Accountax Lecture



Thank you all for coming, for those of you that don't know me, I'm Christopher Harris, and this is the Trafalgar IR35 and How to Avoid It Seminar. We are very lucky to have this evening David Smith whose firm is a leading advisor in the UK on employment law status and actually he is fighting cases with the Inland Revenue. He has a highly successful record, he has only lost 1 case in 300 plus, is that right David?


We are going to be talking about 2 things tonight, David will be explaining far more eloquently than me, how contracts work and how they can be structured to actually beat IR35. If that's not possible then I am going to show you how Trafalgar plans to handle the situation after 6th of April when IR35 comes into effect. So, I would like you now to welcome David Smith.

Good evening everybody, can you hear me OK?


One of the messages I am trying to get over to you tonight is that there is something we can do about IR35 and despite all the scare mongering and doom and gloom on the internet etc, conceptually IR35 is not a difficult problem to solve, it is only difficult when you don't understand what IR35 actually says and more importantly what the law itself says.

What I am trying to do tonight is to give you some technical knowledge, hopefully a little bit more than you have at the moment regarding certain aspects of IR35 but more significantly to say, come on guys, there is something that we can do to solve this, it is not that difficult to solve. Before I launch into my presentation can I ask you if you have mobile phones on, can you turn them off?

Perhaps it's worth giving a 2/3 minute history of where we are with IR35, I become increasingly concerned when I read that this all about closing loopholes, that's not really the case, we didn't introduce the legislation allowing people to take dividends, it's been there for donkey's years, it is your right as a shareholder to take dividends and to say that this is all one big con and a loophole is really quite offensive, all you've done is follow the law of the land as it exists. It always strikes me as being amusing really that the Revenue would never have attacked you guys, whilst an awful lot of you 3/4 years ago were working in their own offices. We also know at the moment, times are good. People are earning good money and now they have targeted you.

As you know, IR35 comes around because of the pressure of IR35 from March of last year.
The Revenue over the course of the last year/11months have offered various published guidance notes, frequently asked questions and at one stage as you probably realise, they considered bringing in a new test to determine whether you would be self employed or not and it was going to be a variation of something I am going to talk about in a bit of detail tonight, the control test.
What the law says now, in a nutshell, and we should remember that the law is essentially in a draft stage, I don't know whether any of you have seen the draft Finance Bill that was on the internet yesterday, 30-40 pages, quite a lot of it.
What the law basically says is this, if in truth and in law you are really an employee merely inserting a limited company between yourself and the next person up the chain, often an agency, will not stop you suffering the consequences of PAYE. Now everyone talks about IR35 in the context of limited companies and in particular the IT industry.
But let's be clear on this, IR35 affects any personal service business and it affects partnerships as well as limited companies and the latest Revenue thinking is, and it's a bit hard to get your head around this, it also affects sole traders. They are now going to run the argument, which I appreciate you guys will not be, you may be acting as a personal service business, supplying yourself. It is getting very, very complicated.
But, in essence, what they are saying is that if you are really an employee, merely inserting a limited company or a partnership will not stop you being treated, not as an employee of the agency but effectively suffering the tax and national insurance effects as an employee.
In other words, suffering tax on a deemed salary. If you are to fall foul of IR35, ie you are caught, there are some hideous complications which I am not going to go into tonight. Our philosophy is, let's view this as a club that we don't join, then we don't have to worry about the complications and the 5% expense rule and everything else. So our brief as accountants is essentially either preserving self employment or creating self employment where it did not previously exist. I've got to say a quite word about the Inland Revenue Guidance. Can I have a quick show of hands, who has seen things like the booklet IR56? And there are various other ones.

I won't beat around the bush, the guidance in a lot of the Revenue booklets is out of date, its very simplistically written and in certain circumstances it is actually fundamentally wrong. Now please, don't make your decision or your approach to IR35 based on the Revenue's documents, some of them are simply wrong.
{The Inland Revenue have now created the updated pages}
Someone did a very interesting experiment, they looked at the number of cases which have gone through the Courts where the Courts have determined that the worker was self employed. Now I'll talk about these shortly. They then went back to the IR56 booklet and looked at whether they would be self employed if they'd looked at the Revenue's criteria and, guess what, they would all have failed. But the Courts are coming down time and time and time again in favour of self employment.
The Revenue won't tell you this, for obvious reasons, but I'll tell you it. The last time the Revenue took a case to Court where they were trying to establish PAYE Schedule E and actually won was 1987. Right? They haven't won a case in the last 13 years.
The Contributions Agency (or the Contradictions Agency as we commonly call them), they haven't won a case since 1983. Case law time and time and time again comes down in favour of self employment, particularly where the worker himself wants to be in self employment. You have to look very hard at the case law authorities to find any situation where PAYE has been found where the worker himself wanted to retain self employment. So what I am really saying to you at this stage is don't think we are facing some incredible legal mountain, the law is on our side and bearing in mind the Revenue haven't introduced a new test, they have simply said we will go back to the old case law to find out whether you are an employee, we really should have a bit of confidence. The confidence comes from knowing what the law actually says, not from reading the rubbish that is on the internet sites that we've seen and the Revenue's guidance. Even today, when I pulled off the Revenue's latest explanation of the draft Finance Bill, they have got something very fundamentally, misleadingly wrong. Now I don't know whether they are doing this on purpose or whether it is just incompetence, but either way, they are getting it wrong time and again.

So, what does actually decide if you are self employed? Now, I've mentioned a few times already cases going through the Courts. The simple reason for this is that there is no definition of self employment. You can't look up in an Act of Parliament, it doesn't say you are self employed if and give you a list of conditions. It doesn't exist. So what has happened over the years, and I 'm going back to the 1870's, 1880's, cases have gone through the Courts, some of them have been concerned with tax, some have been concerned with National Insurance, some have been accident cases, unfair dismissal cases, all kinds of situations, where the Courts have had to say, is this person self employed or is he employed?
In the absence of a legal definition, the Judges have to decide. Now, forgive me for going on about this, but this is really quite crucial, this is what we call precedent. The Courts lay down legal precedents which will apply through the Doctrine of Precedent and certainly the law has developed over the years and I will give you a few examples shortly.
We have to look at the words the Judges have said to see what the law says, not the Revenue booklets. Now what you should do tonight is you should challenge me. If I say to you that the absence of holiday pay and sick pay is an indication of self employment, my opinion counts for nothing, your opinion counts for nothing, the Inspector's opinion counts for nothing, what matters is why do I say that? What is my legal authority for saying that? So, if I come out with a statement tonight and you think "Where does he get that from? That sounds helpful"
I should be able to say, you get this from such and such a case where the Judge said etc etc. We've got to back up our opinions, as advisors in particular, with what the Judges have said. I actually studied law at university and I remember my very first tutorial, I hadn't prepared it and I was trying to wing it and my tutor said to me
"If you want to know what the law says, read the words that the Judges have used, don't read the little summaries, the little pamphlets, no good."
So, we have to look at case law to understand what the law says and the way we solve IR35 is to make sure we know what the Courts have recognised as genuine self employed terms and conditions. That's a fair step, we have to understand the law. The reason I am explaining this to you is because there is a lot of misunderstanding of what the law says. Once we understand what the law says, it is relatively simple to get that into a contract. You are self employed or employed as determined by your working relationship which will come down to contractual rights and obligations. If we understand what the law says and we get the right clauses in the contract, the problem will be solved. I am not dismissing the fact that contracts need two people, sometimes you are going to have to talk to certain people, to negotiate contracts because there may be certain clauses that you have to consider changing, but this is our approach. We understand the law, we apply the law.
The Revenue sometimes say "Ah, yes, but what about the case of Walls v Sibbet 1986?",
which I know you are all very familiar with. In that case the Judge said that you don't compare the facts of one case to another and he's dead right. We are not talking about facts now, we are talking about legal principles and when I see the nonsense on the internet from people who should know better, who say there is no case law concerning IT contractors, so what?
The case law lays down principles. When we've defended self employed status at the Tribunals and the contributions agency appeal, we will often quote cases that have got nothing to do, in the factual sense, with the occupation of the person that we are defending, it doesn't matter. We are looking for the legal principles.

It is very annoying that to this day, and I mean to this day, the Revenue still say that the first item on your checklist to determine whether you are employed or self employed is what? Does anyone know? Control.
Forty years ago they were right, but during the 50's and 60's the Courts have been saying that control is not the simple test to determine whether you are employed or not, because you get many genuinely employed people, the captain of a ship on the high seas, a surgeon carrying out complication brain operations, they are employees but no-one is controlling them. As long ago as the 50's and 60's the Courts were really trying to move away from the simple control test. That isn't the test anymore.
Unfortunately because the Revenue like to trip you up by saying "can they tell you what to do?",
you say "yes", they say "in that case you're controlled".
If we had this argument 30 or 40 years ago they would be right but it is very much out of date. Let me give you an example of how the control test, which is still taken into account, you still have to take it into account but it's not crucial, how it's implemented.
There was a chef, now don't fall asleep we are looking for legal principles here, he was a very talented chef and he worked in a restaurant in 1983 and the contributions agency came along an said,
"We think you are controlled, we think you are actually caught by the agency regulations and you are an employee."
He said "I'm not controlled at all, I'm a highly skilled chef."
They said "As we understand it, on a Monday night in the restaurant, it's French night."
He said "That's right".
They said "And you've got to cook French food, it's a French themed evening."
He said "That's right."
They said, "Well surely that means you are controlled, in fact it's worse than that, we even can tell you, the restaurant what to cook as a starter, they can insist on what you cook for the main course and they can insist on what you cook for the pud, They are not telling you broadly what to cook, they are telling you precisely what to cook. Tuesday night is Mexican night, you have to cook this, this and this. Wednesday night is Chinese night, Thursday night Italian night, Friday night is Indian night".
They could tell him precisely what to cook.
The contributions agency said if that is not control we don't know what you are talking about.
Went to the High Court.
High Court said, "This guy is not controlled, you can tell him all day long what to do, but you can't tell him how to do it."
1985 DSS case, Staples v Secretary of State for Social Services

Now, you guys, weren't not talking about the construction industry, we are talking about highly skilled people here, not lads digging holes in the road for a living, you a specialists in what you do, that's why you are pulled in on contract. A contractor in your position will be given a job to be done, but how many people are actually standing over your shoulder precisely telling you how to do it? Now it is interesting, because a few years earlier there was a case called the Moren case, 1965.
This is in some ways the nearest case you are going to get to your type of situation. Moren was a qualified engineer. In that particular case, and if you can get your head round this it is really quite helpful, if you are a specialist or if you are an expert, there is no scope to tell you how to do your work. It's just not possible.
That's because you are the expert. Now the Courts are saying if you are an expert, almost by definition, there is no real scope to tell you how to do your work.
A few years later, the Staples case (Staples v Secretary of State 1983), the Staples case is saying, unless you can tell somebody how to do their work, they are not controlled. You put those two halves of the equation together and what we are really saying is, specialists cannot be controlled.
Now if the Revenue want to have the argument on a control factor, we will have it, because they are going to loose.
The truth is control is not as significant as it used to be. Swan H?? was a case that went to the High Court in 1984, Justice McCulloch said,
and I quote, "even if you are subject to a very considerable degree of control,"
- and he is accepting that you are subject to a considerable degree of control -
"you can still operate as an independent, self employed contractor."
Now tell me if I'm right or wrong, do the Revenue quote this in their leaflets? I don't remember seeing that one.

Remember, IR35 is about money. They have brought this in to get money. It's not about controls and fairness and Red Dawn and all the rest of it. They are not going to come with this with a neutral, objective stance.
Let me give you another quote, "It is perfectly possible to be self employed despite the fact that you provide no equipment whatsoever and take no risk of loss".
That would be a nice little quote wouldn't it if you had to have an argument with the Revenue? So, I said to you earlier on, challenge me. What do you want to know now? Which case? It's even better than telling you which case it comes from, it comes from Brabin v Barnet 1996, but in fact the words weren't the Judges' words, I've just quoted the Revenue's own QC.
But they don't tell you that in the leaflets do they? Now that is an interesting case, let me tell you, when the Inland Revenue themselves tried to argue that the worker was self employed. Right? The guy was a video technician, he declared his income, he sent in his accounts, everything was normal year on year, until the Revenue found that he had not declared certain income, so they raised an estimated further assessment. You may have come across these in previous years.
When you think an assessment is wrong you appeal against it and normally you appeal and you say, "It's estimated, it's excessive." He didn't. He appealed against it and he said, "Actually, I am not self employed at all, I'm an employee and yeah, I've had this extra money but I've had it when the National Insurance was stopped, so if you want the tax and the National Insurance, Mr Taxman, you'll have to go to the client."
Which happened to be his dad. Bit of a family feud. The Revenue, being neutral and objective, realised that the father's business was rapidly going down the toilet and they thought to themselves, being neutral, factfinding and objective
"Where are our best chances of getting the money? Well, if we can say that the fellow is self employed, we can get the tax and the National Insurance off him."
So, they said, "You're self employed".
He said, "No I'm not, I'm an employee".
They said, "Fine, we will take you to the tax commissioners which is the tax tribunal and if necessary we will take it beyond, because you are self employed."
Now this is 1996 which in legal terms is quite recent. So, might it not be helpful to us to know what arguments the Revenue were using only 3 short years ago to establish self employment? Maybe, we can use these arguments against them?

The Revenue said there are 3 reasons why you are self employed:

  • The first is, when you originally set out in your relationship with the client, it was your intention to have a self employed relationship and the Revenue said, what the parties intend is an extremely important factor to be taken into account.
  • Secondly, you have an element of flexibility in the hours that you work, you don't always have to be 9-5, there is a flexibility in your hours and that is a very strong indication of self employment.
  • But the third one is the jaw dropper. The Inland Revenue said that there was a further very compelling reason why we should treat you as self employed and that is because in previous years the Inland Revenue have accepted you as being self employed.

  • Who won? Well, I'm thrilled to tell you that the Inland Revenue won and Mr Justice H?? in the High Court virtually repeated the Revenue's argument word for word,
    flexibility of hours,
    intention and the "very potent factor"
    (the Judges words, not my words)
    that the Revenue had accepted him as self employed in the past.

    The Inland Revenue have now published something called their internal manual. These are not little booklets, these are thousands of pages, I'm not exaggerating, these are internal manuals available on CD or at your local tax office if you want to go and look at them. We've got them at the office.
    If you tap in Brabham v Barnet, which is the case I've just quoted, guess what? It's not there. The case is now 4 years old and it is not there. The difficulty is, of course, if you are one of the foot soldiers in the Inland Revenue trying to argue the law generally, you are already handcuffed because the up to date law isn't in your own manuals. I've spoken in the law 2/3 weeks to two very senior tax inspectors, one in the North East, one in the South West who are going to be very influential and very senior when the IR35 compliance kicks in, and they have said that they already know that they are getting contradictory advice from Head Office which flies in the face of the established case law.

    It was that same case, where the Revenue's QC said it is perfectly possible to be self employed when you have no equipment and you have no risk of loss, because he was trying to argue for self employment. In cup ties the Revenue will argue accordingly, this is about money, not fairness or objectivity.

    Probably one of the most significant factors in establishing self employment, and listen to my words carefully, is the right to send a substitute to do the work on your behalf, or the right to assign the work to a third party. This goes back to what is called the Ready Mix Concrete Case in 1969, which I'll skip over, it came up again in the House of Lords in 1978, the Chaplin case, and then came to prominence in 1991 in a case called McMenimin v Diggles.
    The tax payer (this is a tax case) had been an employee under PAYE for 24 years. He goes home on Friday night and he comes back on Monday morning with a contract and decides that he is self employed. But he is essentially doing the same work for the same people on the same premises, everything else,
    and the Revenue said "You can't just be an employee for 24 years and then come back self employed"
    and he said, "Ah, but I've got this lovely little self employed contract."
    They said, "We don't accept this, we are going to take this to the Tribunal and the High Court".
    And it went to the High Court.
    In his little self employed contract, he had a clause which said "I may send a substitute to do the work so long as the substitute has at least 15 years experience of doing this type of work."
    And the Revenue said "OK, out of interest, who would you have sent? Who has got 15 years experience of doing the work that you do?"
    And rather sheepishly, the taxpayer said, "Well, I don't know anyone who's got 15 years experience of doing my kind of work."
    So the Revenue threw their hands in the air and said, "Well the whole thing is a sham, it's a nonsense."
    And the Judge said, "No, it's not. The important think about substitution is the right to send a substitute. You may struggle like hell to find one, you may never send one in practice, but you have got the right to send a substitute and that one factor virtually concludes self employment."
    Needless to say, the Revenue didn't take it any further, the High Court was bad enough, it didn't take it to the Court of Appeal.

    But I must take you further on substitutions, because there was a case last year called Express Publications v Tanton. Mr Tanton was a delivery driver for Express FO Newspapers and he was made redundant. A little while later they re-engaged him on a self employed basis. He wasn't really sure, Mr Tanton, whether he really was self employed or not. So, he decided to take some advice on the matter from a very neutral, fact finding, independent third party - the Inland Revenue - and they said, and I quote,
    "they would countenance no other view whatsoever, he was an employee."
    He goes back to Express FO and says "I'm an employee"
    and they said "No, you're self employed."
    They have an argument and it goes to the Court of Appeal.
    The Court of Appeal is serious, heavy stuff.
    1999, very recent case. A cracking authority.
    Remember, the Revenue would countenance no other view whatsoever, this guy, black and white, he was an employee.
    Lord Justice Peter Dickson, Court of Appeal, in a very nice little judgement, only about 10 pages long,
    said "If you've got the right to substitute the work, then as a matter of law, you are not an employee."
    We don't have to say control, risk and intention and holiday pay and sick pay, it's a non-starter if you have got the right to send a substitute. It is a matter of law, you are self employed.
    As a matter of law. Beyond negotiation.
    Now, the Revenue hate this case, they clearly said he was an employee and they were wrong.
    He was self employed. The reason is, of course, is that he had a clause in his contract to say he could send a substitute.
    The point I want to stress here is that it is the right to send a substitute.
    Whether a substitute is ever sent is not the issue and when the tax man attacks,
    he might say "Is there are clause to send a substitute?"
    and we'll say "Yes, clause 3"
    and he'll say "Yes, but how many times have you sent one?"
    Not relevant.
    The right to send a substitute completes the issue, you will be self employed.

    Now, one of the problem areas that you guys come across, and I've seen stuff on the internet about this, is that one of the Revenues classic hall marks of genuine self employment is that you can provide expensive equipment etc and a lot of you guys do not provide expensive equipment. Let me just tell you the story of Mr Lorrimer, a very famous case in the tax status argument. It concerned a guy, Mr Lorrimer, who was a vision mixer. A vision mixer edits different camera angles to come up with the pictures you see on the screen, and he didn't provide any equipment, nothing. There was no equipment, no materials, nothing. The Revenue challenged him and took him the Commissioners and the Commissioners said "He's self employed." The Revenue challenged them and took it to the High Court, the High Court said "He's self employed." The Revenue said, "How can this be? Here is a man who supplies no equipment, no materials, no tools of any description, how can he be self employed? We're going to the Court of Appeal." Three Judges in the Court of Appeal, 3-0, self employed. The Revenue said, "How can this be? This man provides no equipment etc etc" and Lord Justice (N??) said, "You're dead right, he doesn't provide any equipment, premises, materials or tools, but he is not there to provide those things, he is there to provide his specialist labour, his specialist skills, so don't ask daft questions about materials, tools and equipment, he is not there to provide them."

    The Courts have said (take my word for this), time and time and time again that provision of labour, even unskilled labour, can be a perfectly legitimate form of self employment if the other terms and conditions amount to self employment.

    Now, one of the problem areas of course is that you guys might be thinking, OK we can put a contract together but the contracts you may have at the moment do not contain the clauses that we are suggesting and that Trafalgar provide to solve this issue and surely if you now sit down and change your contract, the Revenue are going to come down on you like a ton of bricks. Well, let me tell you, and I can quote cases all night long on this, probably the leading case is Massey v Crown 1977 in the Court of Appeal, Lord Denning said "The parties to the contract can sit down and renegotiate that contract whenever they wish." We live in a free country. If you want to change the terms of your agreement, then that's what you can do. The fact that that may create self employment, or make self employment more watertight, or if you get it wrong, makes you an employee, that is just a consequence of changing your terms and conditions. But the idea that you can't change your contract because somehow the Revenue won't like it, please, just don't entertain this. You can change your terms and conditions so long as the other party and yourself can come to an agreement, end of story.

    I could talk about tax cases all night long. Now, you might say, "Yeah, but what about all those cases where the tax payer lost?" We are going to struggle to find them. In the last 15/20 years, cases where the tax payer himself wanted to be self employed, because sometimes people like to be self employed and then change their mind, but where they wanted to be self employed themselves, the Revenue, to my knowledge, have not won a case in the last 20 years.

    Something else I want to pick up quickly before I finish off, hopefully I have given you the message that the law is on our side, people have said, "If the tax man comes along and decides that you are caught by IR35, he's a tax man, the games up". To dispute the tax man is a civil matter. It doesn't matter what the tax man thinks, or what I think, there is an independent Tribunal called the General Commissioners, which is fairly inexpensive to go to, you don't need Barristers or anything like that, and they will actually arbitrate between you and the Revenue. Now, what is the balance of proof if you were to argue the toss with the Revenue - if you want to go to the Tribunal, I've taken many of them - what is the balance of proof? The balance of probabilities, 51%. Now, I'm telling you, I used to be a tax inspector, I'm cured now, you may have convinced the tax inspector 95%, but you have never quite gone that extra inch. It doesn't matter. The Tax Tribunal is 51%. You normally get 3 commissioners hearing a tax appeal. All you have to do is convince 2 out of 3 to the tune of 51%, this is not a heavy burden and when you turn round to the Revenue and say, "Actually, with all respect, you are wrong, because this is what the law actually says, these are the bits we are going to quote" - and believe me, when I've been at the Tax Tribunal and started quoting their own Barristers and saying "It is perfectly possible to be self employed despite the fact that you provide no equipment and at no risk of loss", they're not daft. They are going to back down. The vast majority of the 300 cases that we have won, we have won before it's got anywhere near a Tribunal. It is a mistake to think we are against the finest brains in Somerset House in IR35. We are not. I am not being flippant here, we are dealing with employer compliance officers who are not the rank of an inspector in your local tax offices. We are not dealing with the Inland Revenue, we are dealing with Freddie Smith at Waterloo 2.

    With a bit a confidence and a bit of scare mongering it is not difficult to put the right clauses in place. I fully accept it takes two parties to agree it, but this is a problem that can be solved if only you concentrate on what the law actually says.

    I'm going to wrap up now, you'll hear this on the Radio 4 bulletin tonight, but I've heard that they have given up using rats now for laboratory experiments and are using tax inspectors instead - there are far more tax inspectors than rats and the scientists get less attached to the tax inspectors!

    We have covered a lot of ground tonight. I don't expect you to take all this in, but what I do want you to take in is that this is a problem that with a bit of knowledge and understanding can be solved. Praise to people like Trafalgar who are taking the initiative, and believe me there are plenty of people out there who are shrugging their shoulders and saying there is nothing you can do. They are the people who are going out of business on April 6th.


    Question -
    "From what you were saying, it sounds like it's extremely easy to beat IR35,
    it's virtually impossible for the tax office to prove you are not self employed,
    so why are they introducing the legislation at all?

    David - Because, and I speak with a lot of experience in another industry, the Revenue will rely on the easy deal, I can tell you now that if you took 5 accountants and said who will be caught by IR35, probably half would say yes and advise their clients accordingly.
    All the stuff I've been talking about tonight is not the run of the mill stuff your average accountant would spout off, it's a highly specialist area, sometimes accountants are generalists and take the soft option. If the Revenue wanted to bring in legislation which is absolutely water tight they have the option to do that, they haven't, they have brought in legislation which has said we are not going to create a new test, we are just going to go back to the existing case law. I think the actual wording of the IR35 is very weak, we've got some information which can pull the whole thing to bits before you even look at the case law, but they are relying on people not really understanding it, you can talk about bully boy tactics and all the rest of it, but certainly in the construction industry, so many contractors put their guys on the books without really understanding it and they based their decisions on either poor advice from their accountants or the booklets which are not accurate. I personally feel that the Revenue will not carry out IR35 compliance perhaps to the extent that they have led us to believe they will. It's all about money, it's all about the 80/20 rule, they are going to get 80% yield for 20% of the effort, and they are going for the soft targets. I sincerely believe that if you understand the topic you are not easy guys to pick on. They will pick on the easy people. I think also to say, "If it's so easy to defeat IR35" is simplifying it a little bit. I said it is relatively easy, if you understand the issues and you have the goodwill of two parties who will look at their contractible terms. There will be a lot of people who do not understand the issues and will also get certain agents who say you have a contract, hard luck.

    Although IR35 is of major importance and significance to you, this is just the Revenue's flavour of the month. Next year it will be something else. Last year it was something else. They go round and have their little targets, it just happens this year you guys are in the firing line. Next year it will be something else.

    Question -
    "I'm worried that the European Courts will take a firm line on this?"

    David - Remember, there has been a lot on the internet about both sides of the argument, the reality, as I said earlier on, is that we are not dealing with the European Court, we are dealing with Freddie Smith, the Compliance Officer. I would be absolutely astonished if it went higher. We have certain similarities with the States, Australian, Hong Kong. Certain legal similarities in certain countries, the Europeans have their own way of doing things.

    Question -
    "There has been speculation in the press about the length of a contract?"

    David - Thank you for raising that! The Revenue's guidance which was issued in February, their final, final guidance, came out with some very interesting comments. It said that if you have a contract of more than 28 days, we will attack you because we will consider you are IR35 caught. But it didn't say that and all you people who are nodding haven't read it properly. What they said was existing standard agency contracts, the majority of them fall foul of IR35, because they are very badly worded and I would agreed, that's why I write contracts for people like Trafalgar. The majority of existing standard agency contracts fail IR35. What the Revenue actually said was that if the contract you have is less than 28 days, they will turn a blind eye to it, but most agency contracts fall foul of IR35, because they are very badly worded, and I would agree. If it is longer than 28 days, then they will look at it. But I have to say, this is classic Revenue arrogance to say if its longer than 28 days you're caught. Let's have a bit of fact finding first, let's talk about the balance of probabilities first. As I said, the Revenue lose far more cases than they win. The 28 day rule was actually saying a lot of the existing contracts are very poor but effectively if they are less than 28 days we will turn a blind eye.

    On a more general aspect of the length of the contract, the Inland Revenue have a tax bulletin every quarter, like a quarterly newsletter, and in the tax bulletin of April 1997, they asked a series of questions and answers about self employed status. It was in the context of the construction industry, but that's neither here nor there and one of the questions was, this guy has been working for us almost continuously, year in year out. Does that mean he is an employee? You would expect the Revenue to say of course it does. Except they don't. To give them credit. The reason is this, one of the tests of self employment is what they call the sound management of your business. If you can show that you are soundly managing your business, a small business, that is extremely helpful. The Revenue said, and it is absolutely right, if you have the opportunity of regular, well paid, local work with a client or agency that you get on with and trust, all you are doing is exercising sound management in regularly accepting that work. What are you meant to do? Go and work 100 miles away for someone you don't know for less money? The Revenue have actually said this themselves, accepting continuous work doesn't mean you are an employee at all, just exercising sound management. Not my argument, the Revenue's argument. When we look at whether somebody is self employed or not, we go through approximately 100 factors, when we do a status audit. If someone had been with the same company for 10 years, I would see that as a factor which would go against you, but what I am interested in is the overall thrust of the 100 factors, particularly the substitution rule because that is so important.

    The only thing I must mention, a bit of a mouthful, a concept called Mutuality of Obligations. That is saying is your client or your agency obliged to offer you continued work? Do they have to offer you work. If they do offer you continued work, through the client, are you necessarily obliged to accept it? No. In those circumstances you have a lack of Mutuality of Obligations, the Court has said, Carmichael v National Power, House of Lords, Lord Irvin Nov 1999, unless you have got Mutuality of Obligations, you cannot have employee relations.

    Just to finish quickly on this, back in the late 80's, the Mutuality of Obligations issue was probably the single most important fact. I would suggest that the substitution issue is now the single most important factor but the mutuality factor is very important. If you said to the Revenue that the agency were not obliged to offer you continued work and you were not obliged to accept it, go away see what was said in the House of Lords a couple of months ago, they wouldn't have a leg to stand on.

    Question -
    "How do you go about proving to an agency that you do not fall into IR35?"

    David - Can I just make this clear, if you do fall foul of IR35, there is no obligation on an agency to do anything, There is no risk. What is at risk is what they confusingly call the intermediary, which you may be excused for thinking means the agency, but actually means your limited company.
    At the end of the day, if you have an agency or a client where you work direct for the client, if they say they won't change their standard contract, there is nothing I can do to force them.
    It is a matter of education. They are taking a worried stance, unless you can prove you are outside IR35, you are displaying their ignorance very well, it doesn't make any difference to them. It is an education process.
    We work with a few agencies, if you said a few months ago what are you doing about IR35, a lot would have said not a lot. I'm telling you, the agencies are changing, they are not easy, but you must try and educate them, tell them to talk to these guys. Unfortunately there is so much misunderstanding, keep on beavering away. If they say they won't stand for it, find another agency! Maybe you can't always do it, but you must keep chipping away.

    Question -
    "If you have a contract with the agency, does it make any difference what the agency signs with the client?"

    David - This is a difficult issue, we are going to get bogged down in 3rd year contract law. What I would say is this. You/Agency/End User. As a limited company you have a contract with the agency, not with the End User. You have a contract with the agency. The legislation says you look at the circumstances of the engagement.
    I think it is absolutely indefensible, logically, legally, any other way you want to look at it,
    for the Revenue to say "We are going to ignore the existing contract you have with the agency and instead we are going to try and imagine a non-existent contract with the End User. Our position has always been this, if the Agency has an agreement, a contract with BP or whoever, you are not a party to that contract. Occasionally, you get a tripartite agreement, but rarely. If the Revenue came to me and said what about the contract further up the chain, I would say, "On your bike". That's not relevant.
    What I would say, the Revenue are going to try and muddy the waters where ever they can, it is clearly desirable where ever possible, to make sure that where there are clauses between the agency and the End User, they are not directly contradictory to the clauses between the agency and the individual company.
    I don't think that we should fall into the trap so easily, we need to concentrate on the contract between you and the agency.
    Don't let the Revenue muddy the waters. Sarah Walker, made the point herself, that whatever the arrangement is contractually between the agency and the top of the chain, Fred Bloggs at the bottom isn't a party to that.
    I don't want to dismiss the contract at the top of the chain as being completely irrelevant, I'd prefer it didn't conflict with anything else, but the thing we have to concentrate on is out contract with the next party, the agency.

    Question -
    "What about a contract where you are named?"

    David - IR35 essentially is aimed at provision of people. I'm not going to start quoting cases or we will be here all night, but what we try to do with our contracts is move away from provision of people to the provision of services. It may well be that it amounts to the same thing in practice, but there is a difference in employment law between saying "You will supply Fred Smith for 50 per hour", that's not good, on the other hand if you can say "Fred Smith Programming will undertake the work for 50 an hour, that's OK. It's a difference between undertaking services and providing people. The Revenue are going to have their easiest pickings where it is named persons in contracts. Remember we don't want to get confused about contracts up the chain but it is unhelpful.

    Question -
    "Will taking contracts that fall foul in the past, will the Revenue be able to come back to you?"

    David - Remember what I said at the outset. Whether you fall foul of IR35 is down to your working relationship and the terms and conditions of your contract, it's quite possible that for one 6 months contract you were outside IR35 because the contract was OK, the next 6 months you may have a more difficult agency or client whereby you can't escape IR35.

    Question -
    "You can have them in parallel - one contract which falls foul and one that doesn't?"

    David - Yes. That's why the terms of the contract are so important. I must stress, this isn't a paper exercise, not something you put in a drawer, we would recommend that every six months we come back to you and go through the basic points to make sure that contract is still outside. It is very tempting, if the Revenue can show it is a sham, they will put it to one side.
    If they say you have a contract and you say "Here it is" and they say "And is this contract being implemented?" and you say, "Yes it is, and here is the proof", you are getting yourself into the category of people it is very difficult to attack.

    Question -
    "You say you guarantee the contracts which are going to be reviewed or your contracts. How do you guarantee it?"

    David - it is effectively licensed, basically we don't deal with you guys direct, we deal with accountants, agencies, people like Trafalgar. We have obligations to Trafalgar, whereby if we get it wrong we are in trouble. Whether you are construction worker, we have had to defend the self employed status of Nuns, they occasionally do work in the community for the Church. It was an example of a vocation. It is the same rule that applies, you have to take my word for this, in the last 4 years, we have done 308 cases, we have lost 1. We lost because we had a homemade contract, having said that the Inspector thought we had won it, but we lost one case. What we are talking here is not, Oh, IR35's coming up lets make a few quid, it is based on an awful lot of experience. Every day of the working week myself and my partner, that's all we do. We are pretty confident we know what we are talking about. If you give me a contract that falls foul of IR35 we will tell you. Our advice is good, we cannot vouch for anybody else.

    Question -
    "What do you think of the Professional Contractors Group (on the internet) contract?"

    David - The PCG had a contract drawn up by XX Pearce last year who are very well respected firm of solicitors, a very large firm of solicitors. Everyone criticised it. PCG have retained a different firm of lawyers for the second version. Whether they will admit it to you I don't know, but they asked us to look at their second contract, drawn up by a firm of commercial lawyers, it has some absolutely top class clauses in relation to copyright, confidentiality, everything you would expect from commercial lawyers but it did not solve IR35. We told PCG that. You draw your own conclusions. It was certainly a huge improvement, our opinion was it still wouldn't do the trick. One of the dangers I think is that all kinds of lawyers from a theoretical legal point of view, but this is a problem of dealing with the Inland Revenue, Fred Smith. How you actually phrase clauses, particularly clauses that the Revenue will see as a big red light, drawing on our practical experience with the Revenue. We have offered our services to the PCG. I was due to go to their Birmingham seminar, unfortunately I couldn't attend. All sorts of people are offering all sorts of advice, one thing we do have is practical experience of dealing with the Revenue, there is another firm on the Internet which will remain nameless, offering IR35 contracts and I sent them an email saying "Just tell us how many cases you have handled with the Revenue". When they eventually came back to me they said they had never actually handled any disputes with the Revenue. We need more than theory. We need to know how to handle the Revenue. I haven't time tonight to go through the strategy and tactics of how you win with the Revenue, I am ex Revenue, there is a lot of tactics and games, that knowledge helps us.

    Question -
    "If we manage to get the contract implemented with an agency and we get picked up for it, are you providing free services?"

    David - Nothing is free in this world! No. The majority of our work is fighting live cases, not giving talks and selling contracts, we will be available and obviously we work very closely with certain advisors. What we are saying is we are not here today, gone tomorrow. If you have a dispute a couple of years down the line, we will be very happy to get involved but we are a commercial organisation and we've tried making a living giving free advice, it doesn't work. We are going to be around. This must not slide into pessimism. Somebody said that for every single personal service business to be visited at least once every 5 years they need an extra 2,000 fully trained, full time, dedicated compliance officers for IR35. Not going to happen. Not to say we should rest on our laurels, but I don't think we need to panic.

    Chris - We will tell you how to structure your company so you are not one of the soft targets. They will go after soft targets.

    David - Absolutely. But no-one will give you an indemnity against penalties in 5 years time. The main reason is about half the accountants we work for, as soon as the Revenue say Who? And give in.
    We basically give advice to accountants and agencies like Trafalgar.
    We have to draw a line. We are trying to help, we are looking for the solution. We now know what the draft legislation says, cases have gone through the Court, who know what cases will go through the Courts in the next few years, we must keep a watching brief on this. This is not an exercise in signing a piece of paper and forgetting it, we must keep revisiting it. None of the case law has been tested yet.

    If the law is changed, we have to accept that. In IR35 they are relying on the case law and bringing in some very woolly legislation. When you go back to the case law it goes in our favour. If they bring in an Act of Parliament that is water tight, we are stuffed. We must keep watching.

    They will rely on an awful lot of people not knowing what the real situation is and biting the bullet because they don't know any better. Ignorance is bliss, they will get the majority of their yield where with a bit of thought it could be avoided.

    The National Insurance side of it, in the Welfare Reform Bill last autumn, that introduced in s75 provisions whereby certain National Insurance rules could be introduced. What they did last year when the Bill became an Act was they actually set up the legislation. We now have the actual details of it which is s75 of the Act of last year. From the tax point of view, it is going to be brought in in the Finance Bill 2000 which will not take effect until the summer, but it will be effective from April. This is retrospective taxation. How on earth can you have a fundamentally changed tax system that is brought in 3 months later. What the Revenue would say, in their defence, is since you don't have to decide to pay over any tax until April the following year, you still have 8/9 months to look at the situation.

    Question - couldn't hear it

    David - the substitution clause will deal with it, the case was absolutely black and white. If you have invoices you are running a risk. The Revenue will say that unless you have a fixed price for a job of work you have no financial risk. I think that it is unrealistic. We know you are not guaranteed work, you should have professional indemnity insurance, because you have risk, you have no holiday pay, pension rights, you are not getting it laid on for you. That's risk. If you drop a computer on someone's foot, you have public indemnity risk. It is grossly unfair that you haven't got risk. What they are saying is that you are giving a fixed price. To the nature of some work you can't price it. But substitution fills it, mutuality helps. You will be in the very difficult to attack category, they will pick on the easy people.

    The problem with contracts for IR35 is that clauses should be in there which aren't and some which are in there which must be out. Everything I've been talking about, like mutuality, intention, substitution etc, if you have all those types of clauses you will escape. Not having one of those clauses doesn't mean you will be caught.

    Seminar ended.

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