New self employment tax law under fire

At a seminar held by the recruitment law specialist Lawspeed on 15th April in London, the new rules commonly known as ‘the agency tax legislation’, which follow the government consultation ‘onshore intermediaries – false self employment’ came under fire from a packed audience.

“What is in no doubt”, explained Adrian Marlowe, MD of Lawspeed which presented the seminar together with a spokesperson from HMRC, “is that HMRC has cast its net wide so that wherever there is agency supply the PAYE tax regime could apply, with responsibility for compliance and accounting for PAYE and NICs generally lying with the agency that has the contract with the end user client. This places a considerable burden on agencies dealing with ‘self employed’ workers as the rules do not identify whether an individual is genuinely self employed, but instead look at whether anyone can supervise, direct or control how the work is done (SDC).”

Whilst the rules do not extend to workers whose payments are already treated as employment income, s.44 of the Income Tax (Earnings and Pensions) Act 2003 as amended by the Finance Bill 2014 specifies that the only circumstances in which the new rules will not apply is if where it can be shown that there is no SDC. Marlowe continued “As most hirers will want to check work done and give new instructions from time to time, elements of supervision, direction or control are likely to exist in most supply cases. Risk averse agencies will therefore want to steer clear of engaging any workers on a self employed basis, even where the worker can demonstrate that he or she is genuinely in business on his/her own account. In our view the test is unsatisfactory because it has little or no case law precedent from which it can clearly be determined when the rules apply. Also, agencies are not lawyers, and even lawyers would be unable to express the definitive position except in the most obvious circumstances.”

Lawspeed argued that the uncertainty leads to the prospect of cases being determined on a one by one basis, with the agency always at risk. “There is no more graphic an example of the problem than in the construction industry, where there is a specific scheme for paying CIS registered self employed workers gross, yet there is no distinction between those who are genuinely self employed and those who are not. This new law leaves the CIS scheme in a shambles.”

A director of one construction agency present said “I don’t want to be lying on the beach in 6 years time only to find myself facing a claim from HMRC that someone we supplied years ago and paid gross under the CIS scheme was after all subject to supervision or direction by the client as to how the work was done. The idea that we can avoid liability by relying on evidence from a client ahead of an assignment does not exist in reality. Every client wants to check how the work is being done and HMRC may be able to show that, even if the client, who may not understand what is meant by the test, says otherwise.”

Personal Service Companies, and some other small composites, normally pay their deployed staff by way of employment income and dividends, and as such the rules would not normally apply to them. However, HMRC noted that there are circumstances in which a company could pay someone on a basis that could result in the agency being liable, although the HMRC spokesperson pointed out that payments by companies to individuals on a self employed basis is “not a very tax efficient method”. HMRC said that one purpose of the rules was to “level the playing field for businesses”, but one frustrated attendee commented “this in effect means that those with a higher risk averse strategy will lose out to the unscrupulous who take a more liberal interpretation of the law”.

Whilst HMRC says that it wishes to allow genuinely self employed businesses to operate to encourage and support the flexible workforce, Lawspeed suggested that clarity is required. If this is the approach, why not make the law easier by providing lists of those professions that HMRC says are genuinely self employed and not subject to SDC. Why not use a different and clearer test that does not depend on an interpretation of how one person treats another on a day by day basis such that different tax rules apply?

Referring to one example in HMRC guidance relating to drivers, Marlowe said “it would seem that if a hirer tells a supply driver to go up a particular road to a destination, the new rules apply, but if the driver can choose his own route the rules may not. Most hirers will automatically want their drivers to take the most efficient route from every perspective, time, expenses, fuel cost and so on. So if this is an example of when there is direction or supervision or control as to the manner as the guidance suggests, this would exist in nearly every kind of job, the driver using his skillset in driving being no different from an IT expert building a database to a hirer’s specification. In fact the guidance published so far seems to be based upon employment status cases which are largely irrelevant.”

Many in attendance were concerned at the new rules, with the focus being on the use by HMRC of a new untried and unclear test. In a post seminar survey conducted by the law specialist, 91% of 54 respondents said they do not understand how the SDC rule can work fairly.

Marlowe, who is also chairman of the Association of Recruitment Consultancies (ARC), summarised “Whilst the majority acknowledged that there have been avoidance abuses historically and HMRC are right to do something, the effect on genuine businesses whether agency or self employed, was overwhelmingly regarded as disproportionate because of the way the SDC test is set up. It would be a great relief to the industry if HMRC would review this area and come up with a more suitable test. This would save worry for businesses and costs to everyone including HMRC and the taxpayer.”