Future Articles can be found at the Caliber Consulting web site where this blog has now moved

Chancellor Brown swells the Contracting Cake......"contracting" does not actually exist, pretty much like most of the supposed constructs created within the "industry". Industry? What industry? It's not even a variation on a theme, it's simply the large corporations trying to "have their cake and eat it" - a wonderful English expression I usually fail to understand when I hear it. However, in this case it works.....

 

The Full Story:

Nothing changes?

A French phrase, partially assimilated into English. The full phrase in French is "Plus c'est la meme chose, plus ça change" which translates as "The more things change, the more things stay the same"

It's often used in a cynical sense to imply that although the outside surface appearance of things may appear to differ, underneath the system is basically the same.

Amongst many things the French value their individuality, their independence and still their language has this famous saying.

Sounds just like "contracting" to me.

For a start "contracting" does not actually exist, pretty much like most of the supposed constructs created within the "industry". Industry? What industry? It's not even a variation on a theme, it's simply the large corporations trying to "have their cake and eat it" - a wonderful English expression I usually fail to understand when I hear it. However, in this case it works; the "corporates" want:

1. the benefits of having employees (this is the cake)
2. without the associated obligations created under the law. (this is the eating of it)

To achieve this employers (more about that in a moment) write employment contracts and then issue them as contract opportunities, as if this in some way means they are not employment contracts.

Lifting the Corporate Veil

Legislation actually exists to see right through the paperwork and to attach the employer obligations even where it might not immediately be apparent they exist. There is a great deal of this going on, originally and colourfully termed "lifting the corporate veil".

In concept the term originates from two hundred years ago (Saloman v Saloman 1898 - every professional accountant's first company case law - http://en.wikipedia.org/wiki/Piercing_the_corporate_veil).

The point here is that limited liability and separate legal persona (personaility) were created by H M Government (HMG) to encourage business, not least with the colonies. Investors were naturally concerned about risking their shirt (literally in those days) on business ventures.

HMG created the Registered Company (RC) and variants, [of which Limited (Ltd), is just one], to encourage investors to invest money. This meant they still might lose it, but they would not lose more than the sum invested.Thus liability to the amount committed to be invested was born.

Risk Management by Risk Limitation

Business is about profit and profit is about reward for risk. For these reasons anyone doing business with a Registered Company can be taking varying degrees of risk whether they are aware of it or not.

Many, if not most, tend to do such business in blissful ignorance - including it has to be said, HMG of late. This is an irony not lost on HMG and is engendering a stern response. HMG is not meant to be the risk the Ltd is limiting liability against, but rather it is to limit commercial risk generally; not the tax on the rewards for success!

HMG wants its share of the rewards for offering the right to trade with limited liability in the first place.

To do otherwise is perhaps to bite the hand that feeds and in the case of MSC's the "hand that feeds" (HMG) is removing the sustenance ("law"), forthwith.

Misuse of RC's (or PSC's)?

Those who are not averse to risk can continue to ride the tide of profiting from the Government's attempts to stop the "misuse" of the RC - granted HMG caused the move in the first place via "agency law" s134 ICTA '88.

How long the Government will leave those inappropriate profits (i.e. unpaid taxes) untouched remains to be seen. There has been zero mention of amnesty and ignorance has never been allowed as an excuse for not knowing the law. I wonder. They could have six years (or arguably even more) to turn their attention to this area, depending on the size of the hammer they select. Even without that we have had retrospective tax legislation in recent times. Can the culprits really sleep well?

Employee or not to employee..?

It has long been established that an employee costs (same concept as costs of ownership) about two and half times his basic salary to employ - even three times. Let's use three.

So a person providing his time and skills in return for a safe income is happy to earn say £2,000 per month while costing the employer of his services around £75,000 per annum. Sound familiar?

A "contractor" for the same job will be paid about three times the salary cost of the "same" employee.

When contractiung was born it made perfect business sense to pay much the same overall cost for the receipt of the skills in return for not incurring any wider employment obligations yet still facilitating the work.

If the worker stopped working, was ill for a day or whatever, she/he was not paid.

Suddenly the losses (the risk) land in the hands of the worker and not the "employer" (no sick pay to find).

This all has a balance to it, a transfer of risks and rewards from the company to the worker. Workers were/are happy to accept the risks (such as not being paid if off ill) and the "employers" enjoy reduced staffing risks.

Seems fair enough. Notably, all the contract monies paid by the company are tax deductible. Amounts equivalent to employers' nic's are impliedly built in to the sums paid under the contract. So in theory the worker is no better off, but has no employment protection of any kind.

Since all the apparent extra money they receive represents costs of operating themselves, one way or another. Training is a good example, tax deductible when paid by the employer. NOT tax deductible when paid by the employee.

Contractor Employees

Unfortunately the corporations continued to insist on writing contracts that were and still are to practically all intents and purposes, contracts of service/contracts of employment. Even where the evidence is not so obvious as a written contract, the companies continue to treat "contractors" like employees to the extent it is often the case that no one "on site" can tell the difference without looking at the contract and the "pay".

Even more unfortunately, though perhaps understandably, there was a trend to accept the above described shift of risks as being the same as the risks HMG intended to ameliorate by offering limited liability. It has become increasingly apparent this was and remains a mistaken interpretation.

Super Profits and Service Providers

Where there is super profit there will always be those seeking to benefit from it. Not surprisingly the first into the pot of honey were the "service providers", being operators espying that there were thousands of what are really employees, suddenly "out there" pretending to be "self employed" (under whatever guise) and yet not wanting the responsibility for running their business, (or even having a clue how to go about it), and basing much of their "business expertise" on little more than bar room advice often found on the internet or the employers' staff canteens.

"Running their business" conversations exclusively rotate around how much "retention" each person is achieving. This of course means the size, or lack of size, of their tax payments.

Those truly in business on their own account are focused on profit, not tax (without of course being blind to it).

Contractor Tax Planning.... or Tax Avoidance?

Unfortunately (again!) no one seems to have pointed out to the "industry" that while planning for the least amount of tax is acceptable, carrying out business operations with the sole intent of avoiding tax has long been established in case law (involving an international firm of accountants!) as being a matter that will fail when tested in court.

There MUST be a bone fide commercial reason for actions and if tax saving follows then so be it.

Practically every time a "contractor" speaks, he unwittingly breaks this tenet of business and tax. Why does no one tell them? Ah yes, "super profits". Everyone wants a slice and saying the government is right would not be popular. Not at all.

The result has been the creation of what amount to payroll companies (Umbrella Companies) allowing every employee to have their own class of shares upon which to receive dividends.

The only reason they have got away with it has been that so many have been duped by slick web sites, unfounded reassurances and herd mentality ("everyone is doing it").

Add to this the pressure from peers and employers and their agents and it is easy to see why people who have never really been anything but employees in their way of being, do what they are told.

Being in business on your own account is all about doing what you think is right for profit (not tax reduction), not doing what you are told.

Now there are a quarter of a million people who do not know what to do and yet even now may be being led up the same old garden path. Even if they have seen the light (i.e. realised everything may not be quite as it seems) how on Earth do they know who to trust/believe? Come to that who really knows? Especially if a slick web site with comforting guarantees has been found to be the very cause of the problems.

Principles and Service Companies

There are principled advisers, but their advice is less attractive, more considered, is not "simple" and so on - something to which the person in business truly on their own account is accustomed. "Employees" just want it "simple". If you want simple, pay P.A.Y.E. on it all.

It may be that if there are any keys to this state of affairs one of them is the employer status of the employers constantly referenced by HMG in their PBR (Pre Budget Release). If "employers" have to face what the Government declares (and this is after all the Law of our society) is their continuing liability for the employees they have sought to shed, while keeping their benefits, then just maybe the changes that are needed might start at the top, where the whole messy problem started.

Bear in mind that HMG is stating the contractors are in reality really employees, so it follows that there must be employers somewhere. Also recall that HMG has clearly stated that employee rights may exist even where employment does not.

Market Distortion

In addition to this there is competitive distortion within the market of services to these "contractors".

So many contractors have been misled that the ‘principled' service providers, who do not espouse such clear breaches of the spirit of the law, [let alone the letter of it], have in fact often found themselves shunned.

This is simply because the truth is less "simple" and requires responsible business activities, rather than behaving like an employee (for whom everything is done by someone else and who typically does not appreciate the business they are in).

Even the sales aspect is referred to as "job hunting". The wise entrepreneur would not cease his selling operations while working on an assignment/project, but rather would continue to market themselves throughout.

It seems to me that if your name is in the contract and you negotiated it yourself (there are times when individuals are employed and yet named, but they don't do the final negotiating and sign off), there is an uphill struggle to claim it is not an employment contract.

This is the stance of HMG with regard to MSC's. Contractors typically present a completed and agreed contract with their name on it to a service provider who follows the instructions of the contractor and even takes an indemnity from him (which I grant you is not very employee like).

Temping with Attitude and IR35

Before "contracting" there was temping. (No quotes because we all know what temping is). Contracting might be characterised as "temping with attitude". A bit like in sailing, "racing is cruising with attitude". The difference is the industry wide attempt to claim that contracting is not temping when I submit it really is.

Contracting has more of everything temping has;

• Longer contracts.
• More money (much - the only reason the problem exists).
• Bigger projects.
  
  

.....and yet it is all temporary.

Those who are familiar with "status enquiries" (the basis of IR35) know that the legislation already existed, (case law actually), and IR35 was not necessary. Looking back IR35 now looks to me like an attempt to guide the industry back to the acceptable path. Remember that the government sets out what is acceptable.

Safety in PSC's (the Limited Company route)?

The PBR (Pre Budget Release) is very direct in saying generally that lines have been crossed.

What happens when MSC's have been dealt with?

The problem of not having enough resources to compliance check every contract by every contractor is exactly the same problem as dealing with MSC's, except worse, because now instead of 150 MSC's to engage, there are 240,000 individuals who have disappeared into PSCs (or MPSCs).

MSCs are just a temporary (forgive pun) diversion before the business of "tackling contractors" is addressed, in my opinion.

As someone has succinctly said, all HMG is doing is moving the problem from A to B. I think HMG knows that very well, but politically has to have regard for a quarter of a million people and being fair with them when most probably have no idea about any of this - and after reading the reassuring web sites with guarantees, who would not?

It all started with agency laws (recruitment) when HMG sought to stop the Friday/Monday scam.

In this case employee Fred resigned on Friday and cam back to the same job on Monday, but as a self employed person. This still goes on today.

Clearly "status" case law applies.

Then recruitment agents began paying workers as self employed and a law was passed saying that in this case Schedule E (i.e. PAYE) had to be applied.

Then someone created his own Ltd Co. and had that sign the contract and pay him dividends. A case came to court and the Ltd Co "route" was born.

The court's view was basically that the Ltd Co simply took over the obligations from the agency, so nothing really changed. If the individual tried to claim he was self employed the section still applied and PAYE had to be operated.

There was also existing law about not taking any salary, so PAYE was operated and as much as possible paid as dividend.

Then wives came into play, rules about shares being jointly owned and so on and on to reach today's state. The wives routine is addressed by S660, at least that is the idea.

Informed Choices

So over time this tic-tac-toe is going on, rules changes, even concept changes and industry responses gradually developing a framework of never ending details. As long as this continues there will never be clarity, confidence and certainty. Many carry on in ignorance, some carry on despite the risks since they can manage that degree of uncertainty. It comes down to making informed choices. The challenge is on what information.

Seems to me there are three:

1. Pay PAYE on it all and relax, but have less (money) while having a good life.
2. Ride whatever is the latest loop hole or mass movement and see what happens next. (Doing this without realising is perhaps the real issue).
3. Figure out how to operate in business without causing any of the intermediary legislation to engage. The rest of the business world does it.

Taxes and Shark Containment

In my opinion, the law caused the problems in the first place by attempting quick fixes. Now it is reaping the consequences not least because there are individuals who are business like, astute, very intelligent, experienced and know what they are doing, both within the arena of the workers and the service industry.

Einstein said "We can't solve problems by using the same kind of thinking we used when we created them."

Continuing to apply fixes with bits of legislation, like IR35, S660, the present Pre Budget Report warning, will not fix the underlying trouble; all it does is squeeze the water filled balloon into a different shape.

There are not enough government employees, nor I suspect could there ever be, to police every contract.

Expecting the individuals who know very little about it all, to police themselves was never going to work - they do not understand the rules and even if they do, their conclusion is "I comply". What would anyone do with 53% of their income at stake in exchange for reaching a conclusion of two words?

It is worth observing that the original and the IR35 status "rules" were and even now are, enthusiastically argued by seasoned professionals before government tribunals (the commissioners).

Expecting a seasoned computer programmer and his ilk, to do better all on their own, is what the authorities have relied upon. Really it was never going to happen the way the government hoped.

It is not the same as expecting us all to be unpaid tax collectors such as with PAYE and VAT - we are given the choice to ignore it all. So everyone has their heads in the sand - even HMG methinks.

We are seeing two sets of opposing lawyers being allowed to fight it out. It needs the rest of us to drag them apart, put the other sharks behind a net and determine whether the cake should continue to be had and eaten in spite of the mayhem being visited upon all the individuals involved - I seem to recall it is the first duty of government to protect the individual, not large corporations' risk management strategies?

Anthony Mellor FCA

Future Articles can be found at the Caliber Consulting web site where this blog has now moved