Countering false self-employment
Proposals announced at the Autumn Statement 2013 to change the agency legislation to counter false self-employment will have effect from April 2014. Sarah Bradford, of Writetax Ltd, explains what the proposals will mean
A
n anomaly of the tax system is that a person who is self-employed
will pay less tax and national insurance contributions (NICs) than an employee with the same income. In addition, the employer must pay Class 1 NICs on employees’ earnings (although the contributions can be deducted in determining the employer’s taxable profits). Given this state of affairs it is hardly surprising therefore that it is seen as desirable, from a tax and NICs perspective at least, to be self-employed rather than employed. Consequently workers (and those who engage them) often seek to arrange their affairs in such a way that they are self-employed rather than employed. HM Revenue & Customs (HMRC) take a dim view of this, regarding many such arrangements as the deliberate avoidance of tax and NICs.
Rather than level the playing field to remove the incentive of contrived self- employment, HMRC choose instead to add a raft of anti-avoidance legislation to the statute book to counter this perceived abuse.
Continuing in this vein, in December
2013 HMRC published a consultation paper titled Onshore employment intermediaries: false self-employment, which sets out HMRC’s proposals for tackling the use of employment intermediaries to disguise employment as self-employment by widening the scope of the existing agency legislation. The consultation is the first stage
...EVIDENCE OF EXISTING EMPLOYEES BEING MOVED INTO SELF-EMPLOYMENT ARRANGEMENTS INVOLVING
INTERMEDIARIES... 30 PayrollProfessional
in delivering the following commitment given in the Autumn Statement. “The Government will legislate in Finance Bill 2014 to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self-employment. The Government will consult on strengthening existing legislation to ensure that the correct amount of tax and NICs are paid where the worker is, in effect, employed, with effect from April 2014.” The consultation is technical, setting out planned changes to the legislation.
Issues
Although the Government acknowledges that there are many legitimate reasons why a worker is engaged on a self-employed basis they are aware that there are times when a person who should be an employee is engaged on a self-employed basis. This is advantageous to the engager for a number of reasons. The engager does not have to pay secondary (employer) Class 1 NICs of 13.8% or administer pay as you earn (PAYE) and without an employer/employee relationship the
engager does not need to worry about employment rights, pension costs, sick pay, redundancy pay etc. Rates of NICs are lower for the self-employed than for employees, so the worker may also benefit financially from moving from employment to self-employment. However, this must be balanced against the loss of employment rights. The use of intermediaries to facilitate false self-employment, which originated in the construction industry, is now believed by HMRC to be widespread in other sectors. There is evidence of existing employees being moved into self-employment arrangements involving intermediaries. The intermediaries often charge a fee to the worker (stated in the consultation document to be between £10 and £25 per week). HMRC are of the view that the intermediaries ‘exploit’ the legislation in order to avoid employment taxes. In some cases the worker is simply labelled as self- employed and in other cases the contract is drafted such that it provides for the worker to send someone else in his or her place (the right of substitution – an indicator of
technical
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