News Items – at 24th July 2007

Employment Status and IR35 Legislation

Commissioners uphold HMRC decision

In a significant decision for workers affected by the “IR35” legislation, the Special Commissioners have rejected an appeal from the director of a personal service company against HMRC assessments for PAYE tax and NICs.  The decision, in the case Island Consultants Ltd v HM Revenue & Customs was given on 5 July 2007.

The IR35 legislation applies where a company enters into a contract with a service company for the supply of personal services.  In this case, Mr. Hough, director and shareholder of Island Consultants Ltd, worked for Severn Trent Water Ltd under a contract between the two companies.  He worked as an IT specialist on a five-year data conversion project.  In these circumstances, the IR35 rules (Income Tax (Earnings and Pensions) Act 2003, sections 48 to 61) require the worker to hypothetically decide whether, if the contract had instead been between Severn Trent and Mr. Hough personally, Severn Trent would have had to treat Mr. Hough as an employee, deducting PAYE tax and Class 1 NICs.  If so, the legislation requires Mr. Hough to pay, in effect, the same amount of PAYE tax and NICs through his limited company.

Island Consultants, Mr. Hough’s own limited company, appealed against HMRC’s assessments to the Special Commissioners.  The Commissioners applied the “picture painting” approach from the Hall v Lorimer decision, namely to stand back and look at the whole picture, not at the fine detail.  This is now the standard approach to these employment status questions.  The key factors considered by the Commissioners were:

• In business on his own account – Mr. Hough did not work for other clients or offer his services elsewhere and could not increase his remuneration above the daily rate.  He had virtually no overheads and there was no possibility of making a loss.
• Payment terms – Payment within the following month after submitting time sheets within 10 days of the end of the month involves a longer period of risk than for normal employees.
• Financial risk – Although defective work had to be put right in his own time, payment was calculated on days of varying length and any corrections were made within that flexibility.
• Provision of equipment – The provision of equipment was not relevant as Mr. Hough had to work on Severn Trent’s mainframe computer.
• Length and number of engagements, and exclusivity – The five-year project consisted of a number of short-term contracts and there was an expectation but no guarantee that each contract would be renewed.  He did not work for anyone else during the project period.
• Provision of benefits – He did not receive any of the fringe benefits provided for Severn Trent’s employees.
• Rights of termination – Four week’s notice was required for termination of the contract.
• Intention of the parties – This factor was not relevant as they could not have any intention over a hypothetical contract.
• Part and parcel of the organisation – Mr. Hough was provided with a desk and computer terminal, a car park place and access to canteen facilities.  His badge identified him as a contractor.  He worked on a particular project, not as part of Severn Trent’s business.  He was not in charge of other staff.

The Commissioner’s view, having considered the position as a whole, was that the factors predominantly point towards employment.  The only factors pointing away from employment are the longer payment terms than normal for an employee, which is not important; and the intention of the parties, which cannot be directed to the hypothetical situation.  Although the number of separate contracts would normally point away from employment, and there was a risk of the contracts not being renewed, there was no real commercial risk as the project needed his services and he was satisfactorily performing his duties.

The decision, therefore, was that Mr. Hough would have been an employee under the hypothetical contract and the appeal was dismissed.

Further information:
Island Consultants Ltd v Revenue & Customs  http://www.bailii.org/uk/cases/UKSC/2007/SPC00618.html

New Statutory Holiday Entitlements in Northern Ireland

Initial scheme to be the same as the rest of the UK

Northern Ireland has ten annual bank and public holidays, two more than the rest of the UK.  When proposals to increase paid holiday entitlement were initially announced in February 2007, the intention was to increase statutory holiday entitlements by 10 days, from 4 weeks to 6 weeks.

Following further consultation, the draft Northern Ireland Regulations published by the Department for Employment and Learning propose increasing the entitlement by only 8 days initially, exactly in line with the provisions for Great Britain.  There will be further consultation on the cost implications of the additional two days with a view to deciding whether Northern Ireland’s additional holiday entitlement should eventually be 10 days.

Further information:

Payroll deadlines during the next month

August 2 – This is the date by which any changes to the provision of company cars in the three months to July 5 must be reported using form P46(Car).

August 5 – This is the final day of tax month 4.  Tax and NICs etc for payments made in the tax month to August 5 are due for payment to the Accounts Office by August 19, or by August 22 if paid electronically.

August 17 – (August 19 is a Sunday) – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

Payroll FAQ's

Statutory Payments and Bank Holidays

What payment should be made for a bank holiday that falls during paid statutory leave?

A bank holiday may occur while an employee is away on maternity, paternity or adoption leave.  What action, if any, the employer takes with regard to payment for the bank holiday is a contractual matter.

In the case of salaried staff, for example, where an employee’s salary is paid as normal when there are one or more bank holidays during a month, the contract may say very little about payment arrangements.  In contrast, the contract for a weekly, hourly-paid employee, particularly if shifts are paid, may be very specific about how payment for a bank holiday is calculated.  Further complications may arise if the employee works part-time, does not normally work on the bank holiday but receives a pro-rata payment in order to avoid discrimination with full-timers.  Where the contract provides for payment for bank holidays, the amount paid will almost invariably be more than the proportionate payment for a day of maternity, paternity or adoption leave.

It is important to recognise that SMP, SPP and SAP are governed by statutory rules.  In contrast, whether or not an employee is entitled to be paid for a bank holiday is a contractual matter.  However, if payment is made for a bank holiday and that day of holiday is to count against the annual entitlement to statutory holiday pay, the rate at which payment is made must not be less than “a week’s pay”, as defined in legislation.

A number of statutory rules for SMP, SPP and SAP are relevant to an employee’s procedures. 

• Maternity and adoption leave are periods of up to 12 months.  The maternity and adoption pay periods are periods of up to 9 months.  These periods cannot be extended if any days during leave are treated or paid for as bank holidays.
• Paternity leave and the paternity pay period are periods of one or two weeks.  They also cannot be extended if they include a bank holiday.
• Each maternity, paternity and adoption pay period is a period of seven days, each one following on from the previous one.  For each of those seven-day periods, the employer must pay one week’s SMP, SPP or SAP (at the appropriate statutory rate) and, having done so, may recover either 92% or 104½% of the payment, according to the employer’s size.
• Any payments of remuneration*, contractual sick pay or contractual maternity, paternity or adoption pay that are made in respect of a statutory payment week satisfies the employer’s liability to pay SMP, SPP or SAP, and vice versa.  Note that this offsetting provision relates to each whole week of leave, not to particular days.  If the employer pays, say, £100 in respect of a bank holiday during a payment week, the whole £100 may count towards the statutory payment due for the whole week.  In reverse, the statutory payment for the week can count towards the whole of the contractual holiday pay.

Taking those factors into consideration, the options available to an employer in respect of bank holidays depend on what the employer is obliged to do under the contract.  It may not be necessary to do anything, if there is no contractual obligation to pay for the bank holiday or if the statutory payment may be treated as meeting any contractual obligation.

Otherwise, if the employer is contractually obliged to pay for bank holidays on top of SMP, SPP and SAP, the contract may permit the employer

• to provide a day in lieu of the bank holiday when the statutory leave period has ended and the employee is again receiving full wages, or
• treat the bank holiday as such and either
  • make no additional payment for it, on the basis that the statutory payment offsets the contractual payment due, or
  • make an additional payment for it, according to defined contractual rules.

In the case of the second option,

• the statutory leave period cannot be extended – in effect a day of leave is lost as a result, but
• the employer may still recover 92% or 104½%, as appropriate, of the total amount of the statutory payment due for the week.

*Holiday pay is assumed to be “remuneration” for this purpose although the Regulations do not specifically say so.

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