CIS - changes to self-employed status from 06 Apr 14

Over the last decade or more there has been a significant increase in the numbers of self-employed individuals driven in large measure by the increase in temporary employment agencies and payroll intermediaries.

false self-employment

The government has been determined to stamp out what it sees as false self-employment, whereby temporary staffing agencies & payroll intermediaries have allowed employers, particularly in the construction industry, to avoid employing personnel directly. The obvious motivation has been the avoidance of on-costs including Employers NIC, holiday pay, higher pay rates and other direct employee benefits. The Construction Industry Scheme (CIS) has inadvertently facilitated this growth, as individuals in the construction sector have been able to register easily as self-employed individuals by simply making a phone call & obtaining a UTR No. (Unique Tax Reference) subject to a short lead time. Individuals have then been able to work on a self-employed basis subject to deduction of tax at 20% under CIS.

A large proportion of CIS workers have been contracted through either temporary employment agencies or payroll intermediaries so that there is no direct contractual relationship between the contractor and the individual worker.

HMRC Onshore Intermediaries - False Self Employment

SUPERVISION, DIRECTION & CONTROL

The government’s focus has been that these individuals have been subject to the same level of supervision, direction and control as if they were employed by the contractor and consequently are in effect employed. As a result the government concludes that it is missing on very significant revenues and that individuals are being deprived of their employment rights. The government estimates that there are some 200,000 who are falsely self-employed, the new regulations aim to stamp out this practice and direction and control are at the heart of the legislation.

Under the new regulations, if you are subject supervision, direction or control during the execution of your work (or if someone has these ‘rights’ even if they do not exercise them) you will be ‘employed’ for tax purposes regardless of what your view is, whether you are paid through an intermediary or under CIS. If you currently work through an existing ‘Personal Services Company’ (PSC) then technically you are exempt from the regulations, however you stand to be captured under IR35 regulations as being effectively employed. HMRC are fully aware of this possible loophole, so any PSC formed after06 April 2014 will come under heavy scrutiny.

Agencies and payroll intermediaries must comply with these new laws and should they continue to pay anyone on a self-employed basis, through CIS or through a PSC, the they will have to submit a report to HMRC explaining (a) who those workers are, (b) how much they are being paid, (c) who they are being supplied to and (d) why they are being paid as self-employed. For further information please see:-

Definition of Supervision, Direction & Control

In the rest of this article we look at what the response has been from the agencies and payroll intermediaries and what it means for the previously self-employed person.

THE RESPONSE
Contrary to what you might be told the Construction Industry Scheme has not been abolished. Legitimate sub-contractors can still operate under the CIS scheme provided they meet the supervision, direction and control provisions and will continue to have 20% tax deducted at source and will be required to submit the usual annual self-assessment tax return to claim their tax refund.
Some press release comment that agencies and payroll intermediaries will have to pick up the extra costs involved in respect of those previously operating under CIS; as they will now have to process them as employed individuals under the PAYE scheme. This is unlikely to be the case, instead individuals are likely to be pushed down the ‘Umbrella’ route .Umbrella schemes are essentially PAYE schemes with a dispensation under which temporary employees can claim a weekly offset against gross pay for certain expenses, thus reducing taxable pay for tax and NIC purposes.
UMBRELLA SCHEMES
Standard umbrella schemes have been operating for some time and vary in the extent of dispensation however they all essentially allow the individual to claim an offset, often referred to as “expenses”, against gross pay. These “expenses” are not paid on top of gross pay, they operate effectively as extra notional personal allowance and include such elements as mileage allowance, daily meal allowance, tools and PPE, business mobile costs (itemised bills) and laundry allowance.
What you may not be aware of is that as well as paying both PAYE tax and employees NIC, individuals will also be required to pay employers NIC. This is a prerequisite of the umbrella model but payroll intermediaries are not always open about this fact. Another provision they do not always disclose is that the amount of expenses that can be offset is restricted, in that they cannot reduce the effective hourly rate below national minimum wage. Any unused expenses can be carried forward for future use but there is a likelihood they may never be available for offset. Individuals will not be paid holiday pay in addition to their gross earnings but may have a deduction made from their gross wages to build up a ‘holiday pay pot’.
If a payroll intermediary performs a comparison against CIS for you, be aware of the above and that they will possibly just compare against a gross less 20% scenario and not factor in your tax refund and the expenses you could previously claim against your CIS income. / A new umbrella model is now emerging called the Elective Deduction Model (EDM) or ‘Low Pay Model’. The intention of these models is to maintain notional ‘self-employed status whilst “electing” to pay PAYE tax and national insurance contributions. Full details are only just emerging but trade associations view this new model as an attempt to work round national minimum wage, AWR and pension regulations and are calling on HMRC to take action to stamp out this development.
Trade associations respond to EDM developments
We recommend that if you are required to be paid under an umbrella model that you obtain full facts about the regime and ask for a written statement of any net pay comparisons. If you can persuade the contractor to take you on directly as an employee this may be the best option as you will have employment rights, holiday pay and pension entitlements.
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