HMRC plans to tackle agencies aiding false self-employment will be problematic, say lawyers
The Employment Lawyers Association (ELA), whose 6,000 plus members advise employers and employees, has raised doubts over proposals from HM Revenue and Customs (HMRC) to crackdown on those who use the cloak of self-employment to dodge tax and national insurance (NI) payments.
ELA supports moves to stamp out the use of intermediary arrangements that aid false self-employment. But they believe proposed legislation is being rushed in (implementation is set for the new tax year in April), that it is too blunt, will mistakenly hit legitimate businesses and will spawn satellite litigation.
HMRC says there is increasing evidence that employment intermediaries, such as agencies, can be used to aid false self-employment thus enabling individuals and businesses to avoid paying income tax and NI. This practice leads to unfair competition and can result in some individuals being denied employment rights such as national minimum wage and sick pay.
"The Government risks undermining its own objective of a simpler test for determining when remuneration must be treated as earnings from employment by making the position more uncertain and complex with its proposals," said James Warren, chair of the ELA committee which has examined the proposals and responded to the HMRC consultation.
ELA's key concerns are:
i. The new test to govern when an "agency" is liable to operate PAYE for individuals performing or providing a service makes the position much more uncertain. It is removed from the employment status test used in other employment legislation and will revolve around a concept of "supervision, direction or control". ELA says that many different parties in a long contractual chain from clients to employment businesses could be involved in exercising such authority. "This is because each intermediary is legally the client for the provision of services to it, as well as the provider of services to its own client. As it stands, it seems any and all of the employment businesses in the chain could potentially be liable."
ii. The tax status of individuals would be different depending on whether they engage directly with clients or via an intermediary, the complete opposite of what HMRC says it is trying to achieve. "The draft legislation will have a confusing effect, creating a completely separate regime to govern the treatment of individuals working through intermediaries from those who are not, when conceptually the employment status analysis should be the same," says ELA.
iii. Significant commercial difficulties could arise from the wider scope of proposals encompassing all sorts of business-to-business relationships, including those not meant to be captured such as where no employment business or intermediary is in the contractual chain.
"The proposals suggest that individuals who were formerly treated as self-employed would now be employees / workers and therefore gain the benefit of employment rights," said James Warren.
"However, this will not be the case for many basic employment rights such as the right to claim unfair dismissal or redundancy compensation. This means individuals will have the burden of PAYE and NIC deductions but no corresponding benefit of employment law protections."
He added, "As drafted, so much uncertainty is created by the current proposals that we foresee people resorting to litigation simply to gain greater clarity about who is liable to pay what. It is in everyone's interest for time to be taken to redraft the wording of the legislation to eliminate uncertainties, avoid litigation and, chiefly, ensure HMRC closes a tax loophole effectively."