Reply to: Complex IR35 issue

[NotAllThere]

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.

This reminds me of cases along the lines of "we've had to use the money we owe you in order to meet liabilities caused by you" that we've heard many times here.

The issue is would a judge rule the OP's friend was paid net of tax and NI? Yes, the client has to meet the tax NI bil. No, he was paid gross, in which case the client needs to issue proper payslips.

[Peoplesoft bloke]

I haven't got access to the figures or can claim to be a legal expert but several months worth of daily rate at Director level would seem to be very much worth pursuing.

I didn't say it wasn't worth it - but it may well not be cost effective.

[SussexSeagull]

IR35 is about how you are taxed - it doesn't confer employment rights as you ought to know as you claim to have been working as a no-rights worker for ages.

This is actually not a complex issue at all.

The end client has behaved abominably, but your friend is unlikely to be able to get any cash from them, because the cost of any lawyers would be more than they would get back.

Your friend needs to put this down to experience - and you need to brush up on your understanding of IR35 too.

I haven't got access to the figures or can claim to be a legal expert but several months worth of daily rate at Director level would seem to be very much worth pursuing.

[northernladuk]

Sorry if I'm teaching you how to suck eggs but I think you are missing the fundamentals of contracting. The fact you keep calling them your employer is a massive red flag. You need to re-adjust your thinking..

Employment requires a contract of employment with an employer and they pay you. Now lets forget all that.

You have a contract with a client to do work regardless of IR35 status. It sets out the terms for that contractors engagement. The contract may have different terms in dependant on wether they expect that person to be inside or outside but its a contract non the less. The contractor that has this contract then needs a payment vehicle and that changes depending on inside or outside. So the chain so far looks like this. Client - Contractor (you) - Payment.
Outside IR35 - Client - Contractor - LTD company - you.
Inside IR35 - Client - Contractor - Umbrella - you.

For the purposes of this basic description, the only difference between the two is how the tax is handled and the payment vehicle (LTD or Umbrella). None of this perm rubbish. You are still a contractor to a client in both cases. The contract for your services is between the client and the LTD in outside and client and umbrella for inside.
What we should really be doing to do this properly is have a contract to deliver a whole piece of work and get paid at the end of it. The daily rate confuses the whole thing and which is why HMRC have done all this to us but sadly the market never went that way so we are where we are.

You are an independant supplier to a client, not a permie, no zero hours etc. A contracted supplier. Always think like that. You are a business not an employee. Sadly HMRC thinks you are a temporary employee hence this mess. But having the right mind set makes it easier to understand things. You get me? Forget rights, employers, year raises and all that rubbish.

However, I'm unsure how it works when there's no umbrella company, and you're contracted directly with the employer. They want to treat you as if you're outside IR35—offering no holiday pay, pension, or notice period—while paying you under IR35 rules.

This means you're responsible for the Employer's NI, the Employee's NI, Income Tax, and the Apprenticeship Levy.

I think you've for this backwards and they don't want to treat you as outside, that's a tax situation they don't want to know about. They've been forced in to giving SDS's or face the consequences so it's all as bad for them as it is you. All they want is a supplier to do some work as per a contract and that's what they do. They've got some hoops to jump through to cover their backs i.e. the SDS and then they get you in to start working. It makes no difference to you turning up and working if you are inside or outside. To contract directly with the client you need to be outside, if they don't want you outside then you cannot contract directly with the client.
Even if they take you on inside they don't have to offer holiday pay pension etc.. that's handled by the payment vehicle mention above. The only time a client is ever on the hook for that is you are on an FTC contract which is effectively a contract of employment. As mentioned before, inside or outside makes no difference to the work you do for the client.

There is so much wrong and many nuances missing out of that but it would take too long to be totally accurate. Just get your head around the basics of contracting first and the rest will fall in to place.

That make it any clearer?

[Protagoras]

I understand that I don't have typical employment rights, such as filing grievances or going to an Employment Tribunal. I don't want all the politics, office stuff and stay well clear of it all- been there done that. This is due to my arrangement with the umbrella company.

There's nothing to stop an umbrella company worker raising a grievance or an ET case against an umbrella company.
My biggest gripe re umbrella companies is the pay-when-paid model. No other employer pays employees only when paid by a third party. Hence it's important to be prepared to 'down tools' rather than allow wages debt to accumulate.

However, I'm unsure how it works when there's no umbrella company, and you're contracted directly with the employer. They want to treat you as if you're outside IR35—offering no holiday pay, pension, or notice period—while paying you under IR35 rules.

One doesn't have a contract with an employer, other than as an employee.
Where there's a B2B contract that's generally between a contractor's LtdCo and the Client.
Few would operate an 'inside' engagement via a LtdCo since it makes no commercial sense.

How does this differ from a zero-hours contract at McDonald's? Even there, you don't have to pay the employer's NI and Apprenticeship Levy.

My understanding is that McDonald's engages workers as employees and accordingly pays employment taxes.

Note that there are three possible IR35 states.
An engagement may be 'outside', 'inside' or not assessed.

The latter two states would mean that workers are engaged via an agency or an umbrella company (i.e. a payroll intermediary).

Some people will even use an umbrella company for an 'outside' engagement; where there are no business costs incurred it's more cost effective than running a LtdCo and carries no tax risk (using a compliant umbrella company).

[polarbearuk75]

I'm open to learning more about this.

Currently, I work inside IR35 under an umbrella company, which provides holiday pay and pension and allows me to claim business expenses. I got an SDS, which I agreed to. My day rate is okay—nowhere near what I earned in the old days.

I understand that I don't have typical employment rights, such as filing grievances or going to an Employment Tribunal. I don't want all the politics, office stuff and stay well clear of it all- been there done that. This is due to my arrangement with the umbrella company. Fair enough. I'm aware of what I've agreed to—it's not ideal, but it's the reality of today's job market in the work we do.

However, I'm unsure how it works when there's no umbrella company, and you're contracted directly with the employer. They want to treat you as if you're outside IR35—offering no holiday pay, pension, or notice period—while paying you under IR35 rules.

This means you're responsible for the Employer's NI, the Employee's NI, Income Tax, and the Apprenticeship Levy.

For my friend - I finally got my hands on the SDS they sent out to everyone this week, which looks shocking with mixed contract terms with the Tax side. Not a SDS format I have ever seen before. No idea who is advising them. There is no way I would sign it—clearly, they don't want any more contractors.

I know being inside IR35 is challenging, but this seems excessively unfair. How does this differ from a zero-hours contract at McDonald's? Even there, you don't have to pay the employer's NI and Apprenticeship Levy.

I realise you answer these questions daily, and I understand everyone is fed up with it all—the government wants everyone to be permanently employed, with zero rights and no idea whether you will have a job or not.

At the end of the day, the fact that this whole process allows a big company to force a group of people to work for X weeks for free should not be allowed in this day and age. Withholding wages is illegal as an employer—why should someone under IR35 NOT have the same rights? Our solicitor told me that the fact that there was a 3-month termination clause meant that if he had walked, he would have been at risk of breach of contract.

No need to respond - in a grumbling mood now

[Peoplesoft bloke]

[*]If my colleague is found to be inside IR35, they would presumably be entitled to employment rights. Withheld wages, lack of holiday pay, and absence of other employment benefits could breach those rights. Question is which approach is now better - we think its outside, they think inside - and nothing will now change their mind. Learned that lesson myself the hard way.

IR35 is about how you are taxed - it doesn't confer employment rights as you ought to know as you claim to have been working as a no-rights worker for ages.

This is actually not a complex issue at all.

The end client has behaved abominably, but your friend is unlikely to be able to get any cash from them, because the cost of any lawyers would be more than they would get back.

Your friend needs to put this down to experience - and you need to brush up on your understanding of IR35 too.

[Bluenose]

four months ago, the company stopped paying all contractors

Unreal.

[polarbearuk75]

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

We don't 100% know this yet - it won't be - it will be a large part of it, maybe 60%. However, this person has already paid tax on it via his PAYE salary from his company which was less that his day rate at the client. So he will get double-taxed, and I assume HMRC won't refund that!

[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.

[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.

[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?

[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.

[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.

[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!