IR35 Contractors are no more than a temporary employee? This is history little known.

16/3 16:00

Back in the day “temps” would get work through agencies. Specifically temporary secretaries would be supplied by temp agencies. No one ever doubted these ladies (predominantly, back then) would be paid via p.a.y.e.

Somewhere back there in time, say the 70s, maybe 80s, there rose the “body shops”. This deprecatory term was used to describe the provision of staff to meet work demands of information technology in companies. To give context the IBM PC arrived only in 1980 I think it was. I guess it was probably sudden, the demand for programming people. However, these were not permanent positions and had finite terms based on the systems being created.

Another expression was “bums on seats”.

“Seats” are a term used by Microsoft (and others now) to price the sale of licences for software. These required people to sit on those seats, so to speak. It was probably completely natural to be operating pretty much just like the temp agencies.

However. But. And. Here is the rub. The perceived skill levels and the amounts of money (pay) were vastly different as between the temp sec and the temp programmer. I can’t recall the rates of pay but say the sec was on £3 an hour, £24 a day and the Cobol programmer was on £85 an hour or £600 a day.

Temp secs were called in to replace existing permanent staff

not present for some reason, whether illness or holiday or whatever. The Point is the temp was standing in the shoes, or indeed sitting on the seat of a permanent member of staff, replicating exactly what that staff member would do day in day out. At least that was the hope, experience varied.

Temp programmers (a loose term for computer specialists) were not called in to replace similarly skilled permanent members of staff. They were quite literally surplus to requirements except to achieve some set objective. Indeed, despite set assignment end dates, necessarily arbitrary as I have described above, engagers would send these “temps” off site when the work was done regardless of the official contract end date.

Arguing with a large corporate was not the done thing, not least because the parties wanted repeat business, both the worker and the agency. The worker from the agency (and the client) and the agency from the client.

In those days the agencies paid the workers regardless of themselves having been paid. “Invoice discounting” (borrowing based on sales invoices) was common if not a necessity. Nowadays, margins have been cut and extensive delays in payment as compared to the old days is now normal and the younger ones don’t even know it was not always this way. That rapid payment did indeed look like employees being paid.

Our temp secs provided highly valued services and were happy enough with their lot,

being able to dip in and out of the employment market. There was little or no need for ongoing training in typing, shorthand and audio typing. Some were in it for the “pin money” others single parents making ends meet and so on.

Our temp workers (merely lacking a better differentiating description) were high earners having to keep up with quickly changing and developing skills that required constant work to stay up to date and to be able to offer in demand skills. Indeed, failure to do so would see a person’s prospects of finding assignments slowly fall away. Back then the way in to this world was via first line support on help desks, odd as that has always seemed. That type of job of course probably was employment whether temporary or permanent, but aside from that it had all the hallmarks of self-employment, not employment.

It should here be noted that we have had decades of “status” experience with decades of case law.

That means the tax industry (so both HMRC and the accounting professions) had vast experience at determining who was in reality an employee and who was in reality self-employed. Whether via a legal entity (i.e., usually a limited company) or simply as themselves (which means actually “self-employed”). Both these in today’s parlance can be seen as “being in business on their own account”. Each case was considered on its merits with recourse to appeals where agreement could not be reached. These were the times of the “Friday Monday” problem, when an employee resigned on Friday and came back as a contract worker on Monday. However, the agency worker problem is in a different section of the tax paying community.

Now then, HMRC (The Inland Revenue) came along and asserted that both types of “temp” are for tax purposes identical and both had to be paid via paye.

This is the source of all the IR35/OPW problems.

HMRC totally believe contractors are like temp secretaries for tax purposes.

Section 203 of whichever act it was, was the first incarnation.

I need to find this again. It said anyone obtaining work from and working via and agency must by law have p.a.y.e. operated by the agent. In short, they sought to shortcut the status determination processes and wholesale draft the entire “professional knowledge worker” into employment, whether they liked it or not. Without any consideration of status. It was a simple blanket and completely arbitrary decision. With hindsight, it looks naive, and I offer the idea that the current legislation evidences this, by emphasising the manner of control.

That is where all the trouble started.

All those who had been operating as self-employed were indirectly forced to use limited companies so as not to be forced on to p.a.y.e. Doing this did not dodge the risk of a status enquiry (which they then tried to encapsulate in law as IR35, again trying to shortcut the process), but it did avoid the immediate p.a.y.e. This then lead to an actual loss of tax revenue because money could be taken by means of low salary and high dividends upon which there was no national insurance (NICs). Whereas the self-employed pay both class 2 and class 4 NICs, as well as tax. I am glossing over details to demonstrate the failure of the attempt to wholesale capture vast numbers of very tech-savvy workers who were doing no more than follow the tax rules of the time. No surprise then that such changes to tax law resulted in equal and opposite changes in worker operational methods. No one at HMRC saw this coming? So it would seem.

HMRC has never given up trying to short circuit what was perfectly good law.

The complaint was it was complicated; it still is and will always be complicated and attempting to over simplify a complex matter appears destined to fail. As a result, the legal profession has made a killing with schemes designed to circumnavigate every attempt by HMRC to capture the same target group. This has been going on now for decades, but the history is lost in time. All HMRC ever seems to achieve in its attempts to make life easier for itself, is to lose the support of sections of society, upset vast numbers of people and even cause loss of life which is still going on today. All this to the extent there is an all party parliamentary group involved and the Lords have castigated HMRC’s methods.

One solution

would be to allow these workers to be self-employed again when acquiring work via an agency. Indeed, the relevant law actually does seem to allow for this at Part 2, Chapter 7 Income Tax (Earnings and Pensions) Act 2003, section 44(2)(a)

Seems to me that all that is required, in common with being determined outside IR35 is the will to work together in the ways seen as appropriate to self-employment (being in business on one’s own account).

Of course that willingness also requires a proper understanding of all these matters by all parties involved. Currently the “corporates” in the form of their HR departments are playing “catch up” or even make wholesale decisions where they make a “blanket” decision, which itself is illegal under HMRC guidance. Not that HMRC are doing much enforcement since it suits them to have workers forced into paying more tax.

Of course there are many workers via agencies who should be classified as employees.

Often they are barely even aware they are not an employee. These folk are not the thrust of this piece. However, if they were to exit the self-employed market then matters for those who belong there, might improve significantly.

I have for years being saying “employers” should be responsible for IR35,

just like they were always under the status enquiry “rules” (when IR35 did not exist). I was not ready for their total ignorance of how it all works. That is an unpleasant surprise. Once educated those in authority (usually at Director level) tend to come “onside” pretty quickly as they understand all that is required is the necessary will. This being to negotiate in businesslike ways and to avoid any hint of employment, such as being sent via the HR department. That “will” manifests as directors giving appropriate instructions to their line managers. The problem is the corporate personal seem scared witless of the risks, which seem to have been presented to them by guess who? HMRC. However, directions from board level allow staff feel able to engage instead of to block.

Of course HMRC is made up of 100% employees, who see “contractors” making far more money than they do, without any recognition there is far more to it than that net pay number — not least corporation tax. Shouting “it’s not fair” is best reserved to five year olds, a reference to our current Chancellor of the Exchequer, both within and without HMRC.

My personal opinions are based on watching for 40 years.

Your preferred search engine is your friend.

Happy days.

https://www.gov.uk/guidance/understanding-off-payroll-working-ir35