Disguised employment rule to run next to IR35

The rules which are to be strengthened so intermediaries can no longer avoid tax by using “contrived contracts” to disguise employment have been identified to ContractorUK, following the Autumn Statement’s failure to name them.

Speaking to CUK last night, HM Revenue & Customs said stopping on-shore employment intermediaries avoiding tax from ‘dressing up’ workers as self-employed would be achieved by changing the Agencies legislation, not IR35.

“The amendments are going to be made to Sections 44-47 of ITEPA 2003,” said the HMRC spokesman, when asked which rules the Treasury yesterday vowed to amend but didn’t name. “It is not the government’s intention to make any changes to IR35.”

The clarification should allay fears expressed immediately after the Autumn Statement that IR35 – the legislation already in place to tackle disguised employment – was the likeliest rule to bring about the crackdown on fake self-employment.

Those initial fears were echoed by accountant Kingston Smith, which said the chancellor’s move against intermediaries disguising employment “looked like” a new attack on contractors who work through their own limited company.

However, HMRC has told CUK that “contractors working through their own companies should not be affected by the proposed changes” to the Agencies legislation, assuming the contractor is “genuine”.

The tax authority’s statement leaves open the possibility that contractors who are not legitimately self-employed may be dragged into the new crackdown - in line with the accountant’s fears - even though they are not the intended targets.

In fact of the crackdown, the HMRC spokesman explained: “It is aimed at those who are providing schemes making low paid workers self-employed, where the terms that they are engaged under are those of employment.”

In 2011, the Revenue tried to claim such terms existed – and therefore PAYE and NICs were owed – for a group of cosmetic consultants who it said were not truly self-employed because they were supervised, directed and controlled by the hirer.

At court, the Revenue was defeated (largely due to the right of substitution), and the consultants were ruled to be outside Section 44-47 of ITEPA, meaning employment taxes were not owed.

Whether this type of case is behind the new crackdown may be addressed on Tuesday Dec 10th, when draft legislation and a consultation on how HMRC wants to stop intermediaries masking employment will be unveiled.

The consultation will say that, from April 2014, about £400m a year will be netted by strengthening the Agencies legislation (also known as the Agency Worker Rules) to ensure the correct tax and NICs are paid where the worker is employed.

Contractor accountancy firm DNS Associates warned: “Intermediaries are going to be at a big risk of paying someone as self-employed, as HMRC can come after them from April. 

“Unlike IR35, in this chain the taxman won’t have to find the worker so it will be easier to hit intermediaries who have mistakenly, or intentionally, paid the employed as self-employed.”

Editor's Note: Further Reading -

HMRC to spotlight personal service obligation on Dec 10

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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