Insight Local Government Lawyer Insight July 2017 5 “The changes to IR35 generated a lot of interest from locums about our service. What we are hearing is that they are taking an almost 30% fall in pay,” he says. He also gives the example of one consultant who works away from home and whose hotel and travel expenses can no longer be set against tax (the standard practice for contractors which is denied to those on PAYE). “He told me that his profits a week have fallen to £300,” says Yazdi. Layers of complexity Deciding whether someone is an employee or an independent contractor is accepted by HMRC and all tax experts as being a complex issue which cannot be decided in all cases on a tick box basis. In one of the defining cases, Hall v Lorimer, the Court of Appeal upheld the High Court decision of Mummery J who had said: “This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail.” People affected here are those who work for a personal service company or other intermediary and who, absent the intermediary, might be classed as employees. The legislation does not affect self-employed people working without an intermediary company. The specific background behind IR35 is explained by Lee: “HMRC have long been concerned about people working through intermediaries, such as their own limited company, and so paying reduced amounts of tax and National Insurance. IR35, introduced in 2000, was an attempt to counteract that but it has not proved particularly effective, partly because policing it is very resource intensive for HMRC. And, because any tax liability falls upon the intermediary, or the worker, many ‘employers’ have been able to safeguard their own position by insisting that workers operate through an intermediary.” What changed in April was that public sector employers were made liable for the extra tax and NI payable by teachers, doctors, nurses, lawyers and others in the contractor arrangement who went on to be deemed employees in disguise by HMRC. Lee adds: “Many organisations seem likely to take a safety first approach and deduct tax that may not be properly due, so unfairly penalising the worker.” Policy shaping In many councils, personnel in Human Resources and Finance - rather than legal teams - have been shaping policy on IR35. How is that being implemented? Two authorities have given detailed descriptions. A Bristol City Council spokeswoman told us: “We are taking a cautious approach with IR35 after carefully considering HMRC guidance and looking at the nature of the work interims are doing. “Most interims are covered by the new legislation and challenges to this position were only accepted in a very small number of circumstances so far. Our carefully considered opinion is that to do otherwise would create the type of ‘disguised employment’ that the revised legislation is seeking to eliminate.” Regarding the possibility of exceptions, she added: “Individuals deemed affected by the revised IR35 legislation were invited to submit a challenge to this decision. These challenges are assessed in line with information provided by HMRC and our independent tax advisors.” At Medway Council, a spokeswoman said: “All self-employed consultants have been assessed using the criteria set by the HMRC tool to see if they fall in or out of scope of IR35. Those that fall within scope are being treated as employees and being paid via payroll with PAYE and NI contributions taken at source. There are no exceptions.” Asked how Medway would respond to a ‘don’t know’ or ‘undecided’ response from the IR35 calculator, the spokeswoman added: “We have not yet been faced with that scenario, but our default position is that unless otherwise demonstrated self- employed contractors are considered ‘in- scope’.” For its part, HMRC told Local Government Lawyer: “‘The [IR35 calculator] Employment Status Service has been extensively tested with the largest public bodies and stakeholders affected by the changes. While we will not oblige customers to use the service, HMRC will stand by its results where correct information has been inputted in line with the guidance…. If there is a disagreement on the facts, the contractor should first try to resolve it with the engager. If they cannot agree, the contractor has the option of making a claim for overpaid tax through their Self Assessment tax return. If HMRC disagrees the claim, the parties can test the matter before the tax Tribunal.” Market turbulence So what will happen now? “Like most new changes in law, there can be a time lag before it is properly understood and applied,” says Azhar Ghose, an independent consultant who has been researching, advising and writing on IR35. “For IR35, it requires a distinction to be Fig 1 What changed in April was that public sector employers were made liable for the extra tax and NI payable by teachers, doctors, nurses, lawyers and others in the contractor arrangement who went on to be deemed “employees in disguise” by HMRC.