Inside the Revenue's Employment Status Manual

The Inland Revenue recently published the bulk of its internal manuals on its website.

Kevin Miller, Finance Director of PCG, looks more closely at this information

Introduction

The Revenue's manuals have been available for some time to those who have subscribed to expensive commercial tax manuals but this step means that access is no longer restricted to those who can afford such products.

A fuller discussion of the contents is available to PCG members at:

This thread on the members web site

There is a wealth of material available. However, of most interest to contractors will be the Employment Status Manual (ESM).

Employment Status Manual

This covers all aspects of employment status taxation including the basic status criteria (ESM 1000), Agency workers (ESM 2000) and Service companies and other intermediaries (ESM 3000). It is not possible in the space available to summarise all of its contents. However, some interesting and sometimes contentious points emerge.

Employee rights

There is little in the discussion of employment rights that is new. However, there are several comments which give credence to the growing concerns that, if contractors are engaged under contracts and terms that would fail the self employed status tests applied under the intermediaries legislation, then their status as "disguised employees" of their clients suggests that they have an increased chance of claiming employee rights and benefits from their clients. This should reinforce the message to clients and agencies that the best way to protect clients from possible employer's liabilities when using contractors is to ensure that the relationship meets the self employment criteria.

For example section ESM 1045, which says:

"Both parties may genuinely believe a worker is self-employed. But, if the worker is in fact an employee, entitlement to the rights of an employee will follow. Entitlement to SSP etc does not determine employment status. It is the other way round."

Status tests

Section ESM 1000 of the manuals contains detailed discussion of the various status criteria that have been used by the Courts over the years to decide whether a worker was employed or self employed. These include amongst others:

· In business on own account (ESM 1011)

· Control (ESM 1013 – 1029)

· Financial risk (ESM 1031)

· Opportunity to profit (ESM 1035)

· Basis of payment (ESM 1041)

· Personal service (substitution) (ESM 1051 – 1059)

· Provision of equipment (ESM 1061/2)

· Mutuality of obligation (ESM 1071), and

· Personal factors (ESM 1091-1094)

There are few surprises and much of the material has been available for some time. However, there are several sections which cover the issue of personal service and substitution (ESM1051 to 1059) and the point is made that:

"the Commissioners and Courts will accept a written contractual clause unless they have evidence that it does not represent the true agreement between the parties. This means that if we are to dispute such a clause the onus is on us to demonstrate that it is a sham (or has been varied by an agreement subsequent to the contract being signed)"

Elsewhere the manual clarifies what the Revenue regard as being reasonable rights of veto for a client over a possible substitution.

It says:

"A reasonable right to reject a substitute would include

· refusal because of the substitute's inability to do the work effectively or within a reasonable time span (especially where payment is by the hour)

· the substitute being a known trouble maker

· other workers refusing to work with the individual"

Intermediaries

The detailed application of the Intermediaries legislation is covered in ESM 3000. This deals with matters such as

· When the legislation applies (ESM 3030 – 3036)

· The conditions required for liability under the regulations for companies, partnerships and individuals (ESM 3100 – 3120)

· The liability to NICs for workers working overseas (ESM 3130 – 3133)

· The calculation of the deemed salary (ESM 3140 – 3204)

· The application of the existing Schedule E and NIC rules (ESM 3210 – 3232)

· Selected issues such as double taxation and multiple intermediaries (ESM 3250 – 3268), and

· A number of sections dealing with issues relating to giving opinions on contracts (ESM 3280 – 3310)

Opinions on contracts

There is considerable discussion of the procedures and practicalities of workers seeking opinions on contracts. The issue of substitution clauses is also covered again and guidance is given regarding the situation where there is a substitution clause in a contract between the intermediary and an agency. For example in ESM 3295, which discusses access to third party contracts, the following guidance is given to Revenue officers:

"you should ask the worker to provide you with a copy of the contract between the third parties before giving an opinion. The service company may not be a party to the third party contract and may have a copy of that contract, or access to a copy. If so then you should ask for the worker to arrange for a copy of the contract to be sent to you. Alternatively, you may ask for authority to approach the client or agency in order to obtain a copy of the contract.

Where the worker refuses to co-operate by arranging for a copy of the third party contract to be provided you should inform him or her that you will not be able to provide an opinion on the engagement."

This section seems to imply that it is purely a matter for the worker as to whether the Revenue obtains a copy of the third party contract. Where the worker is unable to arrange for the Revenue to receive a copy of the agent/client contract it appears that they are unable to obtain any certainty as to their position.

This seems to be inherently unfair.

Finally in ESM 3299 there is an example of the standard letter the Revenue will use when asked for a written opinion on a contract that they consider falls within the legislation. Contractors who have already been through the process and have complained that the response they received did not seem to have considered all the facts of the contract will not be surprised to see that the standard letter encourages a standard list of failure points. While officers are told that "it is important to adapt it with regard to the particular case that you are dealing with", experiences to date suggest that many are just using the model and making little attempt to tailor it to the actual facts of the contract.

Kevin Miller

Finance director, Professional Contractors Group Limited

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KevinM