The Finance Bill 2014 has now been published, setting in motion the changes to tax law which were announced in 2013.
As you’d expect with any new HMRC legislation, there’s been significant concern and confusion around one particular element, the new False Self-Employment legislation. Aimed at specific sectors within the contracting industry it’s still under scrutiny from industry professionals. Not all contractors will be affected but it is worthwhile being aware of the changes in case of any tweaks to the draft.
Why is it happening?
HMRC are concerned that there are a growing number of workers operating as self-employed or as a sole trader who may, in fact, be ‘disguised employees’, sometimes hidden by intermediary companies, who are either incorrectly listed as freelance or are purposely listed that way to avoid the correct taxation. They also believe that many of these sole traders aren’t completing income tax forms and so aren’t being taxed the right amount or in some cases aren’t paying any tax or NI at all.
Also it’s worth noting that in recent years there has been a rise in the number of ‘intermediary’ companies which act as middle men between the worker and the recruitment agency. These intermediaries have previously been bearing the PAYE risk but managing it with agreed terms with the worker.
What is it?
The legislation HMRC plans to put in place will implement a new way to check up on sole traders and contractors. The plans mean that the matter of compliance passes hands to the recruitment agency rather than the intermediary (as mentioned above); this is because the agencies converse directly with clients and have more influence over how the worker is paid. HMRC will be checking up on intermediaries and looking out for those that are enabling tax avoidance to happen. They have also proposed that a statutory returns and record keeping practice be put in place.
As part of the legislation a TAAR (Targeted Anti Avoidance Rule) will be introduced, The TAAR will be designed to enable HMRC to consider the motive for setting up the employment status arrangements; whether a business is incorporated purely with the motive of avoiding income tax and also whether it achieves the motive of tax being paid or not.
When does it come into practice?
Immediately. Many concerns were raised by stakeholders who worried that the consultation period about the changes was too short a time and that it was being introduced much too quickly. They suggested that it should in fact be implemented in April 2015; however, the government believes that delaying its implementation will allow too much time for new avoidance arrangements to be put in place.
How will it affect me?
Overall, it seems pretty conclusive that limited company freelancers and contractors will not be affected. So if this is you, there is not currently anything to worry about.
Those who will feel the effects are mostly the recruitment agencies that will now have to bear the brunt of any compliance issues with hired workers. It also plans to target intermediaries that supply self-employed workers whilst denying them employment rights and avoiding NI payments. If you are a contractor who is in contact with anyone in a supply chain on a contract for services then you are liable for PAYE as HMRC will presume that you are a controlled worker. It is worth thinking if this is the case for you as you may be affected if you cannot prove that you aren’t a controlled worker.
Another section of those affected will likely be low skilled workers and may not even be aware of their self-employed status. The examples HMRC gave are construction workers, delivery drivers and ‘shelf-stackers’.
What is the industry response?
There are many doubts in the industry that this legislation will have the impact that is expected. There are worries that agencies will be hesitant in placing limited company contractors into work engagements with the changes in place, but hopefully with clear guidance from HMRC this will not be a problem. PCG in particular say that they will be keeping an eye on legislation to make sure that it is not rushed through without proper consideration.
APSCo strongly urged HMRC to consider including the following within the final legislation: statutory guidance on the compliance actions a recruitment firm should take. Statutory defence in the event that they undertake such appropriate compliance checks and a definition of a personal service company (“PSC”).
Following stake holder reactions to the legislation, agencies and other intermediaries will now have until August 2015 to make their first submissions to HMRC, and the definition of ‘intermediary’ will be tightened up to exclude genuine service providers.