false self-employment
self-employment) where in reality this could not and does not happen. Not surprisingly HMRC’s concern is to protect their revenue and ensure that they are able to secure the higher tax and NICs take associated with employment where this is the true nature of the relationship. However, the document also voices concerns that workers are losing the benefit of various employment rights to which they should be entitled.
Employment versus self-employment Employment status is a matter of fact rather than a matter of choice. It is dictated by the nature of the engagement rather than by the wish of the parties. It is not for the engager to simply label the worker as self- employed; the status must be supported by the facts of the engagement. The decision as to whether a person is employed or self-employed is determined by reference to tests set by the courts over a number of years. It is necessary to look at the indicators of employment (such as control over where and when an employee works) and at those of self-employment (such as right to send a substitute, set own hours, bear risk etc) and to see which way the pendulum swings.
A detailed discussion of employment status is outside the scope of this article but guidance can be found on the HMRC website at
www.hmrc.gov.uk/payerti/ employee-starting/
status.htm.
Existing agency legislation The agency legislation is found in Part 2, Chapter 7 (sections 44 to 47) of the Income Tax (Earnings and Pensions) Act 2003. It places a responsibility on the agency to deduct income tax and pay it over to HMRC and to report pay and deductions via real time information (RTI) where the agency has a contractual relationship with the worker. For that relationship to exist all of the following conditions must be met: l the worker provides, or is under an obligation personally to provide, services to another person l the services are supplied by or through an intermediary or third party under the terms of an agency contract l the worker is subject to (or the right of) supervision, direction or control as to the manner in which the services are provided, and l any payments not already taxed are taxed as employment income.
...A PRESUMPTION OF CONTROL (AND CONSEQUENTLY A PRESUMPTION THAT THE WORKER IS WITHIN THE SCOPE OF THE RULES)
An agency contract is a contract which is made between the worker and the agency under the terms of which the worker is obliged personally to provide services to the client. Where these conditions are met, the worker is effectively treated as an employee of the agency such that the agency must deduct PAYE tax from amounts paid to the worker. Similar rules apply for NICs purposes meaning that the agency must pay employer Class 1 NICs and the worker must pay primary Class 1 NICs.
Proposed changes
As it currently stands, the agency legislation only applies where the worker personally provides services. This is to be widened so that the legislation applies where an individual personally provides or is personally involved in the provision of services. The concept of an ‘agency contract’ is removed. A further change is that amended legislation places greater focus on whether the worker is subject to, or to the right of, supervision, direction or control as to the manner in which the duties are carried out. For these purposes, ‘control’ will exist if anyone is able to exercise control or have the right to exercise control as to how the work is carried out. Where a worker is engaged by an intermediary (such as an agency) there is a presumption of control (and consequently a presumption that the worker is within the scope of the rules). The effect of this is that unless the intermediary/ third party are able to provide evidence of the absence of control direction or supervision, the intermediary who contracts with the end client to whom the worker provides his or her services will need to deduct PAYE tax and employee’s Class 1 NICs and pay it over to HMRC together with the employer’s NICs. The intermediary will also need to comply with the requirements of real time information. The worker is effectively treated as employed by the intermediary unless evidence of self-employment is provided to HMRC. Further, if the worker has been treated as self-employed and the intermediary is not able to produce sufficient evidence of the absence of control when requested, HMRC
may recover the tax and NICs that should have been deducted from the intermediary. Arguably, given the presumption of employment, there is a danger that workers who are genuinely self-employed are treated as employees. The responsibility of the intermediary to operate PAYE and NICs in respect of workers only applies if the worker is not an employee of the end client. Where the worker is employed by the end client, it is the end client who is responsible for operating PAYE and NIC.
Impact on personal service companies An intermediary is any structure which is imposed between an engager and the worker. The definition includes employment businesses and personal service companies. Personal service companies must already consider the agency legislation and this requirement will remain under the proposed changes. However, the new legislation will only apply to a personal service company that meets all the conditions as set out in the legislation. Consequently, as is currently the case, the agency legislation will not generally apply to personal service companies as it is unlikely that they will meet all of the conditions.
Interaction with MSCs and IR 35 rules A personal service company is controlled and run by the person providing the services. By contrast, managed service companies (MSCs) are controlled and run by a third party (a MSC provider). The MSC legislation will continue to apply as currently, as will the IR 35 rules. (The latter bite if, looking through the personal service company, the relationship between the end client and the worker is an employment relationship.)
PP
Next steps The consultation closed on 4 February 2014 and comments received will be considered. However, the plan is for the amendments to the existing legislation to be included within the 2014 Finance Bill and for the changes to take effect from the 2014/15 tax year.
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