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
To unsubscribe, send an email to [email protected]