The Government has recently concluded its consultation proposing new measures aimed at preventing employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self-employment.
As a result, legislation will be introduced in the Finance Bill 2014 to remove the need for personal service and the obligation for personal service for recruitment businesses and other intermediaries based in the UK. It also introduces a power for regulations to be made in respect of record keeping, return requirements and penalties.
The changes to the legislation that are proposed have been developed following consultation on the use of offshore employment intermediaries. They require the UK intermediary that contracts with the end client to take responsibility for operating PAYE in relation to any workers that it places if no other person (company, partnership or other entity) through which the workers are engaged is already doing so. There are also corresponding changes in relation to NICs.
Unless an agency worker is engaged to work through their own personal service company, they are generally regarded as an employee. However, to avoid the need to deduct PAYE, agencies often make it explicit in the contract of employment that the relationship will be one of self-employment.
Currently, an agency is required to deduct tax and NIC and pay secondary class 1 NICs only if the worker “personally provides, or is under an obligation personally to provide” services to an engager through an intermediary (the agency). By including in a contract a clause that permits the worker to send a substitute, agencies attempt to circumvent the PAYE obligation, even if the substitution will never be permitted in practice, and treat the worker is self-employed.
The new section 44 (to be substituted by the Finance Bill 2014) provides that an agency must put a worker on its own payroll if the worker “personally provides, or is personally involved in the provision of services (which are not excluded services) to another person ‘the client’, under a contract between the agency and the client. However, this is subject to the proviso that the worker is under the supervision or control of the client or some other party.
A truly self-employed person (including a person who is supplied to the agency by his own personal services company) will not be subject to the new agency rules.
What changes are proposed to Offshore Intermediaries?
Offshore employment intermediaries are companies placed between employers and employees that have no UK presence. As such, they also do not currently have to remit payroll taxes or pay NICs. It is true that many companies of this nature are genuine commercial ventures, however many are designed to avoid UK tax.
The government intends to introduce measures to ensure that employment taxes are payable for all UK employees, wherever the payroll is based, and to give HMRC the necessary powers to collect these taxes.
It is understood that the ITEPA 2003 will be amended to cover a situation where the PAYE regulations do not currently apply because the employer is outside the UK. As a result, a third party (usually a UK agency) will become responsible for accounting under PAYE on amounts paid to the worker subject to certain conditions being met. Here, the employee must work for someone who is not their employer and the agency must have facilitated that arrangement but not accounted for PAYE. The agency must also fall within the scope of the PAYE regulations in the UK. These provisions are also intended to capture a UK associate company of an overseas employer who will also be responsible for PAYE.
When will the changes come into effect?
These new measures will have effect from 6 April 2014. It has been argued that the changes proposed by HMRC will significantly raise the costs of individual construction projects at a time when the sector is still recovering from the recession recent years.
It is therefore crucial that employment agencies carefully consider their dealings with all forms of intermediary since PAYE will apply unless it can be shown that there is no supervision, direction or control.
If you would like further advice on the new regulations we would recommend speaking to Chris Cook at our recommended Employment Lawyers, SA Law LLP on 01727 798019 or alternatively speak to your own Employment Lawyers.
DISCLAIMER: PLEASE NOTE ALL ADVICE GIVEN IS A GUIDE AND YOU MAY WISH TO SEEK LEGAL ADVICE BEFORE ACTING UPON ANY PART OF THIS FACTSHEET