How IR35 lets employers avoid employment liabilities

A few weeks ago, just after the Bill Hood/Usetech case result was announced I sent a letter to Accountancy Age commenting on the Revenue's view of what was an 'abuse' and drawing attention to the Government's failure to address employment protection issues with IR35. I was then contacted by Accountancy Age, who said that they were not able to publish the letter but wanted instead to use it as one half of their weekly 'Debate' section, where two experts argue both sides of an issue.

They said that the Revenue had agreed to provide a rejoinder to my comments. I agreed but said that if it was to be part of a debate then I wanted to revise my letter somewhat and expand on the arguments to make them more coherent. This they agreed and a week later I sent them a revised piece. This debate was published in Accountancy Age on 29 April but is, as yet, not up on Accountancy Age's web site.

Unfortunately Accountancy Age have not used my revised piece but have used an edited version of my original letter instead. This has meant that a key part of my argument has been dropped. Namely that rather than providing employment protection (as was stated to be one of the original aims of IR35), IR35 positively encourages employers to use contractors working via limited companies because it enables them to avoid employment liabilities. In addition I drew attention to the recent Dacas employment case that will encourage employers to distance themselves further from contractor workers.

In addition it appears that the Revenue has decided not to enter the debate and the response comes from the director of tax at accountants, Tenon. Readers of the two items will be confused because his response is really on the tax issues of IR35 and not the employment aspects that I was addressing in my piece.

In view of this I thought it might be helpful if I published my actual debate piece here on UKTECH.

"In Accountancy Age's 8 April report, 'Revenue wins battle of lounge', we learned that the Special Commissioner had found freelance oil rig designer, Bill Hood, who contracted via his company Usetech Limited, to be a disguised employee of engineering group ABB Vetco Gray. The report quotes the Revenue as saying "if there is abuse going on then we must clamp down on it".

The Government considers Bill Hood to be a tax abuser when he sells his skills in the open market via his company and pays himself a modest salary, leaving a profit he can distribute or not as he sees fit. That profit is some compensation for the risks he runs and for the employment benefits he foregoes by working through his own small company.

The original IR35 press release also spoke about protecting workers' employment rights. This concern appears to have been quietly dropped. Instead IR35 positively encourages employers to engage workers in ways that remove or reduce the ability of the worker to seek employment rights.

However, employers using long-term agency workers are increasingly at risk of incurring employment liabilities. In a recent Court of Appeal employment case, Brook Street Bureau (UK) Ltd and Patricia Dacas, it was confirmed that a worker, Dacas, was not an employee of the agency. However, two of the three judges stated that, in their opinion, had the appeal been on the basis that Mrs Dacas was an employee of the end client, they would have found in her favour.

By contrast where limited company contractors have claimed employment rights from end clients, their claims have foundered on a lack of a contractual nexus between the worker and the end client. Because the Government refuses to align tax status under IR35 with employment status, employers are being encouraged to use limited company contractors, who they can control like an employee, without incurring the responsibilities that goes with being their employer.

In the Usetech case the Commissioner observed that Bill Hood was managed and controlled by ABB in a manner that was virtually identical to that of an ABB employee but Mr Hood could be laid off at a moments notice. In fact "it was ABB's ability to adopt that course which had led it to engage temporary staff through agencies." This despite the fact that Bill Hood had spent most of a three-year period working at ABB.

The Government is happy to tax Bill Hood as an employee of ABB but sees no reason why ABB should incur any employment liabilities as a result. Clearly for ABB it is cheaper to hire limited company contractors than risk employment liabilities. This is lucky for ABB now that Bill Hood is unable to work due to ill health and has closed his business. But is it fair?"

Kevin Miller, MA FCA