Contracting Where Did It Come From

Contractors have the dubious privilege of having statute law aimed directly at them in an attempt to reclassify them as employees and thus to charge pay as you earn (p.a.y.e.) tax and nic (employee AND employer) on what they see as their sales turnover.

HMRC’s general view is 100% of contractors should be treated as employees. They may claim differently, but their actions say otherwise.

As a very rough rule of thumb I have always used 100% as an instant estimate of how much tax/nic that will involve. So if your sales are £100,000 then your tax bill on that will be a further £100,000. So we are saying you need £200,000 to have £100,000 left after taxes. Regardless of exactly how accurate this is, the amounts involved can be enough to cause serious financial difficulty and if replicated in to the past for say 4 years in this case that is a £400,000 tax bill.

This deadly “method” is what is called “grossing up” where the money you have received is treated as your “net pay” and then your gross pay is worked backwards up to what it needs to be to generate these net pay amounts. This practice is as old as the hills and was not invented for contractors.

This is us:

https://en.wikipedia.org/wiki/Democracy

and we have an unwritten constitution in which we define the balancing of power as between:

Elected Parliament creates our laws

The police enforce those laws

The Judges decide what parliament meant and rule on police action.

HMRC are an enforcement arm like the police and therefore are also subject to the Judiciary’s rulings (as we all are) . HMRC are NOT all three arms in one, contrary to the way they often apparently behave; note it is established in law (House of Lords) that their guidance CANNOT be relied upon whereas Statute Law can be.

Sometimes HMRC will say : “this has the force of law”: all that means is they are quoting from a Statute.

Where HMRC find criminal law has been broken then they can engage the Police and others, but this has then become a police action and is as ever always subject to what our judges have to say about the matter.

HMRC did? No. Parliament did. However, these laws are put forth by the Treasury who are guided by and listen to HMRC. There is a “consultation” process to allow the public including professions to have their say. However, it seems to me this is not at all the same as the “ear of government” owned by HMRC. When Parliament clearly gets it wrong HMRC still continue to chase the maximum amount of tax, presumably because of pressure to collect as much tax as possible. Regrettably the iniquities caused by bad law seem to be seen as mere collateral damage and not worthy of rectification. This IS a problem with rule by the majority when a minority is opressed, especially when the minority are not poor. The more so when this oppression is to the advantage of HMRC’s statistics.

There is clearly a problem with one of the oldest tax problems in the book, which originally was known as the “Friday Monday Man”. This is where an employee leaves work on Friday and returns on Monday to exactly the same job, but working via his new Limited Company. There was law and case law in place to manage this. However, when it became apparent that agency workers were claiming to be self employed, instead of attacking these claims, HMRC persuaded politicians (who frankly had no idea about such tax matters) to change the law to enforce the operation of p.a.y.e. by agencies on workers working through them. I am sure it sounded like common sense.

However, what they did was to give birth to “contracting”. Those workers simply offered their services via Ltd companies. HMRC at the time were not concerned because to extract money from a company can only be done via salary, dividends or loan and they were satisfied this was not a “threat to the treasury”.

How wrong that was. I can never remember which year this was, but in the 1990s, so ancient history to many.

What happened then was half a dozen huge employment agencies (note that word “employment”) started putting hundreds of thousands of (typically) domestic, health and other previously “temp” workers through limited companies. Apparently none of the tax benefits were being passed on to these workers and were being retained by these agencies. It seems clear these (legal) business methods were an abuse of the law, even if legal. Parliament very quickly wrote and enacted a law to outlaw the abuse. It was, and still is, called the “Managed Service Company” (MSC) law. It had a 14 day deadline and all the agencies exited working in those ways within the 14 days, issuing press releases about how they were offering excellent services to these workers as alternatives. Such is “P.R.”.

So that was HMRC identifying and calling on parliament to avert a threat to the treasury, sucessfully. Sounds good to me.

Ironically HMRC has now more recently used this law against businesses that are not engaged in a “threat to the treasury” and against workers who are receiving the benefits of “contractor” type working. As such I view this as the reverse of the preceding action where it is now HMRC engaged in an abuse of the will of parliament, which was to avert the threat to the treasury, not to give HMRC a very blunt weapon to destroy businesses and lives. I recall one case against a firm of accountants where there were only three contractors. Three? The MSC law was to attack cases of hundreds of thousands of workers, not just three.

The problem here is the vagueness of the law. It was written very quickly for immediate effect and never later polished for precision. As I have said above, getting iniquities fixed takes years and HMRC are not interested in having their wings clipped to achieve fairness involving moves towards the right amount of tax rather than the maximum regardless of equity.

Of course the underlying problem is the legal minds outside HMRC are more clever than those within - if these are the same minds then when inside HMRC they note how they can work around what they have implemented when later working on the outside.

That’s the heart of the matter.

Indeed one can see many “contractors” are in reality are “employees”. Remember the temp agency workers claiming to be self employed? And Remember “Friday Monday Man”. “Temps” clearly are employees. So is “Friday Monday Woman”.

However, they are not everybody.

The courts (HMRC) have derived the idea that to not be an employee one must be “in business on one’s own account”. Here is one Barrister view:

https://www.devereuxchambers.co.uk/resources/articles/view/business-on-own-account

What I find endlessly useful are the judgements the judges hand down to us. They were very interesting reading and often provide us with what amount to sets of instructions about how to do and how not to do things. That said, to identify them can be time consuming and then to read these very long judgements is even more time consuming so most of us have to rely on the summaries written by other professionals or journalists. Both can be interesting and indeed direct attention for further reading - immediate reliance on them is not wise and to be fair they always say to get professional advice.

Be aware that professionals writing for the public are essentially writing to market their services and journalists are writing in ways to attract attention rather than to communicate the law. Nothing wrong with either of these, we should just be aware.

It’s worth noting that Barristers are extremely clever people who work in infinite detail to persuade judges to their client’s view. So the judges have to be even more clever.

Our judges on the other hand are writing directly to us for our benefit in understanding the will of parliament; that’s why their judgments are far far longer than published articles in the general or even specialised press. Reading these takes many hours.