ARC voices concerns over government false self employment consultation
The government believes some 250,000 workers, many of whom work in construction, are claiming self-employment or being put into schemes that they know little about and are being charged inappropriately. The consultation is targeted at bringing those individuals into the scope of the agency tax legislation. As proposed this would require the supplying employment business to pay tax and NICs on a PAYE basis for those brought into scope by the rule changes, eliminating those workers from receiving payments gross, or in the case of CIS, subject to 20% deductions. The consultation closes at midnight today the 4th February and the new legislation is planned to take effect on 6th April 2014.
Adrian Marlowe, chairman of ARC, said, “We can see why the government wants to address this area, but we believe the legislation as currently drafted will have a much wider impact than the intended result. For example, the idea is that the organisation which has the contract with an end user (I refer to these as head operators, or HOs) is to be liable for payment of the tax going forwards, as well as reporting to HMRC wherever payments are made gross. Where there are several agencies in the chain the due diligence required will be excessive in our view. Every company in the chain will have to be checked to ensure that it is not paying the worker gross, and it may be that more than one organisation has a contract with the end user. In addition it is not clear who the end user would be, especially in the construction industry – is the end user the landowner, or the main construction company?”
“Risk averse HOs that are head contractors or RPOs may be tempted to take overall control, which could lead to 2nd tier agencies being used purely as find and introduce vehicles rather than supply businesses as now. Workers could be forced to operate through the HOs’ preferred umbrella company, which may be controlled or even owned by the contractor/RPO. In our view this would lead to an unacceptable interference with the way the industry currently works, as obvious commercial advantage would be handed to specific HOs. We think that this outcome may not have been anticipated.”
The idea of making the HO liable is included in recent draft legislation related to general offshore employment intermediaries. Marlowe commented “the idea is sound so far as offshoring is concerned, because it is relatively easy for the HO to check whether any party in a chain has an offshore arrangement which triggers payment of PAYE tax. This is not the case under the new proposed onshore legislation where the HO will find it very difficult to check how payments to the worker are made. Where gross payments are identified the HO must either pay up on a PAYE basis and account for employer’s NICs or produce evidence that the worker is not under the control, or right of control, of any person, a complex legal test.”
There has been much speculation as to whether personal service companies (PSCs) are outside of scope of the new proposals. “Our analysis of the draft legislation is that every individual working through a company is within scope of the legislation as it is currently drafted as they are unavoidably & lsquo;personally involved in the provision of the services’, this being a new proposed test that triggers the tax. The only way to avoid this would be if payments are made by the company by way of dividend or employment income. However if dividend payments are in consequence to the services, for example where the dividends are made regularly based on payments received, as is often the case with PSCs, HMRC would be entitled to look for payments from the HO on the PAYE basis (making the HO liable for 13.8% employer NICs). Again we are not sure whether this is an intended outcome and HMRC is providing mixed messages on that front.”
“Finally the timing in our view is far too short. Existing projects and labour cost will have been priced on the current tax basis. Where workers are self-employed at the moment but caught under the new rules, the labour cost will increase by 13.8%, the current amount of employer NICs. In the construction industry in particular, where work is typically based on fixed price project amounts, this increase could result in the collapse of projects and businesses where the projects run beyond April 2014. We therefore think that in fairness there ought to be a much longer implementation period.”
ARC is advised by the recruitment and employment law specialist Lawspeed, which recently held a seminar on this subject at which spokespersons for HMRC put forward the government’s position. Both ARC and Lawspeed have voiced their concerns directly to HMRC under the consultation process.