Onshore self-employment intermediaries – managing risk in the contractor supply chain

Following the consultation document published on 10 December 2013 entitled “Onshore Employment Intermediaries: False Self Employment” Brookson have met with HMRC on several occasions to discuss their intended aim for this legislation and have recently submitted our consultation response.

We have summarised below how we feel the proposed legislation will impact recruitment agencies when it is introduced on 6 April 2014 and have summarised ways in which we feel the associated risk can be managed.

Please note, the legislation is still in draft stages, however, we think that only minor changes, mostly surrounding the reporting requirements, will be made before it is introduced on 5 April 2014.

Background to the consultation

HMRC are concerned by the growing number of workers operating as self-employed workers or “sole traders”. The concern is two-fold:

1. These workers may be low skilled, highly controlled, potentially vulnerable workers who are in essence disguised employees and as a result HMRC are not collecting the right amount of tax and NI.
2. HMRC believe that many of these sole traders do not complete tax returns to disclose their income and therefore in some cases not only is the correct amount of tax and NI not paid but no tax and NI is paid at all.

Historically, most recruitment agencies have refused to contract directly with a sole trader as there is existing legislation (s44 of the Income Tax (Earnings and Pensions) Act 2003) which puts the PAYE risk and obligations on the recruitment agency if it can be proved that the sole trader is under the direction, supervision and control of the end client.

In recent years there has been a growing number of “intermediaries” who contract with the agency to supply self-employed workers to fulfil contract roles. These intermediaries bear the PAYE risk and in the past have managed this risk via the terms of their contract with the workers. This arrangement is common practise in the construction sector but has started to be used in other sectors, predominantly catering, driving and security.

How are HMRC tackling this?

HMRC have decided to tackle this issue by moving the compliance burden up the supply chain away from the self-employment intermediary to the recruitment agency who engages with the end client. In doing this, HMRC have stopped short of passing the burden to clients as they view recruitment agencies as having more influence over how the worker is paid. To do this, they have made proposed changes to the existing agency legislation referred to above.

The primary change is to remove the obligation for the worker to provide their services personally and instead apply the legislation if the worker is personally involved in providing the services. This change means that the contractual terms that self-employment intermediaries have used historically to circumvent the legislation are no longer effective.

As a result, if the recruitment agency places a worker who meets the following conditions the recruitment agency needs to consider if PAYE should be withheld from any payments made or take the risk of potentially substantial penalties and fines for non-compliance.

The conditions that all recruitment agencies placing workers in contract roles should consider from 6 April 2014 are:

1. Is the worker subject to (or does the client have the right of) control, supervision or direction as to the manner in which duties are carried out (this test is not defined in legislation and has very little case law interpreting it and so is hard to disprove). HMRC’s opening position is that all workers will be subject to control and it is the responsibility of the recruitment agency to prove otherwise.
2. Is the worker providing their services personally (this will always be the case).
3. Is the worker remunerated as a consequence of providing their services (this applies if the individual receives payment directly linked to the work they do). HMRC have confirmed that one man limited companies (PSCs) are excluded from this legislation providing the worker is a director and or shareholder of the company and remunerates themself by way of salary and/or dividends.
4. Is the remuneration not already taxed as employment income (this means that if the worker is employed by the agency or an umbrella company and their pay is subject to PAYE then the legislation will not apply).

If all four of the above conditions are met the recruitment agency at the top of the supply chain i.e. the one engaged with the client for whom the workers services are being supplied, must deduct tax and National Insurance from all payments made for the worker’s services.

HMRC have also proposed a statutory returns and record keeping requirement. Whilst records must be kept from 6 April 2014 the first return (which should include details of all workers placed for whom income tax and NIC is not deducted) should be made via the RTI system from 1 November 2014.

The final “threat” from HMRC for recruitment agencies who continue to use self-employment providers who claim to have circumvented the legislation is that they will seek to challenge these agencies by using the Managed Service Company legislation.

What are the practical implications?

It is now essential for all recruitment agencies to understand and manage how their contract workers are being paid. This will require due diligence of the vehicles by which contract workers are being paid, making preferred supplier lists event more important for recruiters to understand who they work with. At a high level, the following remain risk free, in terms of tax and NI liability, for the recruitment agency:

1. Contractors employed by the agency directly and paid via PAYE.
2. Contractors employed by a compliant umbrella company which is based in the UK and which engages its employees on a contract of employment and pays them employment income.
3. Contractors engaged via their own limited company who pay themselves by way of dividend or salary.

If the contractor is engaged by anyone in the supply chain on a contract for services (even if this is in the construction sector with 20% or 30% tax withheld) then you should seriously consider what action you will take as under this arrangement you are liable for PAYE if HMRC’s presumption that the worker is controlled cannot be rebutted.