The sting in the tail from HMRCs additional RTI record keeping requirements
The legislation which was enforced on 6 April requires recruitment agencies to guarantee that any self-employed workers that they provide to end clients are fully independent and if an agency treats a worker as self employed when they should have been taxed as an employee, the liability for payment of tax and NIC could fall on the agency and its directors.
Recruitment companies which contract directly with clients will need to make sure they have satisfactory evidence showing the worker is not subject to (or to the right of) supervision, direction or control.
Importantly, HMRC has clarified that they “do not consider a signed declaration from the worker that simply states they are not subject to (or to a right of) supervision, direction or control by anyone, constitutes sufficient evidence for the purposes of the Agency Legislation”. Agencies are left still seeking full clarification as to what does constitute evidence.
In a further tightening, from 6 April 2015 there is an additional RTI record keeping requirement for agencies providing UK clients with workers who receive a gross payment. These returns must be made to HMRC on a quarterly basis and the first returns must be filed with HMRC by 5 August 2015.
As detailed in ESM2043, “from 6 April 2014 the agency must keep and preserve records and make returns for individual workers when they are not deducting income tax and National Insurance contributions at source for those workers through PAYE. They must have in their power or possession and return certain information about the worker, which will include:
information about how they are paid and engaged
reasons why income tax and National Insurance contributions has not been deducted by the agency
information about the business supplying the worker to the agency.”
There is an associated penalty regime which comes into force on 6 April 2015 for failure to make the required return and for incorrect returns which begins with a fixed penalty of up to £3,000 plus daily penalties of up to £600 for continued non-compliance.
Locums Umbrella Services Limited Director, Pom Chakravarti stated, “Whilst this may cause major issues for the recruiters, even the contractors need to consider the implications. IR35 was introduced back in 2000 but never achieved what HMRC had introduced it for. It was fine tuned in May 2012 when the IR35 test was added but HMRC still couldn’t reach the limited company contractors because it couldn’t identify them. But by introducing RTI and putting the burden on the agencies to report the information under threat of a financial penalty, they will receive a list of every contractor who receives their pay gross.
“What do I think is going to happen with that information? I think HMRC will review it from the position of knowing what gross income the contractor was paid in comparison with the amount of tax paid and if there is an inconsistency, they will write a letter asking for the contractor to undergo an IR35 entity test. The contractor might have a right to substitute in their agreement with their recruitment agency, but they will not pass the test if they haven’t actually made a substitution.
“In the light of this latest addition to the RTI information gathering requirement, I strongly recommend PSC contractors revisit their tax position. If HMRC manages to put 2 and 2 together, they might also tax retrospectively.
“PSC contractors may think they can rest easy because they fall outside the scope of the Onshore Legislation for the salary they draw through their PSCs, they file a RTI return and any genuine dividends drawn from the company do not arise as a result of providing a service to the end client but because they are entitled to it as a shareholder of the company. The legislation certainly look like genuine PSCs could fall out of scope but their gross payments will be reported by the agencies along with everyone else’s and HMRC may want further information to satisfy themselves that tax has been paid appropriately. They should certainly retain detailed records just in case. The alternative could be to look at changing to a compliant umbrella company where their PAYE is covered.”