False Self-Employment & Reporting Requirements

Onshore Intermediaries

False Self-Employment & Reporting Requirements

Version: 24/02/15 v.2

1. Onshore Intermediaries – legislation 1

2. Employment Intermediaries – Reporting Requirements 2

1.  Onshore Intermediaries – legislation

s.16 Finance Act 2014 – amends Chapter 7 of Part 2 of s.44 – 47 Income Tax (Earnings and Pensions) Act 2003 [ See Annex C below]

This new legislation is to prevent employment intermediaries facilitating false self-employment and avoid NICs and income tax. In basic terms, the legislation means that agencies need to prove that any self-employed worker they place with a client is genuinely self-employed, to do this they will have to prove that the worker is not under the direction, supervision and control of anyone. If they cannot prove this then the agency will have to pay PAYE on the fees paid to a self-employed individual.

The term ‘employment intermediary’ does not refer simply to a traditional employment agency. In fact, it refers to any company where, generally speaking:

·  an individual personally provides services to a client;

·  there is a contract between the client; and

·  a person other than the worker, the client or a person connected with the client (the “agency”); and

·  the client pays for the services.

There has been some confusion as to whether Personal Service Companies (PSCs) are caught by the legislation but, as seen below, HMRC have released guidance to say that PSCs will generally not be covered by the legislation – [See Annex B below.] It is advisable, however, to ensure that the worker provided by the PSC is a shareholder, and this can be checked quite simply through Companies House. The agency then needs to make a record of the fact that they have checked and they should then be compliant with the legislation.

Supervision, direction or control

To accompany the change in legislation, HMRC produced a guidance document on supervision, direction and control. This supplements the information already provided in the Employment Status Manual[1]. First, it is noted that supervision, direction and control is a ‘qualifying condition’ which must be satisfied before the provisions of the agency legislation can apply. Secondly, the manner in which the person provides the services must be subject to supervision, direction or control or “…the right of…”[2], the latter referring to a contractual right whether the right is exercised in practice or not. Thirdly, supervision, direction or control can be exerted by “…any person…”, not just the person the worker has been supplied to work for.

HMRC have accepted the courts’ interpretation of what constitutes ‘control’ for the purposes of employment status. Accordingly, HMRC rely on the leading authority on employment status of the MacKenna Test, which is stated as the first case to place the importance of control when determining employment status. HMRC also rely on Autoclenz, Talentcore Ltd[3] and Serpol and the issue of ‘right’ of control is clearly emphasised.

In all of the examples given in the guidance document, the individual only has a contract with an employment business and themselves, under which they provide their services to end clients. They do not enter into a contract with any of the end clients and they are not providing their services through a personal service company, a managed service company or an umbrella company.

Definition of supervision, direction and control

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/290051/Definition_of_Supervision_Direction_or_Control_with_supporting_examples.pdf

Anti-avoidance

The legislation includes a Targeted Anti-Avoidance Rule (TAAR) to deter tax avoidance.

2.  Employment Intermediaries – Reporting Requirements

From 6 April 2015, intermediaries must return details of all workers they place with clients where they don’t operate Pay As You Earn (PAYE) on the workers’ payments. The return will be a report (or reports) that must be sent to HMRC once every 3 months. It is advisable to consult the guidance:

You will need to send a report to HMRC if at any time in a reporting period you:

·  are an agency

·  have a contract with a client

·  provide more than one worker’s services to a client because of your contract with that client

·  provide the worker’s services in the UK - or if the services are provided overseas, that the person is resident in the UK

·  make one or more payments for the services (including payments to third parties)

Personal Service Company

The guidance in the box below is from HMRC on GOV.UK “What this means for an intermediary”[4]. Unfortunately, the guidance is a little confusing, but what we know is that someone has to report on the PSC.

Basically, the follow appears to apply:

·  A PSC supplying one worker to a client doesn’t have to report because the ‘intermediary’ supplying them will report;

·  If there is more than one intermediary, the intermediary with the contract with the client does the reporting; unless

·  The PSC supplies more than one worker, including a sub-contractor, in which case the PSC will do the reporting.

What is still not clear, is whether the intermediary is supposed to check if they have the reporting obligation or not. These contract chains can be quite complicated and its not always clear who has the reporting obligation.

Worker details

For clarity, the information that an intermediary will need to include in their return is set out below:

• intermediary name and address

• PAYE number and PAYE reference

• reporting period from and to

• is this a NIL return – Y/N

• have you ceased operating – Y/N

• worker name

• worker National Insurance Number

• where no NINO is available: Date of Birth and Gender

• worker UTR (where self-employed or in partnership)

• worker address and postcode

• worker engagement details

• worker UTR (where self-employed or director)

• start date and end date of engagement

• amount paid for the workers services (currency and inclusive of VAT) (only for the self-employed and others they have engaged where PAYE has not been operated)

• has income tax been deducted from these payments

• name of party paid by intermediary for workers services and address

• Companies House registration number of party paid by intermediary for worker’s services (if applicable)

In reality, the agency will have most of this information already, maybe apart from the Unique Taxpayer Reference (UTR).

You must select the reason why you didn’t operate PAYE on the workers payments from these options:

A: Self-employed

B: Partnership

C: Limited liability partnership

D: Limited company including personal service companies

E: Non-UK engagement

F: Another party operated PAYE on the worker’s payments

Reporting deadlines

Quarterly

30 days after the end of the quarter, e.g:

6 April 2015 – 5 July 2015 report submitted by 5 August 2015 (date report can be replaced by – 5 November 2015)

You must use HMRC’s report template to create the reports. HMRC will provide an online service for you to upload and send your report.

Penalties

If your report is late, incomplete or incorrect you may be charged a penalty.

New automatic penalties have been introduced for not sending a report or for sending a late report. These are given based on the number of offences in a 12-month period. These are:

£250 first offence

£500 second offence

£1,000 third and later offences

Further information:

Employment intermediaries: reporting requirements

https://www.gov.uk/government/publications/employment-intermediaries-reporting-requirements

Employment Intermediaries: data requirements for software developers

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/402888/150210_Employment_intermediaries_data_requirements_v1_1.pdf

Annex A

What this means for the worker

https://www.gov.uk/government/publications/employment-intermediaries-reporting-requirements/what-this-means-for-a-worker

If you use an intermediary or agency to get work you aren’t usually considered an employee of the client or intermediary because you don’t:

·  have a contract with the client

·  do any work for the intermediary

Changes to the law mean an intermediary, or any third party that has a contract with a client that results in you doing work for the client, must treat you as their employee for Income Tax and National Insurance purposes when certain conditions are met.

The intermediary will be responsible for operating Pay As You Earn (PAYE) and Income Tax and National Insurance will be deducted from your payments where those conditions apply.

Because of these changes, you may have to provide the intermediary with your:

·  name

·  address and postcode

·  National Insurance number or gender and date of birth

·  unique taxpayer reference (UTR) number

This will allow the intermediary to complete and send legally required reports to HM Revenue and Customs about workers they don’t operate PAYE for.

Annex B

Interaction of Personal Service Companies with the Proposed Changes to Chapter 7 S44-47 ITEPA 2003 (The Agency Legislation)

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/275993/Interaction_of_Personal_Service_Companies_with_the_Proposed_Changes_to_Chapter_7_S44-47_ITEPA_2003.pdf

For the proposed new Agency legislation to apply to a worker providing their services through a PSC,

all of the following qualifying conditions need to be met:

• the worker personally provides, or is personally involved in the provision of, services to another person as a consequence of a contract between that person and a third person;

• the manner in which the worker provides the services is subject to (or to the right of) supervision, direction or control by any person.

• remuneration is received by the worker in consequence of providing the services;

and

• that remuneration does not constitute employment income apart from under the Agency legislation.

As is currently the case, the proposed Agency legislation will not generally apply where a worker is engaged via a PSC, as all the above criteria will not normally be met. This is because:

a)  the worker as a genuine consequence of their shareholding in the PSC will not normally fall within the new Agency legislation.

b) Similarly, the Agency legislation only applies when the worker receives remuneration which is not employment in come before the provisions of that legislation are applied. Any salary paid to the worker by the PSC is already employment income so the new Agency legislation would not apply to that remuneration.

c) Loans are made by reason of the employment with the PSC. Beneficial or written off loans are chargeable to tax/NICs as earnings but do not normally arise as a consequence of the worker providing the services. As such, they would not fall within the scope of the Agency legislation.

If neither the Agency legislation nor the Managed Service Company legislation applies then anyone working through a PSC needs to consider the Intermediaries legislation, more commonly known as IR35. This will continue to be the case under the proposed new legislation. IR35 applies where the

relationship between the worker and the engager would be one of employment if the PSC and any other party in the contractual chain did not exist.

Annex C

s.44 – 47 Income Tax (Earnings and Pensions) Act 2003

(As amended by Finance Act 2014)

Chapter 7 Application of provisions to agency workers

Section 44 Treatment of workers supplied by agencies

(1) This section applies if—

(a) an individual (“the worker”) personally provides services (which are not excluded services) to another person (“the client”),

(b) there is a contract between—

(i) the client or a person connected with the client, and

(ii) a person other than the worker, the client or a person connected with the client (“the agency”), and

(c) under or in consequence of that contract—

(i) the services are provided, or

(ii) the client or any person connected with the client pays,

or otherwise provides consideration, for the services.

(2) But this section does not apply if—

(a) it is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person, or

(b) remuneration receivable by the worker in consequence of providing the services constitutes employment income of the worker apart from this Chapter.

(3) If this section applies—

(a) the worker is to be treated for income tax purposes as holding an employment with the agency, the duties of which consist of the services the worker provides to the client, and

(b) all remuneration receivable by the worker (from any person) in consequence of providing the services is to be treated for income tax purposes as earnings from that employment, but this is subject to subsections (4) to (6).

(4) Subsection (5) applies if (whether before or after the worker begins to provide the services)—

(a) the client provides the agency with a fraudulent document which is intended to constitute evidence that, by virtue of subsection (2)(a), this section does not or will not apply, or

(b) a relevant person provides the agency with a fraudulent document which is intended to constitute evidence that, by virtue of subsection (2)(b), this section does not or will not apply.

(5) In relation to services the worker provides to the client after the fraudulent document is provided—

(a) subsection (3) does not apply,

(b) the worker is to be treated for income tax purposes as holding an employment with the client or (as the case may be) with the relevant person, the duties of which consist of the services, and

(c) all remuneration receivable by the worker (from any person) in consequence of providing the services is to be treated for income tax purposes as earnings from that employment.

(6) In subsections (4) and (5) “relevant person” means a person, other than the client, the worker or a person connected with the client or with the agency, who—

(a) is resident, or has a place of business, in the United Kingdom, and

(b) is party to a contract with the agency or a person connected with the agency, under or in consequence of which—

(i) the services are provided, or

(ii) the agency, or a person connected with the agency, makes payments in

Section 45 Arrangements with agencies

If—

(a) an individual (“the worker”), with a view to personally providing services (which are not excluded services) to another person (“the client”), enters into arrangements with a third person, and

(b) the arrangements are such that the services (if and when they are provided) will be treated for income tax purposes under section 44 as duties of an employment held by the worker,

any remuneration receivable under or in consequence of the arrangements is to be treated for income tax purposes as earnings from that employment.