What is it and how does it affect agencies?
On 6 April 2014 the Government published final Legislation following the Onshore Employment Intermediaries Consultation. As widely anticipated there was no good news for agencies who will remain responsible for ensuring compliance with the Legislation and will accrue liabilities from 6 April if any 'self-employed' workers placed by them are found not to be genuinely self-employed.
The Legislation coincides with new rules designed to tackle offshore schemes and LLPswhich are used to avoid paying employed levels of tax.
The purpose of the Legislation is to ensure that any agency worker who is 'controlled' by another person is taxed as an employee. This means that they must be paying Employers NI, Employees NI and PAYE ("taxes") to HMRC. Under the Legislation this liability sits with the "first intermediary" i.e. the agency or RPO dealing with the end user/client.
If an agency is not paying the taxes itself it needs to be sure that someone else is paying the taxes or will need to be able to produce evidence to HMRC that the agency worker is genuinely self-employed and not "controlled" as set out in the legislation.
HMRC will determine whether a worker is "caught" by the Legislation. There will be no "reasonable steps" defence so an agency will not be able to say it genuinely thought someone was self-employed and escape liability even where it has carried out extensive due diligence. The only exception to this is where there has been fraud in the contractual chain. Fraud is extremely difficult to prove and an agency will not have a defence where someone else in the contractual chain is simply mistaken or even negligent.
One of the few situations where an agency may escape liability is where a provider has told it that the workers are paid on a PAYE (umbrella) basis but are really paid on a self-employed basis - this is fraud.
Where a provider has told an agency that the workers are paid under a self-employed scheme such as CIS and that the provider believes they are self-employed, the agency will remain liable if the worker is found not to be genuinely self-employed - this is not fraud.
Agencies will have to report quarterly to HMRC all workers that are not on agency payroll. HMRC will then analyse this information and ask an agency to produce evidence that workers using self-employed schemes are genuinely self-employed. The first report will be due in August 2015.
Which services may be affected?
The CIS scheme is a self-employed scheme and is within scope. Although the Government considered an exemption for CIS workers, CIS has not been excluded. Any workers that stay in the CIS scheme will potentially be accruing liabilities for agencies from April.
Some providers run schemes where workers are paid gross after the providers margin. HMRC is receiving no tax at all from the providers so the potential liability for agencies is much higher than under the CIS scheme (where 20% is deducted and paid to HMRC). We do not expect these schemes to survive after April.
Which services will not be affected?
An umbrella is a PAYE solution like agency payroll so the legislation will not affect these arrangements.
PSCs should not be affected by the legislation and IR35 will continue to apply. There will also be a reduced return requirement in relation to PSCs and we await further details on this. HMRC has issued guidance to explain why PSCs will not be affected. The guidance confirms that if a worker withdraws profits from a limited company as salary (employment income), the legislation would not apply because income tax and NICs will already have been deducted. It will also not apply if profits are withdrawn as dividends, as this is a return on capital.
What does control mean?
The legislation states that if a worker is subject to (or subject to the right of) supervision, direction or control of anyone in the contractual chain (e.g. the end user/client or managed service provider) the worker must be taxed on an employed basis. It will be hard for agencies to get comfortable that there is no control without assurances from clients.
Agencies will also need to review contracts which typically place responsibility for supervision and control on the client.
HMRC has produced examples and guidance to illustrate the meaning of control which reads:
Is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard? Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.
Is someone making a person do his/her work in a certain way by providing them with instructions, guidance or advice as to how the work must be done? Someone providing direction will often coordinate how the work is done, as it is being undertaken.
Is someone dictating what work a person does and how they go about doing that work? Control also includes someone having the power to move the person from one job to another.
It remains to be seen whether the courts will agree with HMRC's interpretation but what is clear is that HMRC will take a lot of convincing that there is no control.
What are agencies doing?
For non-construction agencies that operate a strict PSL for umbrellas and PSC providers there has been very little to do. That said, most are checking whether there are any payments to providers not on the PSL that may be using self-employed or offshore schemes. If any are identified they are being asked to switch to an approved provider.
Those not operating strict PSLs have a much bigger job to do. We have advised agencies for some time that PSLs make sense and we have seen a move to set up PSLs in recent months. Having a strong compliance department has been key to our success in getting on PSLs.
Agencies operating in the construction sector have had to decide whether to allow their workers to use the CIS scheme. Many have made the decision to switch the workers to umbrella or PAYE and to avoid the CIS scheme altogether.
Others have switched lower paid workers to an umbrella solution or PAYE (since these workers are generally more likely to be supervised or controlled) and are looking to review the circumstances of the higher paid workers.
Checklists are being developed to gather evidence (that will satisfy HMRC) that the worker is genuinely self-employed.
Impact on the agency worker
Agencies are very concerned about the impact of a switch from CIS on the worker. Financially, assuming rates stay the same, agency workers will be worse off on agency payroll. Where workers incur travel and subsistence costs a switch to an umbrella can help to mitigate any loss.
Assuming a reasonable level of expenses, workers on rates of £8.50-12/hr should not see a reduction in weekly net pay if they transfer from CIS to umbrella. At £12 and above the disparity becomes more significant. This is another reason why some agencies are considering a different approach for higher paid workers.
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