Complex IR35 issue

[jamesbrown]

Since 6 April 2013, an office holder of the end client, which includes an interim director, has been legislatively inside IR35, end of story.

That said, I would separate the contractual issue from the IR35 issue. Obviously, it may cost more to pursue the failed payment than the value of the contract.

[Cookielove]

polarbearuk75 sorry to hear his mental health has declined off the back of this hope he gets this resolved...times aren't easy.

[northernladuk]

He was a director - but not on paper - had to go via company lawyer to all corporate decisions back to board.

I thought that might be the case but still arguable he's an office holder. There is some discussion about being in a position that can drive the client is also an issue even if it's not a true office holder. Then there is the temp role issue. I think he'd struggle to prove he was outside but I think that's moot point in this situation.

No, and that was his mistake for not following it thought - the last time he did this was in the good old days, and honestly, it did not occur to him. In his other businesses, everyone is PAYE - no contractors.

Sadly a common newbie mistake. Being a contractor is about running your company and knowing legislation that applies to you. The actual work at the client is easy. Even the perms can do it.

Let's say it's a well-known brand - and yes - they had no idea at all from what I can see.

That's just crazy. We heard nightmare scenarios a year, maybe even two after the legislation hit but this far down the line is mad.

He might have a stick to use by 'suggesting' to the client HMRC and other parties might be interested to hear about their negligent law breaking if they don't pay up. But that said, he might end up being part of the investigation as an outside to inside contractor which he really doesn't want.

100% and I always do mine with QDOS - had he asked me I would have told him but was after the event.

Fair enough...

Sorry, the lawyer was the client's internal lawyer who said this - not ours.

Yeah I knew it wasn't ours. It just sounded very unusual for the company lawyers to be speaking to or dealing with contractors. I'd have expected supplier management or HR to deal with it and consult them in the background unless it had gotten past all that.

Sorry, your correct language in the contract is under the "termination of the services" clause of 3 months.

Doesn't matter. The notice is to terminate the contract. The very contract that (usually) states that the contractor will get paid upon reciept of a signed timesheet, or words to that affect. That means you only get paid for the work you do. If they want to give you three months notice and then not give you any work to do (gardening leave in permie land) then you don't work and you aren't due any pay so notice periods are pointless.
It's the same clause used for time off at xmas. You are not given any work to do on xmas day so you don't get paid it. It's not a holiday for the contractor.

We have not yet responded to the clients lawyers hence why asking the questions. He wanted some advice before instructing his.

Get his own lawyer to respond. I did believe this is nothing more than a breach of contract at first though. The IR35 noise is just.... noise. He had a contract that explicitly states payment upon work done. He did work, he didn't get paid. Now they are using the outstanding money to pay the tax they should have taken off him from day one then it's just got a whole lot more complicated.

friends lawyer / accountant not experts in IR35 they understood the basics but had not seen this happen before, and so their view was a breach of contract and go that direction.

I'd say the same for starters but... i don't know what they are supposed to pay if they've been breaking the law with no SDS in place. I'd guess try get the day rate paid in to the company and shut it down quick but it does leave the client liable if the director doesn't pay the proper (inside) taxes.

However, the client's lawyer wrote an email saying the supplier is now inside and any outstanding monies will be paid to HMRC to cover Tax and NI, so no breach has occurred, etc as no money is owed. if we had a problem with it take it up with HMRC.

Kind of makes sense if the shortfall in taxes is more than the money owed but he deserves a full breakdown of that statement. If that's the case they are responsible for his taxes so he has a right to know how much he's paid in the form of payslip or some other financial breakdown. How pension comes in to it I've no idea.
I've a feeling however, that it's illegal for them to withhold pay to do this isn't it? It's like an agency witholding a contractors last pay to cover breach of contract penalties. They should pay the full amount due as per contract and THEN recover the tax. Should the client not pay him and then chase him for the tax money back? Possession is 9/10ths the law though so another moot point.
It's a bit of a nightmare one so maybe breach of contract won't work because they have an obligation to pay the right tax.... so maybe they are right. If so it's hellishly complicated and the only people that win in complex situations are lawyers.

Either way demand a full breakdown so you can account for every penny and then assess your legal situation.

if he accepts it was insideIR35, then he has employment rights, which they have then breached, but then there is no idea how we can sort out the Tax and NI AFTER the event.

I don't think he does in such a matter of fact way. It will have to be argued in front of an ET. First they'll have to argue if it is employment, then argue the money. It's going to be a multiple case job.

There has been no mention of going via an umbrella from clients; I honestly don't think they know that is the normal approach and not that they handle these themselves.

not surprised at that. Such a mess.

I can't help thinking that 4 months pay (at inside rates, taxed etc) is about all he can possibly hope for (yet still unlikely) and that isn't going to pay for much lawyer time. My guess is there is nothing more to do on this one unforunately.

[polarbearuk75]

One question I had - as never been 100% clear.

If a company wants to hire someone inside IR35, does it have to be via an umbrella company?

Unless they hire the person as a standard employee (PAYE, zero-hours contract, fixed-term contract, etc.), in which case it would have nothing to do with IR35 as they'd be an employee.

The fact that they issued a services agreement at the start is a red flag, as this is no longer allowed, especially, as technically, it was a senior c-suite role as previously mentioned.

So how can you do fractional work these days with 3-4 long term clients working a few days a month at each? Feels like this would be super complex and risky to do now. Of course people are doing - but ignoring the risk.

Thanks

[polarbearuk75]

I thought that might be the case but still arguable he's an office holder. There is some discussion about being in a position that can drive the client is also an issue even if it's not a true office holder. Then there is the temp role issue. I think he'd struggle to prove he was outside but I think that's moot point in this situation.

Sadly a common newbie mistake. Being a contractor is about running your company and knowing legislation that applies to you. The actual work at the client is easy. Even the perms can do it.


That's just crazy. We heard nightmare scenarios a year, maybe even two after the legislation hit but this far down the line is mad.

He might have a stick to use by 'suggesting' to the client HMRC and other parties might be interested to hear about their negligent law breaking if they don't pay up. But that said, he might end up being part of the investigation as an outside to inside contractor which he really doesn't want.


Fair enough...


Yeah I knew it wasn't ours. It just sounded very unusual for the company lawyers to be speaking to or dealing with contractors. I'd have expected supplier management or HR to deal with it and consult them in the background unless it had gotten past all that.

Doesn't matter. The notice is to terminate the contract. The very contract that (usually) states that the contractor will get paid upon reciept of a signed timesheet, or words to that affect. That means you only get paid for the work you do. If they want to give you three months notice and then not give you any work to do (gardening leave in permie land) then you don't work and you aren't due any pay so notice periods are pointless.
It's the same clause used for time off at xmas. You are not given any work to do on xmas day so you don't get paid it. It's not a holiday for the contractor.


Get his own lawyer to respond. I did believe this is nothing more than a breach of contract at first though. The IR35 noise is just.... noise. He had a contract that explicitly states payment upon work done. He did work, he didn't get paid. Now they are using the outstanding money to pay the tax they should have taken off him from day one then it's just got a whole lot more complicated.


I'd say the same for starters but... i don't know what they are supposed to pay if they've been breaking the law with no SDS in place. I'd guess try get the day rate paid in to the company and shut it down quick but it does leave the client liable if the director doesn't pay the proper (inside) taxes.


Kind of makes sense if the shortfall in taxes is more than the money owed but he deserves a full breakdown of that statement. If that's the case they are responsible for his taxes so he has a right to know how much he's paid in the form of payslip or some other financial breakdown. How pension comes in to it I've no idea.
I've a feeling however, that it's illegal for them to withhold pay to do this isn't it? It's like an agency witholding a contractors last pay to cover breach of contract penalties. They should pay the full amount due as per contract and THEN recover the tax. Should the client not pay him and then chase him for the tax money back? Possession is 9/10ths the law though so another moot point.
It's a bit of a nightmare one so maybe breach of contract won't work because they have an obligation to pay the right tax.... so maybe they are right. If so it's hellishly complicated and the only people that win in complex situations are lawyers.

Either way demand a full breakdown so you can account for every penny and then assess your legal situation.



I don't think he does in such a matter of fact way. It will have to be argued in front of an ET. First they'll have to argue if it is employment, then argue the money. It's going to be a multiple case job.

not surprised at that. Such a mess.

I can't help thinking that 4 months pay (at inside rates, taxed etc) is about all he can possibly hope for (yet still unlikely) and that isn't going to pay for much lawyer time. My guess is there is nothing more to do on this one unforunately.

Thank you!

[northernladuk]

One question I had - as never been 100% clear.

If a company wants to hire someone inside IR35, does it have to be via an umbrella company?

Unless they hire the person as a standard employee (PAYE, zero-hours contract, fixed-term contract, etc.), in which case it would have nothing to do with IR35 as they'd be an employee.

The fact that they issued a services agreement at the start is a red flag, as this is no longer allowed, especially, as technically, it was a senior c-suite role as previously mentioned.

So how can you do fractional work these days with 3-4 long term clients working a few days a month at each? Feels like this would be super complex and risky to do now. Of course people are doing - but ignoring the risk.

Thanks

No but it's the easiest way. You can still be paid through the ltd, net or gross, or sole trader but that means the client has to rely on you paying the right taxes and they are still on the hook if you don't so next to no companies will do this. Doing it themselves is a ball ache so umbrella is the standard way to go.

Many companys have just banned personal sevice companies so it's umbrella or nothing. That way there is no IR35 issue. There is no determination to make or anything. It's umbrella or nothing. It's illegal to blanket ban everyone and it's complext to do individual determinations to the standard way is no PSC's, go via brolly.

It's just as easy as before. You still charge the client by the day, they just pay the brolly and the brolly pays you. Also each engagement can be different. You could have one engagement that is outside for two days a week via the LTD and another client with no PSC's via brolly for the other two.
That said if you are working in that style its more likely you'll be consulting and can argue it's outside as you aren't doing the same work as a perm. There are still 5 days a week outside gigs out there and the likely hood of ad-hoc consultancy is outside is pretty high.
Make sure you have a contract to deliver a service, not just bum on seat, maybe even a retainer/call off agreement for a pool of 20 days over a period and you call off as you need. Perms don't work like that so hard to argue it's inside. Depends on the circumstances of those gigs but still possible.

[northernladuk]

Thank you!

You are welcome but I often gloss over or get points wrong. Hopefully someone more knowledgeable will come along and point out the bits of my posts to ignore as I am sure there are some.

[hobnob]

Either way demand a full breakdown so you can account for every penny and then assess your legal situation.

I agree - that has to be the next step. The OP's friend can also do some sums in the meantime, to work out what the figures should be for inside or outside.

One other point: while the accounts department were being slow to make payments, was the company still signing timesheets? I.e. does the director have evidence that he actually worked the relevant number of days?

[polarbearuk75]

I agree—that has to be the next step. In the meantime, the OP's friend can also do some sums to work out what the figures should be for inside or outside.

One other point: while the accounts department were being slow to make payments, was the company still signing timesheets? I.e. does the director have evidence that he actually worked the relevant number of days?

There was no requirement to sign timesheets, and no one was asked to do so. He invoiced at the end of the month for the number of days worked—a practice that has not been questioned and what was requested.

There didn't seem to be any processes in place for managing contractors. From the start, it was very much treated like a consultancy agreement, not a "bum on seat" arrangement. That's why this sudden leap to IR35 came as such a shock.

[SussexSeagull]

Must confess that sounded very Inside IR35 to start with.

However, it wasn't. Firstly he should have cut his losses by about month two but that ship has sailed. As others have advised he worked in good faith so I would be tempted to start the dunning process and ignore the IR35 dispute.

Seems odd that the exact amount of money owed equals the tax apparently owed.