Following the announcements from Government that they intend to strengthen legislation to prevent intermediaries being used to avoid employment taxes by disguising employment as self-employment, a consultation document has been published. It explains the thinking behind the proposed changes and calls for comment on the potential income on businesses and individuals.
For a number of years workers in the construction industry have worked via intermediaries as sole traders but the practice has extended to other industries and HMRC feels that now many workers are being deprived of the basic rights of employment by companies who are avoiding Employer’s National Insurance contributions despite the fact that their workers are, to all intents and purposes, employees.
The changes are being made to the Agency Legislation which is contained within Chapter 7, part 2 of the ITEPA 2003. Currently the legislation places the responsibility for deducting income tax and NI contributions with an agency that contracts with a worker if certain criteria are met, one of those being the obligation of the worker to provide their services personally. This meant that, if an agency contract had a clause which allowed a worker to provide a substitute the workers would not fall under the Agency Legislation. However, in 2011 HMRC challenged a company called Talentcore and insisted that, although their workers were self-employed, they should be paid through PAYE as, although technically they could provide a substitute, they never did. HMRC were over-ruled by the Judge in an Upper Tier Tax Tribunal who insisted
“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”
HMRC were obviously not happy with the ruling in the case and so have amended the section that deals with personal service in the legislation so that it reads
“a worker personally provides their services or is personally involved in a service that is being supplied, such as a composite service”
This amendment is intended to pass the responsibility of PAYE deductions and payment for Employer’s NIC’s back to intermediaries who had previously engaged workers en masse as sole-traders.
HMRC have, in fact, moved the focus of the Agencies Legislation from rights of substitution to whether or not a worker will be subject to supervision, direction and control; a key pointer in the IR35 legislation. For the purpose of the new legislation, “control” will mean that anyone is able to exercise control, or have the right to exercise control about how the work is carried out. The proposed changes continue to say
“Where a worker is engaged through an intermediary then there will be a presumption that there is control over the worker”
It further goes on to say that if an intermediary doesn’t believe that the worker will be subject to supervision, direction and control, then they will need to keep evidence of this. If the intermediary is unable to provide satisfactory evidence then HMRC reserve the right to recover tax and NIC’s from the intermediary.
Strangely, as HMRC are not often prone to defining anything they have also included a glossary at the back of the consultation document which defines a PSC as; “A PSC is a small limited company through which a [sic] owner/director provides there [sic] own personal services”
What’s contained within the consultation paper will have no bearing on the legislation itself when it comes into being in April 2014 but the Government does comment that it is not its intention for the legislation to impact on contractors working through PSC’s. However, all changes in tax law are designed to make more money for the Treasury so it may be a case of ‘watch this space’ to see what, if any impact, there is on the industry.
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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