The tax tangle of the freelance who cried employment

The advantages that technical worker Andrew Tilson told an employment tribunal that he perceived in operating the way he did cannot be revealed without scrutinising his likely tax position. But for Silversun Solutions Ltd, he would be seen as an agency worker contracted under a contract for services (self-employed) and the tax/NICS agency legislation would kick in, which would mean that the agency should deduct PAYE and NIC from all payments to Mr Tilson. As an agency worker he would not be able to claim any travel and subsistence expenses. With Silversun in the chain as a limited company, the agency would not be required to make any deductions from the payments it made to Silversun. All fairly straightforward so far.

Questions then arise as to whether Silversun itself is in fact acting as an agency and so should have operated PAYE and NIC, or is Silversun simply a payroll bureau? Or is it in fact a relevant intermediary under the IR35 legislation?

It was noted in Judge Smail's judgement that Mr Tilson had a "verbal " contract with Silversun and that nothing was disclosed to the tribunal about how he dealt with his tax affairs other than the fact that he took advantage of his tax position as self-employed, sufficiently explaining why he twice refused to become an employee of the end-client Alston.

We have no details as to the actual payments Mr Tilson received. If we assume that he was registered as self-employed with HMRC and accounted for his tax and NIC as a self-employed individual, then the fact that he has been found to have employee status with the end-client means that there is a shortfall in NIC and tax paid from somewhere in this chain. If expenses have been claimed there may also be issues over these including those under the 24 month rules. What seemed like a fairly straightforward payment structure initially, now opens the door for HMRC to challenge the payments made, backed by several distinct pieces of legislation.

Once again this case shows that we are concerned with working practices and the need to establish these from the outset. From an IR35 perspective, this case clearly shows that an IR35 contract review that does not also look at
the working practices is not worth the paper it is written on. Other commentators are right to say that end clients need to address status and that they cannot have it both ways - all the controls of an employer with none of the responsibilities. But of course the same applies to 'contractors' - they too cannot have the tax/NIC benefits and all of the rights associated with employment.

Kate Cottrell, a former inspector of taxes for the Inland Revenue and the founding partner of Bauer & Cottrell, an IR35 advisory.