In December 2013 the Government begun a consultation over the introduction of legislation to tackle false self-employment arrangements to save tax. The government has now published its response to this consultation. The revised draft legislation has not been published of yet; however, judging from the response (which refers to only small changes being accepted), the draft will not differ greatly from the original. The headlines from the response are:
This will remain primarily with the first intermediary i.e. the agency or RPO dealing with the end user/client. There will be no 'reasonable steps' defence. An agency will not be able to say it thought someone was genuinely 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.
In an RPO situation where the RPO has been provided with fraudulent documents by an agency (purporting fraudulently that there is either no control over a worker or that the worker is paid on a PAYE basis), the liability will sit with the body providing the fraudulent documents. The same will apply where an agency has been provided with fraudulent documents by a provider at any point in a chain of supply. 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.
If a provider has told an agency that the workers are paid on a PAYE (umbrella) basis but are really paid on a self-employed (CIS) basis the provider would be liable - this is fraud.
Where a provider has told an agency that the workers are paid under the CIS scheme 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.
An umbrella is a PAYE solution 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 - further details awaited.
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 It will also not apply if profits are withdrawn as dividends, as this is a return on capital.
CIS has not been excluded. Any workers that stay in the CIS scheme will potentially be accruing liabilities for agencies from April.
The test legislations appears unchanged from the draft legislation originally published in December 2013.It 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 on this point without assurances from clients and providers.
There is a presumption of control over the worker where s/he is engaged with the end user/client via an intermediary. To rebut this presumption the intermediary needs to produce evidence to HMRC and if it cannot do so it will need to remit tax and NICs on HMRC's demand.
To provide clarity for stakeholders, HMRC has produced guidance to illustrate the control test. This includes examples of where HMRC would consider the manner in which the worker provides their services and is not subject to supervision, direction or control. This guidance will not change what the legislation says so it will be very difficult for agencies which contract with end user/clients (and end user/clients) to get comfortable with the point that there is no control.
HMRC's compliance officers will also help customers to make considered decisions in relation to the new legislation. In practice, there is a question as to whether HMRC has sufficient resources to ensure consistent and quality guidance. The Guidance provided, purportedly drawing on case law to date, states:
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.
This Guidance reflects what HMRC would like control to be rather than what the courts have historically held it to be.
What does this mean for you?
There will be no delay in the introduction of the legislation. It will have effect from 6 April 2014. The Government believes delaying implementation would provide the opportunity for new avoidance arrangements to be put in place and therefore implementation will not be delayed. HMRC plans to run a pilot this year to allow HMRC to develop and test the new reporting system with stakeholders.
For agencies, reporting and returns requirements and related penalties will be delayed. The first return will be due by 5 August 2015 which will contain information on workers engaged from April 2015.
Agencies will need to see the legislation itself before finalising their position but we think it safe to assume it won't differ greatly from the original draft.
The first question to ask is "do we have any workers using self-employed schemes?" If you already operate a strict PSL for umbrellas and PSCs there is probably very little to do. You know the businesses with whom you work very well, so know that they are not operating self-employed schemes.
The second question to ask is "do we have any workers using offshore schemes or LLPs (limited liability partnerships)?" New rules on offshore schemes and LLPs (not discussed here) also come into effect in April which could result in a tax liability for an agency.
For those operating in the construction sector it is likely that some of their workers will be using the CIS scheme. A decision needs to be made whether to switch the workers to umbrella or PAYE or to gather evidence (that will satisfy HMRC) that the worker is genuinely self-employed. The impact on the worker of any switch needs to be considered.
Assuming a reasonable level of expenses, workers on limited rates of £8.50-11/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. We will be working with our agency clients to produce examples based on live examples so that the effect can be measured.
For those agencies that do not operate a strict PSL and allow workers to choose how they are paid a very quick review of arrangements is advised for the reasons given above.