Unintended consequences of new tax proposals on self employment could be considerable

At a seminar held by the recruitment law specialist Lawspeed
(legal partners to the Association of Recruitment Consultancies (ARC)) on
Wednesday 22^nd January a number of problematic key points arising
from the government Consultation on Onshore Intermediaries -False Self
Employment were identified.

Speaking to a packed audience of recruitment agencies,
umbrella companies, CIS contractors and accountants, Lawspeed lawyers presented
an in depth analysis of the proposed new legislation. This was followed by
explanations and answers to questions by senior HMRC representatives. “The
objective” said Adrian Marlowe, Managing Director of Lawspeed “was to challenge
the proposals and identify problems that may be caused to the recruitment,
contractor and construction industries. By allowing the audience to comment
directly to government officials we hope that issues that we and the audience see
may arise will be taken into account.”

The consultation includes draft legislation that the
government plans to use to bring sham self employed individuals, who the
government believes should be classed as employees for tax purposes, into scope
of the PAYE rules. Amendments are proposed to legislation known as the agency
legislation, that has been in place since 1976 and which obliges agencies to
use the PAYE rules when paying supplied workers. The government believes these
rules are being avoided by some by wrongly claiming individuals are self
employed, thus depriving HMRC of tax and national insurance and forcing
individuals to lose some state benefits.

“There are some significant problems” explained Marlowe. “We
believe the proposed scope extends far too widely, as it appears to catch every
supply or subcontractor arrangement with few exceptions. The only defence to a
claim by HMRC would be that the worker was not subject to any ‘control’, a
complex legal issue which many will find hard to judge and which require a case
by case analysis. This is guaranteed to lead to uncertainty wherever a
genuinely self employed individual wishes to be paid gross.  Also because the agency dealing with the end
user will be liable for compliance there could be serious administrative
problems wherever there is a chain of supply; those agencies at the top of the
chain will be tempted to either cut out intermediaries or require individuals
to be paid through specified channels or designated umbrella companies in turn having
negative commercial fallout for chain operators.”

“There are also likely to be serious consequences from the
timeline planned for implementation, as the government hopes to bring in the
new rules in April 2014. Where projects are already agreed and contracted to
run beyond April 2014 based on labour costs that reflect the current
legislation, those labour providers caught by the new plans will be hit with a
13.8% charge for employers NICs plus possible cost claims from the workers who
will receive a lower net pay. This may be enough to wipe out the provider who
has insufficient finance in place and who has won the business on the basis of
a properly costed quotation reflecting the current tax position. This in turn
could have significant knock on effect for others in a chain, particularly in
the construction industry, with the result that projects could be delayed and
jobs lost.”

The government is understood to believe that there are some
200,000 false self employed workers in the contraction industry who are paid in
accordance with the CIS tax scheme.

Another area where there is some confusion is where workers
operate through a limited company. Provided they are paid by way of dividend or
employment income by the company these are not brought into scope. However it
is always possible for a limited company to pay in a different way, for example
by way of gross payment and the worker may not be a shareholder. Whilst many
will not pay that way, the risk of incorrect payment leaves the agency open to
risk and therefore will require yet further due diligence, when no such
requirement currently exists. Even so called personal service companies pose a
risk unless they only ever deploy the shareholder/director.”

Marlowe concluded “There are a host of additional points,
many of which were teased out during our preparation for the presentation, and
were acknowledged by the attendees during the seminar. I am very grateful to
HMRC for attending and speaking; its representatives listened carefully and
explained the government position well, so I hope the areas of concern that
were highlighted result in changes to the draft legislation in due course.
However if this is left as it now stands there is little doubt that the draft
legislation will have far reaching consequences beyond those intended by the
measures.”

The consultation closed on 4^th February. Both
Lawspeed and ARC have made representations to HMRC. Parties interested in this
area should call 01273 236236 for more information.