ARC calls upon Treasury to change the new false self employment test
The law, set out in the Finance Bill 2014 amending ss.44-47 Income Tax (Earnings and Pensions) Act 2003, is designed to combat the use of the self employed supply model under which often low paid workers are labelled as self employed in order to reduce tax and NIC payments.
Adrian Marlowe, chairman of the organisation which represents recruitment business worth some £2bn per annum, said “this law applies to consultancies and agencies in the UK that supply self employed individuals. The default position is that whatever the role or seniority of the worker the agencies supplying them will have to apply the PAYE rules to payments due, without any allowance for expenses, unless the agency is willing to take a risk. This is because the PAYE rules apply wherever there is any element of direction, supervision or control as to the manner, meaning & lsquo;how’, (“the SDC test”) the services are provided by the individual concerned.”
“Agencies are not lawyers, and whilst an agency can argue that the SDC test is not satisfied it needs evidence from third parties to be able to do so. This is against the backdrop that the SDC test does not specify what constitutes evidence, the requirement being that it must & lsquo;be shown’ that the test is not satisfied. It means that an agency who is told by a client that there is no SDC could still be liable for the PAYE and employers NICs if it transpires that SDC was present, unless the client was deliberately dishonest in making the statement.”
ARC argues that as the test has no case law precedent of any value, the new law is confusing and unfair. This is because it is expressed in terms similar to, but is actually different from, those that relate to key employment status tests. Marlowe explained “as currently phrased the law leaves agencies, under pressure from genuinely self employed individuals not involved in tax avoidance to pay gross, to decide whether there is or is not SDC. Furthermore whilst statements as to SDC may be made at the outset of an assignment, SDC may arise during the assignment such that the tax status changes. HMRC guidance does not explain the position properly and in our view is never going to be able to.”
ARC has a particular belief that agencies are necessary to support the flexible workforce, and is dedicated to supporting the advantages of agency work to hirers and individuals alike. “The flexible workforce is bound to be unnecessarily affected. Many senior interims are self employed in the same way as construction specialists, and lorry drivers all of whom choose to deploy their services not because they have to under an employment relationship but because they have trained and have expert skillsets which they choose to deploy in accordance with their own business plan. Their tax status should reflect their business investment, yet the new law rules that out wherever they work through an agency unless the agency takes a risk. This forces self employed workers to set up through limited companies or to accept the new regime as compliant agencies will wish to avoid the risk.”
ARC says that whilst HMRC expresses the view that those genuinely self employed should be unaffected, this test does not have that result. “The SDC test does not check whether someone is genuinely self employed, and employment status is irrelevant. Terminology in this area is confusing given that HMRC talks about genuine self employment. As a result of this, agencies may be tempted to ignore the rules when dealing with those they believe are genuinely self employed, and more unscrupulous agencies will carry on regardless in a race to the bottom. This will leave compliant businesses at a serious potential disadvantage. Furthermore, the herding of self employed into limited companies, which is likely to be another result of the tax, is a manipulation of the workforce that involves cost and effort but without achieving a greater tax take for HMRC, benefitting only those service providers that service companies.”
ARC supports the need for HMRC to address tax avoidance through devices such as labelling workers as self employed, but as Marlowe says “if the intention is that all workers operating through agencies should be subject to the PAYE rules, then the law should say that clearly. If on the other hand genuinely self employed are to be allowed to be paid gross, the law should specify a proper and easily understandable test, not the one currently in place. For example, a test based on whether the worker has a genuine business entity and investment would sort the wheat from the chaff. Publication of a list of professionals excluded from scope would also assist. This amongst other things would square off the unfair anomaly that now exists, particularly in the construction industry where there is a clear conflict between these rules and the CIS tax scheme.”
Contrasting the new onshore rules with the recently published offshore intermediaries tax rules Marlowe comments “The onshore tax regime is very different from the new offshore rules where anyone working through an offshore company could be said by default to be trying to avoid tax. It is relatively easy to check whether there is an offshore intermediary in the chain of supply, and thus there is no obvious unfairness.”
Agencies unfairly affected are invited to contact ARC. “As with other issues we have addressed”, says Marlowe “this one should be hit square on the jaw as soon as possible”.