Alastair Kendrick
Government plans to crack down on payroll agencies could kick in soon, explains Alastair Kendrick.
On 10 December 2013, HM Revenue & Customs (HMRC) issued a consultation document targeted at the engagement of workers via a third party, called Onshore employment intermediaries, false self-employment. It contains proposals that could have a major impact within the construction industry but the deadline for comments is short – HMRC is looking for responses by 4 February 2014.
Over the years, HMRC has adopted a series of measures to close down loopholes whereby direct employment could be ‘disguised’ as self-employment, with end-clients potentially undercutting competitors that were paying their labour forces 13.8% employers national insurance contributions plus holiday and sickness pay and other benefits. Seven years ago, I was a member of a working party that spent significant time consulting with the industry in trying to define specific rules for the construction industry.
According to HMRC, the existing legislation could now be given more authority by proposed new rules which, if not followed, could lead to the introduction of anti-avoidance rules. The government’s proposal, first flagged up in the Autumn Statement, is to stop the engagement of workers via a third party (such as an agency or payroll company (an intermediary)) on a self-employed basis.
If someone is able to supervise and could ask for the work to be done in a different way or to vary the work to be done then the worker is likely to be caught by the proposed legislation and be taxable under PAYE. From April 2014, engagement on a self-employed basis via an intermediary will only be possible in cases where the worker is not under the control of the end client.
In today’s industry, it’s relatively common for employers to hire a labour-only subcontractor through an intermediary company. In theory, if an employer hires a self-employed subcontractor – whether working for themselves or through an intermediary agency – they should pay the net or gross individual according to the rules of the Construction Industry Scheme. But the view of government is that many intermediaries exploit the CIS by giving HMRC an inaccurate picture of what the individual is doing on site, therefore remitting less tax to HMRC and at the same time paying inadequate benefits to workers.
In most cases in construction, where the employer is responsible for health and safety, and supervising and directing work on site, individuals applying to be part of the CIS would in fact be assessed as employed. But the government’s concern is that the use of intermediaries “muddies the water” and hides the true nature of the contracts in place, making it difficult for the HMRC to assess the relationship between subcontractor and the eventual employer, and creating a loophole whereby tax can be avoided.
The new proposal in effect may remove the business case for hiring via an intermediary (although of course contractors are still free to hire labour-only subcontractors directly). Intermediary agencies that continue after April 2014 to supply self-employed workers will now need to provide quarterly electronic returns containing details of any workers it has placed who are not already accounted for through HMRC’s Real Time Information (RTI) system.
If the obligation on the intermediaries to apply PAYE/NIC is avoided by the workers being engaged via a personal service company (PSC) then if the PSC fails to meet its liabilities under IR35 these could be levied on the intermediary.
Construction companies that have engaged workers via a third party with the individuals working on a self-employed basis need to be aware that depending on the terms of their engagement this arrangement may no longer work post April 2014.
In addition, if the end client is unsure of how precisely the individual is engaged they need to ensure this is not on a self-employed basis. In light of these proposals, consideration must be given to the basis of future engagement of labour and associated costs.
If you have a comment on the proposals, contact Robert Burton on 03000 526659
Alastair Kendrick is tax director at MHA Macintyre Hudson
