Reply to: 2 or 3 contractors working under same firm

[Robwg]

How can it be tax avoidance when I am actually paying someone?

Because the revenue might look at what the person is doing, see that he is doing work that you could perhaps do yourself, see that you were presumably paying less than you would be if caught (if you aren't paying him less, then you might as well get caught by IR35 - no??), and rightfully decide that the only reason you are employing this person is to get you out of paying the required amount of tax.

Or - are you saying that to get out of IR35 - all any of us has to do is employee a temp for week from an agency (for about 3 or 4 hundred quid - which is far less than we are liable for if caught) and get them to do some sort of spurious task like data inputting and not put them anywhere near a client site?

If so - good plan. I like it.

[Robwg]

Accenture work under a different contract terms to you and I. Some clients (like my last) use them precisely because they DO have a pool of people who can replace a leaver. The terms also allow to send back any unsuitable replacement at no cost.

Plus of course - Accenture don't tend to take their work off of jobserve :-)

[Robwg]

The client needn't even know that you've hired a temp to do some basic work that doesn't need a high level of knowledge or understandng of the whole project.

How on earth is this substitution if you don't even tell the client and just have some temp at your home (sorry 'offices') doing....donkey work as you put it? If I was a tax man looking for my yearly bonus I would say you were paying a temp and using him as a form of insurance to get yourself out of IR35. Sounds very suspect to me - more like Tax avoidance if anything.

Still - whatever floats your boat.

[THEPUMA]

I think in practice HMRC would take on an easier target but in theory I believe it could be challenged.

[ASB]

Firstly, the actual use of a substitute is not necessarily "game, set and match".

An interesting argument. My view is that the notional contract is based on the working practices as well as the written contracts. Actual substitution has taken place. There is therefore a right (fettered or otherwise) of substitution. In any event this demonstates that personal service is not required - thus it cannot be an employment relationship.

It would be interesting to see the IR mount a challenge where substitution has occured, it seems to me it would have to get beyond the high court in order to set new precedent if the victim was unwilling to concede.

Obviously your view may prevail rather than mine, but only time will tell.

[THEPUMA]

A couple of points re substitution:-

Firstly, the actual use of a substitute is not necessarily "game, set and match". The unfettered right to use a substitute is game, set and match but theoretically you could have a fettered right to use a substitute, actually use one and still be caught. If this were not the case, it would be dead easy for any contractor to have a fettered right (which many do), have a substitute on site for a day, say, and not be caught by IR35. If you had a good enough relationship with your client, I am sure some would be willing to allow this.

Secondly, someone said that the courts were hazy on the issue of substitution. This is incorrect. The precedent is very clear on the matter. LJ Peter Gibson, in his judgement in Express & Echo Publications v Tanton, said "In these circumstances, it is, in my judgment, established on the authorities that where, as here, a person who works for another is not required to perform his services personally, then as a matter of law the relationship between the worker and the person for whom he works is not that of employee and employer.".

This is not an ambiguous statement. The unfettered right of substitution is absolutely inconsistent with an employment relationship.

[ASB]

"once the dividend is in the a/c he is willing to share with you."

At the best that completely defeats the scheme for a number of reasons which should be fairly self evident. At worst it gets you both locked up.

Of course the scheme would be entirely succesful until challenged.

[PAG]

Following may not be possible practically but could be possible theoratically to be OUTSIDE IR35?

What if a friend becomes a director of the comapany and he employes me as a full time staff at £10K PA.

As a director he (friend) doesn't do any other work.

when the company makes the profit at the end of the year director declares himself dividend.

once the dividend is in the a/c he is willing to share with you.

this way the director never worked as FT employee so no IR35 ??

[tim123]

So what happens when Accenture need to replace a consultant with another of similar ability? As contractors to the end client, do they then have to carry out the work themselves or do they ensure the same person stays? Neither is my answer. Each employee is a substitute automatically, but that doesn't make a difference when someone else is called in to do the same job.

Accenture work under a different contract terms to you and I. Some clients (like my last) use them precisely because they DO have a pool of people who can replace a leaver. The terms also allow to send back any unsuitable replacement at no cost.

One man bands do not. Whatever the sales pitch said, the savvy client knows that a contractor cannot just find a a replacement for himself at the drop of a hat. You might like to sell yourself on the basis that you will find a suitable replacement, but when you actually have to come up with the goods you might not be able to.

It is perfectly possible for a contractor (one man band) to train and replace themselves on the job whilst they go off and do another. The question is not whether it can be done at all, but whether it is really cost effective to do so? Probably not in most cases.

And this is the point. You can try and negotiate this if you like. IMHO A knowledgable client is not going to buy into it.

As consultants we are able to carve up the job into essential high skilling to donkeywork in most cases. It's perfectly possible to farm out the donkeywork to a lower paid freelance temp or paid agency temp you hire and pay yourself to save you time but do it from their own premises. You are still exercising right of substitution as you are being asked to complete the whole piece of work and what it involves for you in terms of time taken to complete it. The client needn't even know that you've hired a temp to do some basic work that doesn't need a high level of knowledge or understandng of the whole project

Of course we CAN work this way. But this is the holy grail of quoting for a fixed price piece of work and supplying a complete solution. I've wanted to work this way for the whole of my 25 year contracting career, and so have most of the contractors I have worked alongside. IR35 has nothing to do with it. I've yet to find a client prepared to let me work this way. And (once again as I've said before on this board) I've only ever know one contractor manage it. You may work in a sector which is more receptive to this method of working. I do not (and I suggest most contractors do not).

Tim

[Robwg]

So what happens when Accenture need to replace a consultant with another of similar ability? As contractors to the end client, do they then have to carry out the work themselves or do they ensure the same person stays? Neither is my answer. Each employee is a substitute automatically, but that doesn't make a difference when someone else is called in to do the same job.

At Accenture and Cap Gemini and firms like that the client quite often demand to interview any person who is put forward to fill in a specific role - particularly if it is on a client site (it depends on the client obviously).

I know - I was put on a couple of them and it is a fairly standard process (particularly if they will be working under a client manager).

So even with the bigger boys, it isn't quite the 'xxx isn't avaiable - take person yyyy and shut up' scenario you like to make out.

As consultants we are able to carve up the job into essential high skilling to donkeywork in most cases. It's perfectly possible to farm out the donkeywork to a lower paid freelance temp or paid agency temp you hire and pay yourself to save you time but do it from their own premises. You are still exercising right of substitution as you are being asked to complete the whole piece of work and what it involves for you in terms of time taken to complete it. The client needn't even know that you've hired a temp to do some basic work that doesn't need a high level of knowledge or understandng of the whole project.

Obviously you could do that - but when most roles are 1 persons worth of work - why the heck would you want to waste money doing so when you could do the work yourself? You might as well just pay IR35.

[Robwg]

Because in the real world, most clients won't accept a sub. I've said it before, and I'm having to say it again. The most important thing that I take to my client each day of my contract, is the accumulated knowledge that I have learn about the client's software, systems, processes etc during the time that I have been there. By taking this informaton I produce ten times the amout of useful output that I could if I didn't have it.

To be fair - most clients would probably take a sub if they got to interview him first - and that isn't too different to a lot of clients at bigger consultancies work (i.e. the clients frequently want to interview people who Cap Gemini for example put forward to work on their client sites - before actually letting them on).

But I do agree - the whole substitution clause thing seems completely out of kilter with my experience of the working world.

[tim123]

No it's not. Case law is not the same as legislation.

It is until there is an appeal to a higher court. The fact that the IR did not appeal at the time suggests that they believed that they would not win in the higher court. They cannot now appeal the same arguement in a lower court as it has been settled by a higher one.

Just because there has been one judgement on this, that does not mean to say that other judges won't interpret it differently.

Yes it does. That is how case law works. If the facts are the same the ruling of law from the previous higher case must be followed. The judge in the lower court has no discression at all in this matter.

Why is the big three clauses considered so important in the contracts. If you are so right, then no one would bother with the other two.

Because in the real world, most clients won't accept a sub. I've said it before, and I'm having to say it again. The most important thing that I take to my client each day of my contract, is the accumulated knowledge that I have learn about the client's software, systems, processes etc during the time that I have been there. By taking this informaton I produce ten times the amout of useful output that I could if I didn't have it.

If you do a job that doesn't need this then type of info you can send in a sub and the client will be happy. But if you do then only a very foolish client will actually let you sub. So, the finding of fact would be, that you didn't actually have a subs right at all, whatever the contract said.

tim

[ASB]

No it's not. Case law is not the same as legislation. Just because there has been one judgement on this, that does not mean to say that other judges won't interpret it differently.

In terms of case law and interpretation I think you are mistaken. The interpretation is binding in a lower court. The only thing that can really happen is to say doesn't apply because the facts are different. This may then give rise to appeal because the judge may/may not have erred in law.

Why is the big three clauses considered so important in the contracts. If you are so right, then no one would bother with the other two.

They are not additive, they are independant. If any one of the conditions is met then it cannot be employment.

Within the context of IR35 of course the trick is getting those in the notional contract, since it is this work of fiction that will be judged.

[IR35 Avoider]

Or to put the question another way - when does a small group of contractors cease to become a small group of contractors and instead becomes a 'small consultancy'?

It's not enough for each contractor to own less than 5% of the shares. You also have to be sure that each contractors income cannot reasonably be attributed to work they did for particular clients.

The trick is to make sure that what contractors receive is sufficiently related to what they bring in for them to be happy, but not so related that there is a direct link based on how much income they generated from clients. If there is no direct link and they each own few than 5% of shares then the company is not a caught intermediary, so IR35 doesn't apply, regardless of the nature of contracts and working conditions.

Discretionary bonuses and performance-related share and share option schemes are useful ways of ensuring that in the long term each contractor gets what he deserves, but in the short term there is no way HMRC can say that what he gets is linked to what he brings in from a particular client.

Note this not a dodge, but you are trying to operate on the exact borderline of what the legislation says, in order to get round it. It's simple to step away from the border; just pay contractors similar amounts, regardless of what they bring in. In practise contractors will not want "their" money going to someone else, but the more you do to contractually and legally link what they bring in to what they get, the closer you come to stepping over the mark that will make the company a caught intermediary for IR35 purposes.

[ASB]

Substitution does make anyone automatically regarded as a business outside IR35 unless other strong pointers are present. It's just that a genuine right of substitution has to be present in the terms and in practice to earn the right to be considered a business (along with MOO and no client control which are also critical own biz pointers).

There is no "unless".

- An absolute right of substitution is incompatible with being employed. This is established case law - but I forget the case. One of the problems though is trying to establish this in the notional contact, I accept this is big hurdle.

- Actual substitution kills the requirement for personal serivce stone dead. This then cannot be employment. Personal service is required for employment. Same case law. It is possible that the IR might try to construct a series of notional contracts, i.e. that 3 monther was really 5 weeks, followed by 1 week which was substituted, followed by 7 weeks. So one was clear for a week. I think they would have a hard time making it stick with the comissioners though.