disguised
employment situation, tells the contractor that all the contractual
terms of the client/agency contract impacting the contractor are
those of B2B arrangements, and have been accepted by the client.

Regarding rates, irrespective of whether a contractors' rate does or
does not exceed the clients' stated maximum, a contractor can
calculate their 'acceptable' rates based on whether the client chooses
disguised employment or a B2B arrangement (denote them R1 and
R2) . ***

If R2 is less than R1, then over the lifetime of a contract, the client is
presented with a financial "no-brainer" . B2B *saves money* .

*** Contractors have been doing such calculations for years.
Prior to 1998, contractors were increasing their rate to factor in the
consequences of tax on travel/accommodation expenses (the old
Miners vs Atkinson case ?? ) .

Michael,

The theoretical intent of IR35 is for *every client engagement* of yours
to be scrutinised for the existence of disguised employment. And where
it exists, for *you to pay the employers tax on behalf of the employer* for
every such arrangement.

And so to the realities :

1. If you don't appear on the radar (prior to the new P35 'tick box with no
qualifying comments box' ) , because dividends are not proportionately
high wrt salary etc, you are unlikely to be troubled.

Too many companies, not enough IR staff to undertake investigations
(although there will soon be a P35 'lottery' for some unfortunates) .

2. If you have B2B 'form' , you are unlikely to be troubled because of the
'profile' that your business projects (even for those occasions where
disguised employment is evident) . By "form" I mean you have, or have
had :

- multiple concurrent clients

- B2B contracts defined with fixed prices, precise work items/deliverables
+/- work/delivery phases/timescales, payment upon delivery/completion
etc

- performed the work with other people than yourself (partner/sub-
contracted parties, substitutes etc)

Which is why in addition to demonstrating his ignorance of the
contract market (history, intent, realities etc) , also makes himself
look quite silly.

"They do that with AGENCIES. The agencies are suppliers, who supply temporary workers. They view contractors as temporary workers."

They do *no such thing* .

The client contract with the agency is for the supply of a *named person* ,
not for *services* . When *real* businesses make contracts for services,
things are defined in terms of timescales, work items. delivery phases,
deliverables, payment terms for each deliverable etc.

"When they have a major project they tender out to I.T. suppliers and NOT recruitment agencies"

Embarrassingly wrong again.
When real businesses have *ANY* project, they tender out to suppliers.
Project size is irrelevant. As is the corporate size of the supplier.

When a client requires *individuals* to use as *employees*
(regardless of the terms of engagement) , they near-always use
recruitment agencies.

You really don't understand the fundamentals of the client / supplier
model. And have obviously never seen client/agency contracts, either
those written for disguised employment, or those where the client
engages the supplier in a true B2B arrangement and an agency is
involved.

Getting back to the Dragonfly case :

1. The contract that the client intended was for *disguised employment* ,
and nothing else.

2. Dragonfly deluded themselves into believing they had an implicit
B2B contract for services, which they did not. Substitution clauses or
not.

3. Dragonfly are now going to have to pay tax on behalf of the disguised
employer (the client) , because they did not protect themselves by
charging the client a 'disguised employer' premium when it was obvious
#1 was the reality.

A final note to contractors :

For any work that you are going to undertake for a client where you
suspect disguised employment, calculate two costs, one for B2B and
one for disguised employers.

Give both to the client, indicating what occurs contractually in order
to have one or the other.

The client at least can make a choice based on facts.

This whole field in principle applies to "interim management" type work, and I am surprised that no-one in this category has yet seen an IR35 challenge from HMRC.

As a contractor (not through an agent, but direct with clients) I find this whole IR35 thing very unsettling. In this particular case, as described, I have to agree with the judgement really, because the contractor worked on-site, under management control, using the client's equipment.

However, IR35 can still apply to an independent contractor such as myself - for example, at the moment I am at the beginning of a long contract for one company - it will probably last at least 5 years. I provide the office space, equipment to work on etc, but might still be deemed an employee (despite having run my firm for over 30 years now!) The only way I can see around this is to undertake work for other clients, possible at uneconomic rates, simply so I can demonstrate that I am a contractor. This is hardly conducive to giving my best to the original client... (or even producing the best tax income for the HMRC come to that!)

Not all of us contractors are out to beat the system, we really do exist and are being caught very unfairly by IR35 because, as with so many recent laws, we are deemed guilty until proved guilty. As always, the behaviour of a few spoils it for the rest of us... It's about time contractors had some rights!

Who has or has had direct contracts with clients (with or without
recruitment agency involvement) , as well as "disguised employment"
contracts ??

they would put work out for tender (RFPs) etc in order to solicit suppliers
who can provide the service.

Simple really - happens in many fields.

Now that Dragonfly have lost the case, on who is the tax assessed ? Is it the company or the directors ?. If the company is liquidated or struck off does the liability fall onto the directors ?

The Government and HMRC create the unlevel playing field.**

Then they whinge when people take advantage of it, eg incorporation, BATR etc.

Then they typically pick on the 'small people' and align their unlimitedly deep pockets against them, often having carried out an unfair and oppressive enquiry.

Larger businesses and non-doms are voting with their feet, and no wonder.

** and complex rules and provisions such as this which depend on after the fact statements that are by definition impossible to self-assess.

The one that understands the various motivations behind
contracting (nicely elided reply BTW) .

Just to clarify one point of ignorance on your part : clients do not want
'fixed term' anything. They want to buy *X hours of the contractors' time* ,
to use as they see fit.

That aside, we can specifically discuss the tax situation.

The reason contractors trade as Ltd companies is because it was
a solution to get *clients* out of the IR35 of the 1970s : when
contractors were deemed to be disguised employees, and clients
disguised *employers* . Contractors operated as sole traders at that time.

Given the tax rates (corporation, personal) of those times, the use of
dividends wasn't particularly appealing for contractors.

That out of the way, we come to IR35.
The original press release in 1999 talked of businesses who got rid of
employees "on a friday" , and re-employed them as one-man Ltd
companies "on a monday" .

In other words, disguised employment and an attempt to avoid
employer obligations (tax mainly) . But rather than doing the right thing,
True Labour have tried to avoid being tarred with the anti-business brush
of the 1970s, and pick on perceived easy targets to get the underlying
tax.

1. If dividend/salary ratios were defined in the manner that pension/
salary ratios (excluding age, years of service factors etc) used to be,
the argument is over. One-man bands will not be able to abuse
corporation tax. You will also catch the fat cats too.

2. If disguised employment is deemed to disguised employee + disguised
employer, the argument is over. Clients hit with the statutory tax/rights
either pay up, or undertake proper business to business arrangements
with contractors in order to save the money.

Re Actually what planet is q q on?

I think it's probably not so much a planet as an asteroid.

To quote from the article, He was chosen by The AA, he was named as the consultant in some of the documents.

This case was never going to succeed.

All that has been achieved by this ill considered action is that the situation is now a lot more difficult for the genuine cases.

Not for the first time, I am left wondering about the PCG.

Thanks, fellers. For nothing.

- Why do contractors use Ltd companies ??

Because the *legislation makes them do so* .
Do you really believe that contractors want to go through the hassle
of Companies House, registered offices, Public/Employers Liability
insurance etc, for the fun of it.

- How do most clients effectively contractors ??

Exactly as though they were *solely employed* by the client.
A resource to use/abuse as they see fit.

- If the above is the norm, why do clients bother to use contractors ??

In operational terms, to obtain a resource (skills etc) that they do not
currently have, or need for a sufficiently long period.

In financial terms, to avoid all the liabilities (statutory pay) that a sole
employee incurs.

The easiest way for contractors to avoid IR35 is to have :

1. well-defined work items/deliverables.
2. Payment upon completion.
3. multiple concurrent clients.

#1 does not happen because clients invariably don't know themselves
what they need. Only some general idea of the skill sets they may
or do require.

#2 upsets the recruitment agency cash flow model (they are after all
also acting as a payment "factoring" entity for contractors)

#3 does not happen because of the *selfishness* of clients. Even though
there are benefits at many levels in the business world if this happened.

In other industries, there is the concept of 'sole retainer' .
And when business X wants a sole retainer on business Y, they usually
pay a premium. If clients want #3 to continue, they should expect to pay a
'selfishness' premium, in addition to whatever premium they perceive
they currently pay.

Of course, once a government has the courage to legislate IR35 as
disguised employee implies disguised *employer* , and force the
client to provide statutory rights/pay as per sole employees, then clients
will change their ways.

Oh, and I haven't mentioned dividend payments.
Because I believe there should be a 'dividend ratio' in law relating
salary to dividend. Which ensures that fat cats are subject to the same
treatment as one man Ltd companies.

naturally my wife would expect a huge premium in rate to cover her maternity, sorry, that should be my paternity, periods away from the coal face.

Alan, you forgot extra funds to tide over the periods with no work / time between engagements - which are not holiday.
More of a concern at the moment ...

Oh, and HMRC investigation, PI insurances, acct fees, training, etc. but you know all that.

If, and it is a big IF, 1-man-band can get a rate that more than covers

1. Company contributions to pension, (also reduces NICable wage)
2. company medical insurance
3. Childcare vouchers?!?
4. and some sickpay / holiday pay premium
5. Er's NICs 12.8% from LEL up to NICable earnings
then package might be acceptable.

If you want a huge lump to go to your pension, then this might be ideal.

Even if you do the maths. and dividends are favourable, it may still be that as a lifestyle choice you choose to avoid dividends/corp. tax, for an easier life.
If you can avoid HMRC investigation in this way, that might also tip the balance.

I recognise that this is not conventional "wisdom". Lifestyle choices!?! What are you talking about Burt my boy?!?
Accountants are here to advise and guide us clients through our choices and clients often just want to hear how to avoid unnecessary tax, some would say "at any cost". (I wouldn't)

In many cases the client is paying for specialist experience and knowledge, hence the worker is not directly comparable with the client's employees, in comparison with whom s/he is frequently "overqualified".

So the higher rate reflects scarcity value rather than compensating for "not being an employee".

@Mark: Maybe in your sector, not in mine.

@Alan
Apart from any other considerations, you are forgetting about Employer's NI - with no upper limit.

The "avoidance of employment rights" (or should that be "evasion" ?) scenario (= 'Friday-to-Monday') is supposedly the original IR35 rationale, where Big Bad employer turfed out all his long-suffering underpaid employees on Friday and insisted they all become contract workers on the Monday.

Establishment comment at the time was allegedly that IR35 would put an end to this iniquitous practice ...

If a large organisation is prepared to offer a higher rate to avoid giving you employment rights then so be it.
Take the higher rate... but why, why, then additionally try to squeeze the extra NIC savings from the situation.

Take the higher rate from the client company, but surely your 1-man-band Ltd company can avoid HMRC interference altogether by paying him/herself the full salary (+ reduce PAYE with a hefty pension etc.) and pay-over the PAYE due and little or no dividends.

If your 1-man-band Ltd company income is quite predictable salary/Pension/PAYE/ee's er's NICs is easy to calculate and you can save accountants fees by scrapping your complex dividends scheme.

@Neil Wilson:

How about lobbying for an amendment to "The Conduct of Employment Agencies and Employment Businesses Regulations 2003" renderingdeeming any opt-out void if IR35 "employee" status is found to apply ?

That would seem to hit the nail on the head.

Unfortunately the Act as it stands does not seem to overly concern itself with details of opt-in/opt-out.

Unfortunately you can't go for employment rights. There doesn't appear to be any legal basis for doing so.

However HMRC have *always* had the same right to tax an individual as an employee by going down the same road. However they considered it too difficult to try and prove the arrangements a sham and created IR35 instead.

In none of the cases so far has the argument been put that the written contractual arrangements and all the intermediaries are a sham and that the individual is actually retained directly by the employer.

Certainly if I was doing the legal stuff at PCG still and a case came to me that relied upon Dragonfly and was as weak as Dragonfly I would push the case that there is not just a hypothetical contract, but that those are the actual arrangement in law. At the very least the risk of ending up with the tax bill would make lily-livered client managers think twice before regurgitating whatever line HMRC fed them.

NeilW

This surely signifies the last moments of the struggle against IR35.

I was one of the original members of the PCG. They lost the fight after lining the pockets of lawyers. The fundamental issue is that HMRC 'deem' that a worker is an employee for 'tax purposes' but only 'for tax purposes', and this is 'all about fairness'. Well let's have some fairness. The so-called Nuclear Option - going for employment rights - has always been considered a step too far by the PCG and others, but now is the time I think. So, the only way to fight this is to go for employment rights, because that is what will hurt employers who are using this as a way of avoiding their obligations. It cannot be 'fair' to be 'deemed' an employee just for tax purposes.

Remember that the original IR35 proposal was for the employer to pay the NI contributions, and that was changed after employers complianed. So what happenned? The 'deemed' employee' is also 'deemed employer' for 'NI purposes'.

Absolutely crazy, wrong and unfair.

@MarkBrown:
"What the worker wanted to do was to evade tax " - hmmm, sounds like the HMRC angle, at any rate.

If the worker could have been self-employed (PAYE class 4) then many contractors would take that option.

Since the clients & agencies will not tolerate this due to PAYE legislation, the worker requires an interposed legal entity ... "Alert - Intermediary Detected" lights up on the HMRC tactical display!

MSCs have been effectively outlawed, hence the worker's own Ltd Co is the only other option, and then tax planning - used by many other forms of business operating as closed companies - is surely acceptable.

As far as HMRC is concerned however, if you supply widgets it's OK, if you supply expertise, you are fair game.

Surely, if the application of IR35 effectively defines the contractor as an employee, then he should have employee rights at law. If that were the case, then the contractor should be able to sue the employer for the 'rights' that were not provided, eg PAYE, holidays, sick-pay, Employers NI contributions, or whatever. The employer could hardly argue that they were not liable to provide these if HMRC has said that the contractor was just another of their employees?

But then again, who ever said taxation was fair 8)

Mike

The AA were not being honest. What they wanted was an employee, but they are not prepared to stand the consequences of accepting one.

Unfortunately IR35 is nearing its logical conclusion - that employers are able to completely avoid their employment obligations - and the costs thereof simply by placing an agency and a company between the individual and the employer.

Perhaps we should simply push this one stage further and start recommending that clients retain female staff of child rearing age via this method to avoid the costs of maternity pay.

Since the worker no longer has any benefit for operating the way they do and no protection whatsoever, the only course of action that is equitable for all is to require that employment businesses retain their workers on a direct contract of service.

NeilW

Reading these case notes I'm not surprised Dragonfly lost. There must be many similar companies out there where most of us in the profession - along with the men and women in the street and on the Clapham omnibus - would expect the worker to be treated for tax and employment purposes an an employee of the 'client' company.

As others have commented, the iniquity of IR35 is that it lest the client completely off the hook.

I remain very sceptical of substitution as an argument against IR35. Like an IT contractor, I am a 'knowledge worker', but I don't have a substitution clause in my engagement letters. The firm provides a service and we decide who carries it out. It may be the same person every year, it may not. I have always feared that having a named contractor in the agency contract and then including a substitution clause was a partial admission of failure!

Where my clients have been in this position my advice has always been - get a substitute in for at least a week at the earliest opportunity! And actually using it proves the client's acceptance of the principle, even if you haven't seen the top contract. As Dragonfly shows, an untested substitution clause is now pretty worthless.

Perhaps it's time for PCG to take a case or two to Employment Tribunals?

It's unfortunate that being caught under IR35 has no consequences to anyone except the end worker who ends up being responsible for the extra tax - at a higher rate than a "real employee" due to both EE's and ER's NI.

Perhaps someone should join up the dots and argue that a worker having a "pointer to employment" to an end-client should mean that it is the end-client that is therefore liable for the Employer's NI.

If there was some corresponding obligation placed on the Agency (or the Client) by dint of IR35 status, that would help ensure that all parties were acting as intended.

However, this being purely tax law, that is highly unlikely ....

"It may become clear that the end-client actually does require personal service and does retain the right to allocate various tasks and possibly exert other control......".

So why didn't the end user operate PAYE if there was a master servant relationship? Why didn't HMRC challenge the big player "end user"; or even the Agency as opposed to pursuing the smaller fry contractor....
Maybe it would have led to different evidence being provided with the manager better prepared for the hearing
regards
bill@wamstaxltd.com