Historically recruiters have tended to shy away from supplying workers engaged on a self employed basis, largely due to the potential tax issues that may arise. There has reportedly been a recent surge in the popularity of self employment arrangements in order to avoid the AWR. So should self employment be embraced as a solution to the AWR or do the risks outweigh any potential benefit?
There are two ways in which self employment can be seen as a solution to the AWR.
Firstly, for an individual to be an agency worker there needs to be supervision and direction by a hirer. Where there is neither, the individual will not be an agency worker and the AWR will have no application. So are self employed workers automatically not subject to supervision and direction (S&D)? The answer must clearly be “no”. In the vast majority of cases hirers want to be able to exercise some S&D. An individual, albeit claiming to be self employed, who decides to make a claim could easily allege that there was S&D by the hirer, indeed it may be in their interests to do so. If some S&D is established the individual would be entitled to the rights. Accordingly the cosmetic exercise of stating that an individual is not an agency worker because he/she is self employed, and thus not subject to S&D, is not correct, and some S&D will exist in most circumstances.
Secondly, someone self employed could be regarded as carrying on a business undertaking and therefore (provided the right form of contract is in place to reflect the status of the hirer as the client or customer of that business) can be excluded from the scope of the AWR via R.3 (2) (b). If this applies, again the individual would not be an agency worker and the AWR would have no application. However the meaning of “carrying on a business” is subject to debate and the exemption would depend on whether or not a genuine business undertaking can be demonstrated. Relying on a third party to advise that an individual is self employed (even though the third party may have conducted check lists on employment status) and therefore can be exempted would clearly be a risky exercise. Even registration with HMRC as self employed would not necessarily mean that the individual is carrying on of a business undertaking. One can be self employed for tax purposes but not necessarily be carrying on a business undertaking for AWR purposes at the relevant time, i.e. under the relevant contract arrangements.
Aside from the danger of unwittingly participating in a game of charades, recruiters considering these arrangements need also be aware of the financial risks involved. The Agency Worker Tax Rules (S44-47 ITEPA 2003) require that where an individual is supplied to work personally, and the hirer will have “direction, supervision or control as to the manner of” the work, the individual should have their earnings treated as employment income, with appropriate levels of tax and national insurance deducted.
A recruiter, or “umbrella” provider who supplies a self employed person must therefore be certain that the hirer will not be exercising supervision, direction or control as to the manner of the work, a much wider test than under the AWR, and difficult to be certain of. Given that difficulty, payment gross to the individual must come at best with the potential of an HMRC investigation and at worst with the prospect of an actual claim by HMRC for back PAYE and NI payments. The alternative would be to pay the self employed individual subject to deduction of tax and national insurance under the PAYE rules, but this would potentially negate the argument that the individual is carrying on a business undertaking.
In addition, where a self employed model is operated by an umbrella company, recruiters should also be wary of the Managed Service Companies (MSC) legislation. Payments to an individual on a self employed basis do not mean that the company is an MSC, but rather that one of the criteria to be an MSC (that payment to the individual is greater than they would have received if PAYE tax and national insurance had been deducted) is met. To be an MSC the other three criteria, two of which nearly always exist in the case of agency supply, must also be met. The third criteria, whether an MSC provider is involved, will depend on the facts and arrangements, but it is usually straightforward for HMRC to mount arguments that a MSC provider does exist and is involved.
Conclusion: Using self employment as a route to avoid AWR rights is a minefield that should be navigated with extreme care. Best advice must be either to avoid it or to seek an opinion on the proposed arrangements and accompanying process and contract terms.
Theresa Mimnagh of the recruitment law specialist Lawspeed (01273 236236) advises recruiters considering self employment as a solution to the AWR to act with caution. She acknowledges that “It may appear attractive, but it comes with issues and risks that should be considered carefully. It is always best to get independent advice from experts in this area.”