Osborne told 'SDC' examples are useless

A logical interpretation of how Supervised, Directed or Controlled contractors will lose tax relief on expenses points to “absurd and totally unfair” outcomes for them and contracting.

Issuing this alert ahead of next month's Autumn Statement 2015, industry body AUCAE said it had to resort to interpreting as HMRC's guidance on SDC was unclear and uncertain.

The body also told George Osborne, the chancellor: “The examples in the HMRC consultation document are so extreme as to be useless to anyone trying to make such a determination.”

Compounding things for those faced with making the determination from April 2016, there seems to be no case law to refer to where SDC was the sole determinant of status.

And problematically, argues AUCAE, the Revenue is trying to apply a status-orientated test “by reference to a control test alone” even though control is not, by itself, determinative.

“[This approach] flies in the face of established judicial authority which has consistently made it plain that control is only one of a number of factors that must be considered.”  

'The power to tell the worker to do it differently'

Absent of definitions from the courts (suggesting that even improved guidance on SDC from HMRC would be open to challenge), AUCAE turned to non-legal definitions.

Supervision, it says, must mean more to HMRC than merely just checking up on the worker; it will likely mean checking up “with the power to tell the worker to do it differently”.

Direction, which relates to being managed, appears to be layered, ranging from a coder instructed how to code - to a non-instructed coder told to notify his PM upon stages of completion.

For brevity’s sake, outlines for Control were not given by AUCAE but, if they were, the body said it would make the same point – that “taken in isolation,” the notion of SDC “is of little use.”

“It is precisely for this reason that the courts have…developed a series of sophisticated and intricate tests of mixed law and fact and not resorted to one single test,” AUCAE said, adding:

'All manner of problems'

“What is important in all cases is to analyse the nature, quality and intensity of the SDC…no matter how one formulates the test, its application is going to have to be nuanced.”

So the body, which represents umbrella companies, believes that any attempt to superimpose “as unrefined a test as SDC” as a stand-alone test is almost certainly bound to encounter “all manner of problems.”

“Therefore” AUCAE continued, “HMRC will have little choice but to adopt a careful factual analysis, which brings us back to where we started, because that is, in a nutshell, the present approach of the courts in determining employment status”.

This expected “defaulting back to established principles” by HMRC is not the end, however, because SDC does not have to be exercised for tax relief on expenses to be blocked; merely the “right of” SDC is sufficient.

'Empty statements'

“HMRC’s narrative as to how the right will be established is perfunctory to say the least,” said All Umbrella Companies Are Equal (AUCAE), before criticising HMRC for “fairly empty statements”.

“In reality, regard must always be had to what type of procedures, methods and instructions one is dealing with [as a contractor] together with the type of work and the industry sector”.  

Even regardless of sector, an end-user – on whose premises the contractor’s services are being provided and whose equipment is being used by the worker – almost always has the right to SDC.

Also in its submission to Mr Osborne, AUCAE contends: “Anybody who is the recipient of services has a residual right to give directions and instruction to take into account the interests of their business.”

To be meaningfully applied, then, the formulation of the ‘right to’ SDC must be tied to one of two conditions – either it must reflect the (stated, expressed or implied) intentions of the parties, or, if not, it must reflect the status position “in the round.”

'Whole umbrella company industry in jeopardy'

If neither of these conditions gets taken up by HMRC, the signs are that every single umbrella company contractor will have tax relief on travel and subsistence blocked, as SDC (or the right of) can be from any party – not just the end-user.

“That would be the result of a logical application of the proposed new rules, but would be an absurd outcome and totally unfair,” AUCAE wrote.

“Practically every umbrella employee could be deemed to be under SDC, or the right of SDC, which means that hardly any umbrella worker will be able to claim tax relief on travel and subsistence [bills], which in turn places the whole umbrella company industry in jeopardy.”

Personal service company contractors appear even more vulnerable. While they will be subject to the same SDC proposals, they also face reform to IR35 whereby, potentially, the rule will hinge on SDC.

Asked by AUCAE what would happen if IR35 was reworked so that SDC was the rule’s sole determinant, an overwhelming majority (78%) warned that it would inaccurately reflect their IR35 status.