‘Audit of working practices’ will minimise employment status risks

Out-Law News | 07 Jan 2021 | 11:56 am |

Neil Black tells HRNews how the risk of status challenges from HMRC and trade unions can be addressed

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  • Transcript

    As everyone is all too well aware, another lockdown has been imposed on the country, but, importantly for businesses to know, there is no sign of a second postponement of the IR35 legislation and the clear message remains 'be prepared for the new regime in April'. Remember, these are the new tax rules for the private sector that will switch responsibility for determining the correct tax status to the hirer – so determining whether the individual contractors they engage fall inside or outside of IR35. This is contentious legislation and is very unpopular with most contractors who want to remain outside of IR35 but fear that hirers will simply choose the easy option and cut them loose, not renewing contracts and resourcing the work in other ways. That is one of the reasons we have seen contractors bodies lobbying hard to have the legislation either thrown out or changed drastically. Interestingly, shortly before Christmas,  written by the CEO of one of those lobby groups, Seb Maleyof Qdos Contractor, who is now resigned to the changes coming in in April. He says those businesses that continue to engage independent contractors will be in a stronger position than those that play it safe. He argues those that stick with it will have access to the best talent because there will be plenty of contractors out there who have been cut adrift. He also makes the case for hirers retaining flexibility and workforce agility by continuing to use contractors. He says the IR35 assessment is not easy but it is worth doing.

    The point we would highlight here is a risk you face if you get that assessment wrong and incorrectly judge the employment status of these individuals. The problem comes on two fronts. The first is pushed by trade unions wanting enhanced rights for their members – so classification of employee status for the purpose of enhanced employment protection and we have seen plenty of litigation around that. The second is a push from HMRC on tax grounds  – so if these people are in fact employees, but for any employment structures disguising that status, then the Revenue wants the PAYE and NICs which is due by virtue of IR35. The latest lockdown has brought this issue to surface again with so many businesses under further pressure to cut costs. So the issue of employment status is one you need to be looking at closely. You might think this is just an issue for sectors immersed in the gig economy, such as the Tech sector, but that is not case – we're seeing it right now in manufacturing for example. Neil Black has a number of clients in that sector. I phoned Neil to ask if his clients are worried about this issue:  

    Neil Black: “So a number of manufacturing clients are worried about this issue and are starting to look at some of their practices. One of the issues that throws up when we take advice calls on this from our clients is that it is very difficult to give a very quick answer and the reason for that is this: the one thing that the courts and HMRC agree upon is that the contract itself isn't determinative. So you may have a contract between the individual and the business which states it is self-employment, it may go to some lengths to describe the nature of that relationship, but when the challenge is brought or when HMRC are looking at this issue what they will actually look at very closely is the day to day reality of that working relationship and what we generally see in practice is that whilst the day to day reality may match the contract on day one, by six months, twelve months, two, three years down the line there has been a significant divergence between the two and the contract doesn't reflect the reality any more and that is where the real legal risk can arise for a lot of clients including those in the manufacturing sector. So what we have been talking to clients about to try and assess and allay those fears is carrying out an audit of those working practices where they exist, and looking at what the day to day reality is as well as what the contractual position states and the thing that a lawyer can bring is not just legal expertise but also the benefit of legal advice privilege so this sort of exercise can produce information that would potentially become discloseable in any litigation and may be thrown up on a data subject access request so having lawyers involved and that legal advice privilege can be quite key to allow the business time to assess the risk and think about how it is going to take action in a safe zone so to speak."

    Just to close with a word on IR35 which is set to come into force in April. The tool provided by the government to help with the employment status determination has been in the news recently. This is the ‘Check Employment Status for Tax’ tool, CEST, which People Management reports, is unable to determine employment status in a fifth of cases according to HMRC’s latest data. The question that raises is whether it is wise to rely on that tool and our view on that is CEST is worth using in some cases, because the Revenue will stand by its results, but it probably isn't enough on its own for the more complicated or marginal cases. We will be coming back to that and explaining what we mean, so watch this space.