Workers engaged by Onshore agencies on a ‘falsely self-employed’ basis
Legislation in the Finance Act 2014, updates existing ‘agency’ PAYE/NIC rules at s44-47 ITEPA 2003. Although the new rules strictly apply from 6 April 2014, HMRC has adopted a so called ‘soft landing’ approach, so that the new rules will be more rigorously enforced from 6 April 2015.
What is the measure aimed at?
This new legislation specifically targets ‘intermediaries’, including employment business, where workers are engaged on a ‘falsely self-employed’ basis (e.g. as sole traders) and are therefore either paid gross, or subject to CIS deductions.
The rules would be unlikely to apply if the worker were engaged via their own limited company: in this scenario, if the company is a genuine ‘one man band’ Personal Service Company (PSC), as previously, the PSC would simply have to consider its own IR35 obligations. If the company were not a genuine ‘PSC’, HMRC would consider either these new rules, or whether the existing Managed Service Companies (MSC) rules apply to that engagement.
How does it operate?
Legislation considers some fairly simple tests to decide whether these rules apply, the main one being whether can it be shown the worker is ‘subject to, or the right of supervision, direction or control as to the manner in which the duties are carried out’. HMRC’s view is that supervision, direction or control may be exercised by anyone (e.g. including the ‘end user’ of the services), so that most workers will comfortably fall within this definition.
What is the result?
The new rules deem that the organisation which has the direct engagement with the client or end user (i.e. the first intermediary) must account for PAYE/NIC, where this is not already being operated in full.
This would apply even if that intermediary does not actually pay the worker or control the payment arrangements.
Is there potential for duties to be transferred elsewhere?
The legislation places the obligation, on the ‘first intermediary’, to apply the relevant tests and ensure PAYE/NIC is applied fully (either by that business itself or by others in the engagement chain). However if anyone else in the engagement chain has offered false (indeed fraudulent) assurances to the first intermediary, e.g. wrongly assuring that intermediary that the new rules don’t apply, then liabilities could be transferred to the person making those false assurances.
Other ‘transfer of debt’ considerations would apply if HMRC invoked the MSC rules instead.
Other matters to consider
New quarterly reporting obligations have also been placed on the first intermediary and these will also apply from 2015/16 onwards. Whilst the final detail remains under discussion, the essence of the new reporting obligations is that the first intermediary must return details of sums paid (whether to an individual or another intermediary) that have not already had PAYE and NIC fully deducted.