BN66 - The Solution - Frequently Asked Questions

Question: Have you sought Counsel's opinion on your solution?

Answer: Yes, Counsel is of the view that inserting a BN66 sceme such as that promoted by Island Contract Management into what would otherwise be a situation where the agency rules would have applied is ineffective. Counsel further believes that HMRC will have to consider the agency rules where a case is made and that tax will be collected from the employer or employers and not the worker.

Q: I used a BN66 scheme to shelter profits I made from property developments. Will your solution work for me?
A: No, our solution can only be used by individuals who provided personal services to an end client.

Q: I used a BN66 scheme to shelter income I earned providing IT consultancy services to a bank via an agency. Will your solution work for me?
A: Yes, it probably will.

Q: Will your solution involve me contending that the work I carried out was caught by IR35?
A: No, IR35 is a red herring. Our solution works where you:

(a) provided services to a client;
(b) were paid by a third party; and
(c) the client had a right to exercise supervision, direction or control over the manner in which those services were provided.

Matters such as substitution and mutuality of obligation, central to IR35 are completely irrelevant to our solution.

Q: Where can I find the legislation you intend to use?
A: This is principally in Sections 44 – 47 ITEPA 2003. Section 44 provides that in certain circumstances when a client / worker relationship exists, but the worker is paid by a third party (known as an agent) the third party should treat the worker as though he is employed by them and deduct PAYE and National Insurance. Section 46 deals with situations where a worker is a member of a partnership, income he receives from the partnership should be treated as if it had been paid directly by the third party to him personally.

This legislation was introduced in 1975 and so pre-dates IR35 by 25 years. Following the introduction of this legislation agencies ceased a long standing practise of treating the workers they supplied as being self employed and insisted instead that they become employees of the agency, provide their services through a personal service company, or (more recently) joined an umbrella company.

Q: Can there be more than one agent and if so, which is responsible for operating PAYE?
A: There can be any number of agents. For example, in a typical BN66 scheme the traditional employment agency and the organisers’ UK company are both agencies. The trustee may also be an agency. All agencies are liable for PAYE and NI, but HMRC will usually assess the agent who has paid the worker unless that agent is outside the UK, in which case they will assess the last agent in the UK.

Q: Why don’t HMRC use the agency legislation to attack personal service companies?
A: Way back when the agency legislation was being debated in Parliament the Financial Secretary to the Treasury made a statement that the legislation would not apply to a limited company employing the worker.

Q: So is the case that employment agencies have nothing to fear if the payment they have made is to a UK limited company?
A: No, an agency will only escape liability if the payment is to a company that employs the worker, such as his personal service company or an umbrella company. Agencies need to make suitable enquiries before entering into a contract with a UK limited company.

Q: In your fictitious example of Ben, why did Giles’ senior partner Les decline to accept the appointment?
A: This accountancy practice had amongst its clients an employment agency similar to Computex and saw the potential for a conflict of interest. Agencies will of course feature on the client lists of many large accountancy practices. The appointment was declined by Accountants 4U because they relied on the goodwill of agencies such as Computex for new clients.

Q: If this solution is so obvious, why have HMRC missed it?
A: Because they’ve been looking at it from the wrong angle. Initially the BN66 schemes were used by property developers where employment is not an issue. The HMRC team involved operate from a specialist office and deal with complex avoidance arrangements usually with an offshore element. Employment status is dealt with by Employment Compliance Units in regional offices.

Q: If I use your solution, can HMRC simply ignore your arguments and carry on regardless?
A: No, we believe that if you formally challenge your employment status, HMRC will have no alternative other than to refer the matter to an Employment Compliance Officer.

Q: What arguments might HMRC come up with to argue that I am not employed?
A: There are really only two possible alternatives:

(a) the income is trust income; or
(b) the income is self employed income.

If they argue it is trust income they are playing into the hands of the BN66 scheme organisers. If they say it is self employed, they are inviting 100,000 workers providing services through personal service companies within the range of IR35 or managed service company legislation to switch to self employment.

Q: If HMRC accept I am employed, will they not just come after me for PAYE?
A: In the vast majority of cases where a person treated as self employed is determined to be employed, HMRC will assess the employer for failing to operate PAYE. HMRC will question the employer before deciding whether to assess them or the employee. Before assessing an employee they will want to establish that the status position was borderline and the employer acted in good faith. A scheme company would have difficulty in arguing that they acted in good faith but an employment agency may have a stronger case if they can show that they made reasonable enquiries and believed they were contracting with the workers’ personal service company or an umbrella company. Outstanding National Insurance liabilities are dealt with separately, and always collected from the employer.

There are also limited circumstances in which HMRC can assess the employer and then transfer the liability to the employee if the employer becomes insolvent. This legislation is used when there is a close association between the employer and the worker. A typical example would be a personal service company where the director / shareholder drew all of his company’s income as net salary, leaving his company insolvent and unable to pay over deductions.

Q: Where can I find out more about employment status generally?
A: Have a look at the Employment Status Manual freely available on the HMRC web site, it is easy to read and explains the approach tax offices must use. There is a section within the manual explaining the rules relating to agency workers.

Q: If I like your solution, why do you want me to act now rather than waiting for the outcome of a judicial review?
A: Once the Finance Bill receives Royal Assent Clause 55 becomes law. It remains that way until or unless it is overturned. The effect of Clause 55 is to remove the trustee and make you a partner with retrospective effect. At that point you are deemed to know that the income you believed to be trust income is either income from self employment or employment. HMRC have contested that your income is self employed income and until now you have maintained it is trust income. A person acting in good faith would at this point tell HMRC that he believes the income is employment income. Sitting on the fence is not compatible with acting in good faith. Your position is therefore weakened when HMRC are considering whether to assess the employer or the employee, particularly so if the scheme company is no longer around and HMRC are looking at you and the agency.

Q: Can this backfire on me?
A: Yes, in very limited circumstances. This will happen if:

(a) HMRC accept your income was from employment;
(b) They are able to assess you and not the employer for PAYE;
(c) The retrospective effect of Clause 55 is thrown out in a judicial review; and
(d) HMRC eventually fail in the House of Lords to show that pre-existing legislation is sufficient to defect the scheme.

Q: Is the solution suitable for all workers providing personal services?
A: No, it is not suitable for workers who are genuinely self employed providing services to a range of clients such as our example of Joe. Nor is it suitable where services are provided exclusively from the worker’s home (or other premises under his control) such as the second contract in our example of Ben. Finally, our solution is not suitable if your client had no right to exercise control over the manner in which you provided your services. An example of this can be found in HMRC’s employment status manual where a head chef provided on a temporary basis was held not to be under the control of a restaurant. In that case, the tribunal expressed the opinion that an under chef would be under control. In reality, few large clients will wish to argue that they didn’t have a right to exercise control.

Our solution is also unsuitable where indemnities have been given to make good tax assessed on a third party such as an agency or where there is a close connection between the worker and the agency.

Q: What are your fees?
A: Our fees are all VAT inclusive and are as follows:

(i) We require an initial fee of £500 to consider your circumstances. If we feel the solution is not suitable for you we will return this fee.
(ii) If we believe our solution is suitable we require a further £500 fee to write to HMRC on your behalf.
(iii) If we are ultimately successful in that some or all of your trust income is not assessed on you we require a success fee of 5% of that income.

Q: So with perhaps 1,500 people affected you stand to get rich even if your solution doesn’t work?
A: No, we cannot possibly provide a professional service to this many people. We do not expect to act for more than 100 former members. The £1,000 up front fee will do little more than cover our costs. We are relying on the success fee to make the exercise worthwhile for us.

Q: Can’t I take this idea to any accountant?
A: Yes, we welcome competition and do not fear it as we have no delusions that we can act for anything like 1,500 former scheme members. In practice, this area of tax is highly specialised and only a limited number of accountants will feel they have the expertise to take on former scheme members.