HR and employment law update 12 September Paul Scope, Katie Adams, James English Newcastle | Leeds | Manchester
2 Housekeeping SSID - WH Visitor | Password - W@rdh4d@w4y30 Newcastle | Leeds | Manchester
3 Newcastle | Leeds | Manchester
4 Recap on employment status • Employee • Worker • Self-employed Newcastle | Leeds | Manchester
5 What is IR35? • Off-payroll working rules - designed to combat tax avoidance • Targeted at individuals who are providing services through their own limited companies or partnerships and who may not be paying the tax that they should be – workers considered in the eyes of HMRC to be “disguised employees” • Contractors working via limited companies are not liable to pay NICs on income taken as dividends, resulting in far less tax to the Treasury • IR35 exists to ensure that those working in this manner pay the tax they should Newcastle | Leeds | Manchester
6 When does the legislation apply? • Is an arrangement caught by IR35? (“inside” / “outside”) • The legislation applies when the following three conditions are met: • a person individually performs services for a client (or is obliged to do so); • those services are provided under arrangements involving an ‘intermediary’; and • the circumstances are such that if the arrangements had been made directly between the individual and the client, the individual would be regarded as employed by the client for NIC and income tax purposes Newcastle | Leeds | Manchester
7 Consequences if the regulations apply • If IR35 applies, the sums received by the intermediary are, in effect, treated as employment payments by the intermediary to the worker for tax and NICs purposes and will therefore be subject to PAYE. • In other words, if IR35 applies, the relevant tax and NICs consequences fall on the intermediary, not on the client. Newcastle | Leeds | Manchester
8 Public sector: off-payroll working • New rules - 6 April 2017 • Responsibility for determining the IR35 status of a contract shifted from the contractor to the public sector client. • If a contract is considered “inside” (caught by) IR35 , the party paying the worker’s company will have to deduct PAYE and NI before making payment to the PSC. • The contractor will be left with the net payment in their PSC. • Dramatic increase in tax and NI yield for HMRC. Newcastle | Leeds | Manchester
9 Private sector reform • At present, in the private sector, it is the responsibility of the contractor to ensure compliance with the legislation. • 6 April 2020 • Extension of the public sector off-payroll regime to the private sector in order to remove the disparity between the public and private sectors • Responsibility for operating the off-payroll working rules will shift from the individual's PSC to the organisation that the individual is supplying their services to Newcastle | Leeds | Manchester
10 Private sector reform (2) • If IR35 applies, the liability to operate PAYE and pay employers' NICs will sit with the entity that pays the PSC (the "fee payer") • Expected to affect 5.5 million private businesses • Likely to have an adverse impact on efficiency in the sector, in terms of increased costs and administrative burden. Newcastle | Leeds | Manchester
11 Example • Tyne Home Improvements sub-contracts the fitting of windows and doors to Fred's Fitters Limited. • Fred is the owner, director and sole employee of Fred's Fitters Limited and provides the fitting service to Pennine himself. • If the IR35 legislation applies, despite the fact that Fred (the worker) is providing his services to Tyne (the client) through Fred's Fitters Limited (the limited company), Tyne would be liable for income tax and national insurance contributions on the payments made to the limited company. Newcastle | Leeds | Manchester
12 Small business exemption • Exemption from the new rules for small businesses • For the exemption to apply, a company must satisfy two or more of the following: Annual Balance turnover sheet total Not more not more not more than 50 than £10.2 than employees million £5.1million Newcastle | Leeds | Manchester
13 Employment status • Whether the worker would be regarded as employed by the client if the arrangements had been made directly between the individual and the client is a key question in the legislation. • The answer to the above question determines whether or not IR35 applies. • Status is only strictly relevant under IR35 for tax purposes – but employees have more extensive statutory rights than workers. • Factors taken into account to establish status include: Personal service, mutuality of obligation, right of control, financial risk, provision of equipment, right of substitution and benefits. Newcastle | Leeds | Manchester
14 IR35 tax ruling • Lorraine Kelly - TV presenter • Personal service company, Albatel Limited • HMRC claimed there was direct contract between her and ITV Breakfast • Tax tribunal ruled in Lorraine’s favour Newcastle | Leeds | Manchester
15 IR35 tax ruling (2) • Christa Ackroyd - BBC Look North • Operated through her own company CAM Limited • Tax tribunal ruling - inside IR35 • Right of control over the work Newcastle | Leeds | Manchester
16 Preparing for April 2020 – what do you need to do? • Audit • Identify potentially affected contractors across your business • Determine the status of off-payroll workers • CEST – HMRC employment status checker for tax purposes • Communication – liaise with affected workforce Newcastle | Leeds | Manchester
17 Preparing for April 2020 – what do you need to do? (2) • Assess the financial impact of IR35 • Spring clean contracts • Consider employment status • Seek support • Ward Hadaway toolkit Newcastle | Leeds | Manchester
18 Case law update Newcastle | Leeds | Manchester
19 IR35 and Employee Status Cases • Different tests of ‘employee status’ – employment tribunals and HMRC cases. Similar underlying principles. • Albatel Limited v HMRC (2019) : Lorraine Kelly (or supply of her ‘ brand and personality ’) • LK used a PSC to supply her services. If there had been a contract between her and ITV, it would not have been a contract of employment. Her work went beyond merely presenting shows. IR35 did not apply. • Atholl House Productions Ltd v HMRC (2019) : Kaye Adams. • KA had other engagements without requiring permission, so was a ‘freelancer’ . IR35 did not apply. • Kickabout Productions Ltd v HMRC (2019) : H, Talksport Radio. • Very narrow range of services, looser arrangement. Again, IR35 did not apply. Newcastle | Leeds | Manchester
20 Community Based Care Health Limited v Narayan [2019] • R was a not for profit company, which provided out of hours GP services. • C was a GP who provided her services initially directly but from 2015 through a limited company (PSC). She did not tell R about this, only giving them the bank details. She did not send invoices. • Following a disagreement, R terminated the arrangement. C brought a number of claims including unfair dismissal, discrimination, and holiday pay. • The Employment Tribunal held that she was a ‘worker’ but not an employee. R appealed. • The Employment Appeal Tribunal rejected the appeal. • There was no ‘mutuality of obligation’ required to create an employment relationship, but this did not rule out the possibility of an over-arching or umbrella contract between assignments. In addition, C was ‘ integral ’ to R’s operations. Newcastle | Leeds | Manchester
21 Tillman v Egon Zehnder Ltd [2019] (1) • A senior executive had a restrictive covenant preventing her working for a competitor for 6 months from termination of her employment. • The employee argued that the wording of the covenant “ or interested in any business carried out in competition ” would prevent her from having a minor shareholding in a competitor, which was a wider restriction than necessary (in which case the whole clause could fail – the ‘blue pencil’ rule). • Note the importance of geographic or temporal limitations on these type of clauses. Court of Appeal • The word “ interested ” would restrict the employee from having a shareholding in a competing business. • That was unreasonable and exceeded the employer’s need to protect its legitimate interests. • As “ interested ” could not be ‘severed’ from the clause, so the whole clause failed. Newcastle | Leeds | Manchester
22 Tillman v Egon Zehnder Ltd [2019] (2) Supreme Court • The word “ interested ” was an unreasonable restraint of trade. • Beckett Investment Management Group Ltd v Hall [2007] • Guidance on the ‘blue pencil’ rule. To be severable: • A provision has to be capable of being removed without adding to the remaining wording, and • The removal should not cause major change in the restraint’s overall effect. • In this case, the wording could be severed from the clause. Newcastle | Leeds | Manchester
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