A number of legal developments are combining to make the engagement of self-employed contractors increasingly difficult.
Pimlico Plumbers
The Supreme Court held in June in the Pimlico Plumbers case[1] that a plumber engaged as a “self-employed contractor” was a worker (although not an employee). The case did not make new law but is another decision in a relatively long line of cases involving “gig” workers or business models based on false self-employment. Each case is fact specific, but the majority have come out in favour of individuals being workers rather than self-employed in circumstances where they are controlled by or integrated into the employer’s workforce and cannot be said to be genuinely in business on their own account. The consequences of being a worker are:
- for the individual, that they are entitled to paid holiday and the national minimum wage; and
- for the employer, that employer national insurance contributions may be payable.
The scope for a business to directly engage an individual on a self-employed basis where they are not truly providing services to the business on a client-to-supplier basis is increasingly restricted.
IR35 consultation
The UK government is intending to change the IR35 rules to make private sector organisations responsible for the IR35 tax status of individuals that they engage via intermediaries. This principle has already been applied to public sector organisations and will particularly impact cases where the end-user engages an individual through a personal service company (PSC).
In the consultation paper on “off payroll” working in the private sector that was published in May 2018, the stated preference is to extend to the private sector the same rules that were introduced in the public sector in 2017. The change would shift the responsibility from deciding whether the IR35 rules apply from the intermediary to the end-user.
Recent IR35 cases
Recent cases have emphasised how difficult it can be to apply the existing IR35 rules in practice, particularly the “direction and control” test favoured by HMRC. Take two very recent examples:
Christa Ackroyd was a BBC TV presenter who engaged with the BBC on a self-employed basis via a PSC. However, a tax tribunal found that her arrangement was non-compliant with IR35 because:
- she worked at the BBC on a near full-time basis over several years;
- she was treated as part of the BBC workforce;
- the BBC controlled the services she provided;
- she was not permitted to work for other organisations without BBC consent; and
- she charged a monthly fee.
The result was a bill for Ms Ackroyd of over £400,000 in unpaid taxes and NICs.
In contrast, Mark Daniels worked in the construction industry. He used a PSC to engage with a recruitment agency, which in turn provided his services to the end-user, STL. He charged STL a daily rate and was not entitled to any benefits or notice of termination. The tax tribunal found that STL did not have sufficient control over his activities to amount to an employment relationship between STL and Mr Daniels, nor was he integrated into STL’s workforce. Therefore his arrangement was IR35 compliant.
Worker status – the new default?
The government also announced in May that it supports the recommendation by the Taylor Review of Modern Working Practices that individuals should, by default, be treated as having “worker” status in law, until such time as it is demonstrated that they fall within one of the other possible categories (employee or self-employed). This would obviously not prevent genuine self-employment, but it would effectively shift the burden of proof: instead of an individual having to show that they were not self-employed, the onus would be on the employer/end-user to show that they were.
Conclusion
Even if default worker status does not make it from proposal stage into law, the combination of court and tribunal decisions, the likely changes to IR35, together with HMRC’s determination to reduce avoidance and evasion in this area, combine to make self-employed engagements less attractive for end-user businesses.
For further information please contact Blair Adams.