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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 became responsible for ensuring compliance with the legislation and will accrue liabilities if any self-employed workers placed by them are found not to be genuinely self-employed. The legislation coincided with new rules designed to tackle offshore schemes and LLPs which 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 the agency must be paying employed levels of employer's NI, employee's NI and PAYE (taxes) to HMRC. Under the legislation 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 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 was due in August 2015.
CIS 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 are in the CIS scheme are potentially accruing liabilities for agencies. However, providing the agency has carried out adequate checks to ensure the individual is genuinely self-employed, this is still an acceptable way to operate. PayStream can work in collaboration with an agency to carry out these checks.
Some providers used to run schemes where workers are paid gross after the provider’s margin. HMRC was receiving no tax at all from the providers so the potential liability for agencies was much higher than under the CIS scheme (where 20% is deducted and paid to HMRC). We do not expect these schemes to have survived after April 2014.
Limited companies are not affected by the legislation and IR35 will continue to apply. HMRC issued guidance to explain why limited companies are not 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.
An umbrella is a PAYE solution like agency payroll so the legislation will not affect these arrangements.
The legislation states that if a worker is subject to (or 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 is hard for agencies to get comfortable that there is no control without assurances from clients.
Agencies 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 but it remains to be seen as to 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:
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.
For non-construction agencies that operate a strict PSL for umbrellas and accountancy services there was very little to do. That said, most checked whether there were any payments to providers not on the PSL that may be using self-employed or offshore schemes. If any were identified they were asked to switch to an approved provider.
Those not operating strict PSLs had 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 years. Having a strong compliance department has been key to our success in getting on PSLs.
For construction agencies, a checklist has been developed to gather evidence that the worker is genuinely self-employed. These can be completed in-house or in collaboration with PayStream.
