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A Simple Guide to ‘Supervision, Direction or Control’

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I need to preface this by saying that I am not a financial advisor, tax lawyer or accountant; All statements in this blog are merely my understanding & we cannot be held responsible for any over or under-payment of tax.

We have been fielding dozens of enquiries about the change in taxation that took effect from 6 April 2016 which was brought about by The Finance Act. I think there is some confusion about IR35 and The Finance Act / Supervision Direction or Control so I hope to provide some clarity on it. The first thing everyone should be aware of is - they are two separate things.

To make the changes clearer, let us start by looking at the picture from before the changes. Six months ago a temporary worker had three basic choices as to how they are paid; PAYE, Umbrella or Personal Service Company (PSC).

In very simple terms:
1. PAYE was simple – gross pay, minus tax and National Insurance (NI) equals your pay.
2. Umbrella was a little trickier – gross pay, offset your travel & subsistence expenses and then pay tax and NI. By offsetting expenses, you pay less tax & end up with more cash in your back-pocket.
3. PSC was complicated – gross pay, offset your travel & subsistence expenses, then pay yourself mostly via a dividend and only pay tax on the dividend. Here you would pay even less tax & have even more in your back pocket.

If we think for a moment of the need for temporary staff, the main causes are; hard to reach locations, regions lacking or having a shortfall of specialist skills, short term cover needed for maternity/sickness and short term demand for projects etc. The first two of these mean that agencies must encourage people into travelling further or relocating (temporarily) for work.

Temporary workers tend to get paid a little more than permanent members of staff anyway but this is usually seen as compensation for lack of job security. Even if the rates were the same as a local job, the ability to offset your travel costs or B&B costs was a big selling point for these out of the way locations - as you got to live away from home for a few months & it didn’t cost the earth to do it.

As I said, being ‘self-employed’ through a PSC allows people to pay a lower tax rate. “IR35” are the rules the HMRC use to see if you are really self-employed or if you are disguising your true status. The tests are varied and many but include:
• Is there any Mutuality of obligation?
• Is the contractor at financial risk in the project?
• Is the contractor working exclusively only for one client?
• Does the contractor work with their own materials/equipment on site?
• Does the contractor have to rectify work at their own expense?
• Can he or she provide substitutes to carry out the work in place of themselves?
• Is the contractor "part and parcel" of the client's organisation?
• The intention of the parties
• The length of the contract
• Is the contractor under the Supervision, Direction and Control of the Hirer?
Each of these terms such as “financial risk” has to be argued about since what one person may define as financial risk may differ from another person’s or the HMRC’s definition. There is a wealth of guidance from the Government available here.

To add to the irritation surrounding PSC’s, The Agency Conduct Regulations (ACR) have an effect. The ACR provide protection to ‘agency workers’ (i.e. agencies can’t refuse to pay temporary workers etc.). It is difficult for anyone to show they are “self-employed” if they then claim such protection as an “Agency Worker” – you can’t really be both.

The ACR allowed for this by enabling people to “opt out” of these protections, UNLESS (per regulation 32(12)) they are working with children or adults in need of care or attention. This is quite a broad definition and so this means that any Nurse, Social Worker, Heath Care Professional etc. can’t ‘opt out’. Such people will therefore find it difficult to argue with the HMRC that they are outside IR35 & are ‘self-employed’ through their PSC.

Under the old umbrella system (completely separate from “self-employed” & therefore IR35), people could offset expenses & then be paid PAYE (NOT dividends). There was no need to pass any elaborate test from the HRMC & you didn’t need to worry about “opting out” of the ACR either – so you got all of the protection of an “Agency Worker” too. It is this “loophole” that was closed by the Finance Act.

The rationale for closing the loophole was –
1) The Government needs more money in its coffers & if agency staff can’t offset expenses, they get more money.
2) The HMRC do not like “Disguised Employees”
3) The press/public didn’t think it was fair. Read more here.
You might ask why Government & HMRC didn’t make the large multi-national, multi-billion pound coffee chains, mobile phone networks and internet search engines to pay a little more but… I’ll leave that for someone else to comment on.

In simple terms, the Finance Act states that if a worker is under the Supervision, Direction OR Control (SDC) of the hirer OR if the hirer just has the right to supervise, direct or control the work – you are no longer permitted to offset expenses against your taxes. As I said, that is in simple terms but if you would like to read more on the specifics, my colleague Sophie talks more about it here.

Like IR35, each of these words may be open to interpretation as what you believe ‘Supervision’ to be may differ from the HMRC. In simple terms, they mean:
1) Supervision: somebody overseeing you as you are working.
2) Direction: somebody making you perform your job in a certain way.
3) Control: somebody dictating what work you do and how you go about doing it OR has the power to move you from one task/job to another.
As you can see, the bar has been set pretty high & this makes it difficult to argue for many temporary workers.

The SDC from the Finance Act sounds awfully similar to the ‘Control’ element from the IR35 tests… They only differ in one word but this one word will have a significant effect on all temporary workers – The Finance Act says “OR”. This raises the hurdle as it means that the HMRC now only need to prove one of these elements applied to the placement and this will mean you can’t offset any costs against your tax bill.

The final blow from SDC is that the HMRC will assume you are under SDC, unless you can prove otherwise. This means you have to be able to prove that you are not under SDC in each placement – but how do you prove a negative? This is the subject of much debate at the moment & the HMRC have yet to provide a guide on this…

What all of this means for anyone working through an agency is that we are left with only two choices; PAYE or PSC. Unfortunately, as we have discussed, most people working in social or care professions are going to find it very difficult to be the latter.

The knock on effects could be wide ranging & this could cause the ‘out of the way’ services & companies to suffer from a lack of professionals willing to work there, or they might have to pay even more for their temporary staff in future. We could see a reduction in the numbers of people willing to work as “temporary staff” as it may appear a less attractive proposition. Time will tell.

Some agencies and accounting/finance services are encouraging temporary workers to claim they are “self-employed” and/or are not under SDC to enable them to continue to offset expenses. This is a great idea if it is true but if you’re ‘bending the rules’, the HMRC may see this as nothing short of tax avoidance.
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