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Markel Tax

01 Sep 2016

Markel Tax response on the Public Sector IR35 consultation

Following the IR35 proposals David Harmer of Markel Tax submitted the following response to the Government’s  consultation:

Before one can consider the appropriateness or practicalities of a proposal, which in its purest form, is the shifting of compliance burdens, and liabilities, onto Public sector departments and those who source limited company contractors who provide services in the public sector; one must surely codify the principles which underpin any “test” which may seek to impose such a burden and liability.

Within page 22 of the proposal document it states “The government consider the existing employment status test is still appropriate”. It would seem, therefore, any proposals should be focused on the enforcement of current legal principles which establish the existence of contract of service (employment).

As there is no statutory definition, for tax purposes, of what constitutes a contract of service it is left to the judiciary to define the fundamental parameters and qualifying conditions needed in order to establish the existence of a contract of service. A wide body of case law has evolved on this subject and it is widely recognised the correct approach is that laid down by McKenna J in Ready Mixed Concrete.

It is stated in part 6 of the consultation, within the response to the criticisms of HMRC, that HMRC has improved its guidance on Employment status and IR35. In its current form, however, it is noted that the published guidance on Employment Status does not sit well with established case law authority and it would appear that the substantive tests proposed by this consultation have been moulded around HMRC guidance on Employment status and not on the Decisions handed down by the courts. For our Government to found its consultation on the “guidance” or “interpretation” of a Government department which is charged with the administration of regulatory legislation, creates an unsettling distortion of the separation of Legislature and Judiciary.

The omission of Mutuality of Obligations as a founding principle of Employment Status is the most glaring example of the flaws in this approach. HMRC’s guidance equates this principle to nothing more than contract law concepts of “offer”, “acceptance” and “remuneration”. Such an opinion does not follow case law and sits in direct contradiction to the House of Lords judgment in Carmichael.

Within diagram 4, on page 26, it appears that where a limited company contractor does not provide Personal Service and is not subject to Control over how they provide their services they then become eligible for consideration under the new “digital tool” to establish whether there is any liability to tax and NI.

Case law authority, starting with Ready Mixed Concrete, provides Personal Service and Control as fundamental to the issue of Employment Status, they are not simply factors to be considered among other “in business” factors, each of which are carrying equal weight.

In respect of Personal Service Peter Gibson LJ perhaps confirmed this with the most clarity when delivering his decision before the Court of Appeal in Express and Echo Publications v Tanton where he stated “where, as here, a person who works for another is not required to perform his services personally, then as a matter of law the relationship between the worker and the person for whom he works is not that of employee and employer”.

In respect of Control, McKenna J in Ready Mixed Concrete confirmed ”An obligation to do work subject to the other party’s control is a necessary…..condition of a contract of service” . A view which was reaffirmed by the Court of Appeal in Montgomery v Johnson Underwood which held Control and Mutuality of Obligations are fundamental to the existence of a contract of service.

Employment Status case law has continually shown that Personal Service, Control and Mutuality of Obligations are pre-requisites of a contract of service. The absence of any one concludes, in the view of the Courts, a contract of service cannot exist; and no further tests need be applied. These are the Employment Status tests enforced by the Courts.

If the statement on page 22 is correct ”The government consider the existing employment status test is still appropriate” then the proposals should follow the existing Employment Status test established in law. To omit Mutuality of Obligation and reduce Personal Service and Control to matters of insignificance which hold no more weight than any other factors, does not follow established law but imposes a new Employment Status test. Either the proposals are flawed or the statement referenced above is false.

We provide no comment on the practical impact of the proposals or the complexities of enforcing compliance on public bodies (and those who source contractors in that market place) as it is not possible to contemplate such factors until the founding principles upon which they may sit and be judged are clarified, in sufficient detail, so as to allow these questions to be answered.

It would appear the proposals contained in the consultation are nothing more than a thinly veiled exercise to resurrect the wholly inadequate “Business Entity Test” in another format, and grant the interpretations and guidance of an administrative department of Her Majesty’s Government the force of law. The latter is an unconscionable ignorance of the rule of law and entrenched constitutional principles of the United Kingdom.
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