Onshore self-employment intermediaries: False Self-Employment UPDATE
by MATTHEW FRYER
In the 2013 Autumn Statement, the Government announced that they would tackle perceived tax avoidance from the use of false self-employment intermediaries. My previous blog discussed the proposed legislation and how this might impact recruitment businesses.
HMRC received over 100 responses to their consultation on this topic and published their summary of responses document on 13th March which included the Governments thoughts on feedback received. The full document can be found here and I have summarised the significant comments below:
1. Timing of the proposed changes
Over half of the respondents to the consultation, including Brookson, raised concerns that the changes were being implemented too quickly. Having considered the feedback HMRC have confirmed that they are still pressing ahead with the changes which will become effective from 6th April 2014. They have however delayed the requirement for recruitment agencies (and other intermediaries) to file quarterly returns to 5th August 2015 (rather than November 2014). This means that recruiters still need to get comfortable prior to 5th April that their contractors arent being engaged by false self-employment providers as the PAYE liability comes into effect from that date, but they dont have to tell HMRC about payments to contractors until summer 2015.
2. Definition of intermediary
The Government have acknowledged concerns regarding the definition of an intermediary and have committed to amend the proposed legislation to prevent certain unintended intermediaries being caught (e.g. genuine consultancy businesses) but to ensure that the legislation is still wide enough to capture those intermediaries it originally intended to. The 2014 Finance Bill is expected to be published on 27th March and it is unlikely that further clarity on the definition of an intermediary will be known before that time.
This will give agencies and other intermediaries just 9 days to react!
3. Control test
The Government has recognised that the control test to be used to assess whether the agency is required to deduct PAYE is difficult to operate in practise. HMRC have developed further guidance to enable agencies to determine whether a worker is controlled or not. This guidance has be published on HMRCs website. This guidance offers support to recruiters with 12 different scenarios to help demonstrate HMRCs view on control.
The Government have also recognised concern regarding the level of due diligence required to ascertain the workers status and the potential for fraudulent documents being provided to agencies by intermediaries further down the supply chain to purport that PAYE has already been deducted or that a worker is not controlled. To address this concern, HMRC will introduce provisions to transfer any PAYE liability to the organisation providing the fraudulent information and away from the first agency.
4. Personal Service Companies (PSCs)
HMRC have previously provided clarity on whether a Personal Service Company (PSC) will be excluded from this legislation, which can be found here. This confirms that a PSC is outside the scope of the new rules if the director of the PSC withdraws profits by way of directors fee (salary), dividends or loans. As most PSCs will be outside the scope of these new rules, HMRC plan to simplify the process for agencies submitting returns for payments to PSCs by requesting less information.
5. Preventing avoidance
The Government have confirmed that they intend to introduce a targeted anti-avoidance rule (TAAR) to deter further avoidance. The rule will allow HMRC to consider the motive for setting up a particular arrangement (is the motive solely to avoid tax?). For example this will allow HMRC to target flagrant avoidance e.g. an agency insisting that all of its workers (regardless of IR35 or any other factors) work via their own PSC with the sole intention of the agency avoiding PAYE and employers NIC.
Recruiters should give consideration to the products and services offered by other intermediaries in the supply chain by undertaking proper due diligence to ensure they dont fall foul of the TAAR.
From 6th April 2014 recruiters will be exposed to tax and NI liabilities if they are placing workers who are engaged further down the supply chain as sole traders AND it can be demonstrated that the worker is under the control and supervision of the client. Despite reporting requirements not coming into force for over 12 months, it is still essential for agencies to understand who is paying their candidates. We would suggest that agencies ensure they have done the necessary due diligence on their providers and are comfortable that they are not exposing them to risk.
The use of a preferred supplier list (PSL) has never been more important and Brookson would be happy to provide further information on how to implement one and the factors to consider when doing so.