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Will you be affected by HMRC‘s latest measures to counter false self-employment?

6 January 14 | By: Jas Jhooty

builders

As mentioned in the December Autumn statement the government are taking steps to tackle tax avoidance by some employment intermediaries falsely classifying certain workers as being self-employed.

Further details of what these proposals are have now been released in their consultation document Onshore Employment Intermediaries: False Self-Employment.

HMRC have recognised a growing trend whereby some employment intermediaries engage workers on contrived contracts that at face value indicate self-employed status to avoid employment taxes. This article examines what the issues are and HMRC’s proposals to level the playing field.

The issue

It is much more advantageous to employment agencies if their workers can be labelled as being self-employed. These include: -

  • No employer’s 13.8% National Insurance Contributions is due on payments made to the workers
  • No PAYE administration is required.
  • The agency does not have to provide any holiday pay, sick pay, redundancy pay or any other employment law rights that employees are entitled to.

Such advantages enable these employment agencies to be more competitive and hence win more business.
HMRC are contending that the issue of false self-employment is on the rise. What started out within the construction industry is now becoming prevalent within other sectors such as the driving, catering and the security industries. HMRC state that they have evidence of existing permanent employees being taken out of direct employment and being moved into false self-employment arrangements involving intermediaries.

Proposed legislative changes

HMRC intends to make a change to their existing agency legislation. If the agency legislation applies, payments received by a worker are treated as being in consequence of an employment between the intermediary (agency) and worker. This means that the intermediary must deduct PAYE and NIC.

Currently the agency legislation only applies to workers providing their services under the terms of an agency contract. This is defined as:

“A contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client.”

This has led intermediaries to set up contracts which allow the worker to send someone else to do their job and thus it is argued that the worker is not obliged to personally provide services.

The government proposes removing the obligation for the worker to provide their services personally. Instead the proposal is that the agency legislation will apply where the worker is:

  • subject to (or to the right of) control, supervision or direction as to the manner in which the duties are carried out
  • providing their services personally
  • remunerated as a consequence of providing their services
  • receiving remuneration not already taxed as employment income.

New reporting requirements

A new reporting regime is also being mooted that will force employment agencies to report the following information about their self-employed workers to HMRC on a quarterly basis: -

  • Worker’s full Name
  • Worker’s National Insurance Number
  • Worker’s address
  • Worker’s date of birth
  • Where the worker is not a UK citizen their passport number or I.D card number
  • Worker’s gender
  • Reason why income tax and NICs has not been deducted by the employment intermediary
  • Name and address of the business who is supplying the worker to the employment business and the number of hours the payment relates to.

These new reporting requirements will come into play with effect from 6th April 2014.

Financial impact

HM Treasury expect to raise an additional £500 million per year as a result of these new proposals. The construction industry is expected to be most affected by these changes as there is an estimated 200,000 sub-contractors engaged through intermediaries who are being treated as being self-employed. There are an additional 50,000 workers also likely to be affected in other industries.

How emTax can help

This proposed new legislation will have potentially devastating financial consequences for employment intermediaries and the construction industry in particular. Our consultants are experts in all areas of employment tax including employment status issues.

Employment status is not just dependent on one factor but on a range of factors that have been the subject of case law over many years. We can review your current arrangements and advise you on ways to strengthen your case that workers are genuinely self-employed. For example we can advise you on management practices to instruct workers that cannot be construed as being controlling by HMRC and also leave you with tailored contracts for services that define other factors indicative of self-employment such as provision of own equipment etc.

If you will be affected by the proposed new legislation, please do not hesitate to contact us.

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