Changes to the ITEPA – What effect will ‘False Self-Employment’ Rules have on Recruiters?

HMRC don’t like losing – that’s a fact – unfortunately when they challenged a company called Talentcore that’s exactly what happened. HMRC insisted that the company’s workers should be paid through PAYE despite the fact that they were self-employed. Their contracts contained a right of substitution but HMRC argued that it was never used and the workers always provided their services personally and therefore they were really employees. Unfortunately the Judge disagreed and said;

““the fact that the original consultant had complete freedom to arrange for a substitute if he wished, even if he did not actually do so, constitutes in my view an unfettered right of substitution”.

It seems as though this defeat may have rankled somewhat with HMRC as they have now, effectively, moved the goalposts with proposed changes to the ITEPA which are due to come into force in April 2014. The Agencies Legislation contained within the ITEPA is to be strengthened by removing the obligation for personal service and, whether or not someone is considered for tax purposes to fall within the Agencies Legislation will, instead, focus on whether the worker is subject to supervision, direction or control. 

What may be of concern to recruiters is that the proposal states that;

 ‘where a worker is engaged by or through an intermediary [agency or employment business] then there will be a presumption that there is control over the worker’.

It also goes on to say that if an intermediary/third party doesn’t believe that the worker will be subject to supervision, direction and control or that there is a right of control direction or supervision then they will need to keep evidence to support that. If that evidence doesn’t satisfy HMRC then the recruiter could be held liable for Income Tax and National Insurance Contributions.

The responsibility for PAYE deductions will lie with the recruiter if a worker does fall within the new definitions in the Agencies Legislation unless the worker is already an employee of another company, such as an umbrella company.

The Government have stated in their consultation document that it’s not their intention that the changes to the legislation should affect PSC’s but many in the industry are concerned that PSC contractors could fall within scope. KPMG have commented;

“The draft legislation is structured in such a way as to include workers involved in the provision of composite services, as intended by Government. However, KPMG is concerned that the wording of the legislation is too broadly drafted. Currently, the definition of an ‘agency contract’ does not permit services being provided through a personal service company (PSC) from being brought within the agency rules, as an agency contract requires a worker to be a party to the contract. These PSC arrangements are considered separately under Chapter 8 of Part 2 of ITEPA (application of provisions to workers under arrangements made by intermediaries) (the ‘IR35’ legislation). As drafted, we consider that in certain instances PSC arrangements may also be caught under the new rules, resulting in the agency having an obligation to operate PAYE on payments receivable by the worker ‘in consequence of’ providing the services. Such payments may not have been received directly from the end user; they may for example be dividends paid to the worker by the PSC. In addition, the new legislation also extends to cases where a worker is ‘personally involved in the provision of services’ and in consequence of this the client pays the worker for the services. This goes beyond the existing ‘personal service’ requirement. 
When this is coupled with the “manner in which the worker provides the services [not being] subject to (or to the right of) supervision, direction or control by any person” it appears to introduce a more demanding test to avoid the impact of these rules than exists under the current agency rules"

Only time will tell if recruiters could be facing a tax liability from a PSC contractor as this question will only be answered in a test case following protracted debate by lawyers but there does seem to be concern within the contractor market. Discussions begun in the forum of the popular contractor forum on ContractorUK have already had over 4000 views in the space of 24 hours.

The closing date for comments on the consultation into the proposed changes is 4^th February – until then it’s a case of watch this space.

Lisa Keeble is the Managing Director for Contractor Umbrella Ltd, one of the UK’s Most Respected Umbrella Companies and founder member of AllUmbrellaCompaniesAreEqual.
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