ARCTIC
SECTION 660A CASE UPDATE
Hundreds of thousands of small family businesses still
face uncertainty after three days of legal argument
in a tax test case that could have massive implications.
Geoff and Diana Jones from West Sussex, who run Arctic
Systems, were presented with a £42,000 tax bill
after the Inland Revenue decided to implement tax legislation
that dates back to the First World War.
The couple, who have been supported by the Professional
Contractors Group, were given some relief when the Inland
Revenue announced at the eleventh hour that it was dropping
its claim for six years’ worth of retrospective
tax under the S660A rule.
It will, however, be at least six weeks before the
couple knows the outcome of the hearing - a judgment
that will be closely scrutinised by tax experts, accountants
and their professional indemnity insurers as well as
hundreds of thousands of similar husband and wife businesses.
After the hearing, PCG chairman Simon Juden said, “It
seems almost unbearable for Geoff and Diana to have
another few weeks of uncertainty hanging over them and
there is no doubt it adds to the unfairness of the situation
in which they find themselves. We share their relief
that the Revenue decided against pursuing the claim
for retrospective tax but that doesn’t help clarify
the position for so many people like the Joneses.”
“PCG is firmly of the belief that if families
share the risks of setting up and running a business,
then they should share the benefits and we do not believe
it is the Government’s intention to dissuade people
from playing a vital role in the local and national
business community.”
AGENCY REGULATIONS - Preliminary Briefing for
Limited Company Contractors.
Background
The Department of Trade and Industry (DTI) published
The Conduct of Employment Agencies and Employment Businesses
Regulations 2003 earlier this year, the main provisions
of which came into force on 6 April 2004.
PCG had spent two years campaigning for an opt out
clause to allow limited company contractors, who are
often highly paid and highly skilled, to opt out of
being covered by the regulations, whilst preventing
vulnerable workers being forced to do so. In numerous
meetings with the DTI, PCG co-founder and senior political
adviser David Ramsden argued that professional consultants
were not necessarily good at selling themselves, and
should be free to pay agencies to market their skills.
Furthermore, if limited liability freelance contractors
were to be bound by the legislation as originally drafted,
this could prove a disincentive to clients who might
otherwise consider engaging freelance contractors.
The opt-out for which PCG lobbied is covered in paragraph
(9) of Clause 32 and reads as follows:
“(9) Subject to paragraph (12), paragraphs (1)
- (8) shall not apply where a work-seeker which is a
company, and the person who is or would be supplied
by that work-seeker to carry out the work, agree that
they should not apply, and give notice of that agreement
to an employment business or agency, provided that such
notice is given before the introduction or supply of
the work-seeker or the person who would be supplied
by the work-seeker to do the work, to the hirer.”
The Conduct of Employment Agencies and
Employment Businesses Regulations 2003 are published
as Statutory Instrument 2003 No. 3319 by The Stationery
Office Limited, under reference ISBN 011048374X ©
Crown Copyright 2003 and may be viewed on the website.
http://www.hmso.gov.uk/si/si2003/20033319.htm
They are referred to hereinafter in this newsletter
as the “Agency Regulations”.
Introduction and scope
Since the publication of the Agency Regulations, there
has been considerable confusion about the implementation
of the opt-out clause, and PCG has therefore commissioned
extensive analysis to enable it to give the appropriate
advice to its members.
More detail will follow in PCG’s proposed guide
to the Agency Regulations, and this newsletter is intended
to set out the position as understood by PCG at the
time of writing.
Limited company contractors do not fall within the scope
of the Agency Regulations until 6 July 2004.
Guidance
The legal advice sought by PCG on behalf of its members
appeared to be conflicting, but on balance supports
the view that limited company contractors may opt out
of the Agency Regulations in their entirety. This understanding
also accords with DTI’S view, as confirmed to
PCG in writing, and represents the position for which
PCG successfully lobbied prior to the introduction of
the Agency Regulations.
The main question that PCG members want answered is,
“Should I opt out of the Agency Regulations?”
Before attempting to answer that question, a few points
should be clarified.
Firstly, PCG would like to emphasise that it is a contravention
of the Act for any agency to require you to opt out
of the Agency Regulations. It may also be illegal for
them to pressure you to do so by threatening not to
put forward your CV. Should any members find themselves
being required to opt out of the Agency Regulations,
they should inform PCG by email [email protected].
Secondly, the “opt out” must take place
before you are introduced to the client. In most cases,
therefore, this means that it must take the form of
a letter from you to the agency. It cannot form part
of the contract, as you will already have been introduced
to the client before you sign any contracts. The suggested
form of words to be included in such a letter is as
follows:
"We hereby give notice, pursuant to regulation
32 of the Conduct of Employment Agencies and Employment
Businesses Regulations 2003 ("the Regulations")
that both [insert name of limited company] and [include
name of individual] do not wish the Regulations to apply
to any of my engagements through [include name of agency]
Signed by [individual]
Signed for and on behalf of [name of limited company]"
You can withdraw this opt out by giving notice to the
agency, in writing, at any time prior to starting work.
To answer the question of whether or not you should
opt out will depend upon your circumstances as a company
and as an individual, the provisions of the act most
likely to affect your decision should be explained.
Relevant provisions
Some of the main provisions of the Act are:
“Handcuff clauses”. Regulation
10 - Places limits on ‘temp to perm’
fees (where the temporary worker takes up a permanent
job with the client) and 'temp to temp' fees (where
the temporary worker is engaged by the client through
another agency). The Agency Regulations allow such fees
only where the engagement occurs within either 14 weeks
of the start of the assignment or within eight weeks
of the end of the assignment, whichever is the later.
The client must also be offered, in the terms and conditions,
the alternative of an extended period of hire. If the
client opts for the extended period of hire, the worker
can transfer without charge at the end of that period.
It is for the parties to agree the level of the transfer
fee, or the length of the extended period of hire.
“Withholding of payment”.
Regulation 12 - Employment businesses will no longer
be able to withhold workers’ pay purely because,
for example, the employment business has not received
payment from the client or because the worker cannot
produce an authenticated timesheet
.
For many members, the terms of the contract being negotiated
may be the deciding factor. Those working outside IR35
are likely to want to opt out of the Agency Regulations,
whereas those operating inside IR35 may wish to remain
inside the Agency Regulations.
In the main, these regulations do not affect the limited
company contractor as the entire onus for compliance
is placed upon the agency. Therefore, agencies are very
likely to encourage limited company contractors to opt
out of the Agency Regulations. The decision to opt out
is, however, entirely up to the contractor. The Agency
Regulations do not on the face of it affect the clients,
although it has been brought to PCG’s attention
that some clients are apparently insisting on opt outs.
As yet, the reasons given for this do not seem be justified
and so contractors should be wary of such claims until
PCG has had a chance to investigate this further.
PCG expects that most of its members will want to opt
out of the Agency Regulations. This is because they
add little in the way of protection for the typical
freelance contractor and yet will require the agency
to treat the contractor more like a temporary worker
than a business. Many members may feel that it is prudent
to opt out of the Agency Regulations at the earliest
opportunity, as there is no downside to withdrawing
that opt out by issuing notice to the agency prior to
starting work for the client. It is too late to opt
out of the agency regulations once you have been introduced
to the client and so PCG advice is that all contractors
should opt out initially at least and then decide on
their final position once negotiations have reached
a conclusion.
IR35 implications
There has been some speculation that the decision on
whether to opt out of the Agency Regulations has an
effect on the potential employment status of the individual
and, therefore, on the status with respect to IR35.
PCG’s view is that the choice of opting in or
out of the Agency Regulations is unlikely to make a
major difference to employment status for the purposes
of IR35. It is likely that a court may view opting out
of the regulations as a minor pointer away from employment
but it is not likely that remaining within the Agency
Regulations would form an indicator to employment, as
“contracts for services” (self employment)
are mentioned in the text of the regulations.
The effects on the market
This legislation may prove costly for the agencies
to implement, and their margins may have to rise as
a result. Opting out is a way of reducing pressure on
the agency margin and is one of the factors that PCG
urges limited company contractors to consider when deciding
whether to opt out. Agencies may try to give freelancers
an incentive to opt out by offering a pay differential.
There is nothing to prevent this in the Agency Regulations,
but it is a practice that PCG would disapprove of if
it covered more than just the increased costs borne
by the agency. If the pay differential were large enough,
it could be construed as “requiring” the
freelancer to opt out and would therefore be against
the Agency Regulations.
So what should I do?
A typical scenario might be as follows:-
* Agree to opt out by sending an opt-out letter before
attending an interview
* Attend any interview and then negotiate the best possible
contract terms for the engagement
* If the terms of the engagement are business-like,
remain opted out and commence work on the contract
* If the agent is able to offer only employee-like contractual
terms, which are likely to be IR35-caught, then send
a letter to the agent, before commencing work, to opt
back in to the Agency Regulations. Note that it would
be illegal for the agent to refuse to honour the contract
as a result of opting back in.
Conclusion
Income is however the biggest single factor that all
freelancers will have to consider. Until some of the
vagaries of the legislation become clearer, many members
may choose to opt out to ensure that they get the work.
PCG will be issuing updates to its guide, as more information
becomes known, but for now the best advice must be to
opt out if you are unsure of your position and need
the work.
Disclaimer
No part of this note should be taken as constituting
legal advice. It is advice of a general nature and so
readers should take specific legal advice if they are
unsure of their own position with regards to the regulations
or any other aspect of the law.
Professional Contractors Group Limited
Lakeside House, 1 Furzeground Way
Stockley Park East
Uxbridge
UB11 1BD
Telephone: +44 (0845) 125 9899
Fax: +44 (020) 8622 3200
Privacy statement: http://www.pcg.org.uk/aboutus/privacy_policy.html
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