False self-employment attack puts PSCs at risk

Proposals to stamp out tax avoidance by intermediaries disguising employment appear to significantly overreach when compared to their intended scope, prompting growing disquiet in the freelance marketplace.

Before they surfaced in the Autumn Statement, the proposals were characterised by HM Revenue & Customs as a minor statutory change to stop ‘personal service’ being used as a get-out from the Agencies legislation.

The subtext was that HMRC wanted to head off more cases like Talentcore, where workers who were controlled, supervised and directed escaped an employment tax demand, largely because their right of substitution made them self-employed.

In line with this stance, the Revenue had told ContractorUK that the proposals were aimed at 'those who provide schemes that make low-paid workers self-employed, where the terms that they are engaged under are actually those of employment.'

Crucially for personal service companies, “genuine contractors working through their own companies should not be affected,” the tax authority added at the time, referring to the amendment to Section 44-47 of ITEPA, which takes effect from April 2014.

But having studied the proposals – draft regulations open for comments until Feb 4th – a legal consultancy specialising in the contract market says the “likely consequences” of them “go very significantly further than [HMRC’s] stated objectives.”

Similar alarms have since been sounded by professional services giant KMPG; the recruitment law adviser Lawspeed, ConractorUmbrella, the payroll firm, and PCG, the trade group for contractors.

The analysis by the legal consultancy, Egos, states: “If enacted as drafted, this proposed legislation would wholly disrupt the entire temporary work and contracting market. There is a real risk that agencies would feel they had no option but to insist on operating PAYE on all payments they make, even to limited companies”.

The consultancy’s founder believes that the proposed rules, which he says impose "false employment" for tax and NIC purposes on anyone providing services through a third party (such as a PSC or agency), may impact limited companies, whether they are inside or outside IR35.

Egos’ Roger Sinclair adds that this imposition will be the case unless “all” parties in the contract chain are able to show that “the manner in which the worker provides the services…is not subject to (or the right of) supervision, direction or control by any person,” as the draft states.

If a third party or ‘intermediary’ does not believe that the worker is subject to supervision, direction and control – or the right of these – then they will need to keep evidence to support such a claim, advises ContractorUmbrella, which is also concerned that the proposals overstep the taxman’s intention.

“If that evidence doesn’t satisfy HMRC, then the recruiter could be held liable for Income Tax and NICs. Of concern,” added the payroll firm’s Lisa Keeble “is that the proposal states that ‘where a worker is engaged by or through an intermediary, then there will be a presumption that there is control over the worker.’”

New obligations on recruitment agencies do indeed appear to be incoming, assuming the draft regulations are passed into law without amendment, according to KPMG.

The firm says: “We consider that in certain instances PSC arrangements may also be caught under the new rules, resulting in the agency having an obligation to operate PAYE on payments receivable by the worker ‘in consequence of’ providing the services.

“Such payments may not have been received directly from the end user; they may for example be dividends paid to the worker by the PSC.”

The firm adds that the proposals to strengthen the Agencies legislation will extend it to workers who are “personally involved in the provision of services” and, as a result of this, where the client pays the worker for the services.

Sounding concerned for contracting, KPMG reflected: “This goes beyond the existing ‘personal service’ requirement. 

“When this is coupled with the ‘manner in which the worker provides the services [not being] subject to (or to the right of) supervision, direction or control by any person,’ it appears to introduce a more demanding test to avoid the impact of these rules than exists under the current agency rules.”

Chris Bryce, the chief executive of PCG, agrees, saying that despite HMRC’s claim that the Agencies legislation should “not generally apply to PSCs,” the department appears not to have noticed the burden which the new framework will impose on agencies.

“It will make them less likely to facilitate work for freelancers,” he said. “This could result in agencies finding it impossible to do business with independent freelancers.”

He took issue with HMRC’s ‘unhelpful’ move to refer to “computer programmers” in the consultation, despite the fact that the real vulnerable workers it claims the proposals will address are likely to be lower skilled and lower paid.

“It is difficult to comprehend a situation where policy-makers would introduce a measure that makes accessing Britain’s most enterprising and entrepreneurial sector all but impossible,” said Mr Bryce. “With these measures, they risk doing just that.”

Whether HMRC has made a “wrong turn” - in that it neglected to see the “commercial ramifications” of its proposals, or just a “U-turn”, by attacking PSCs almost in the same breath as saying they were not the intended targets, will be investigated in the coming weeks, said PCG.

For now, however, uncertainty appears to be the only certainty. Adrian Marlowe, managing director of Lawspeed, warned last night: “Although the [consultation] document appears targeted to stop exploitation of lower paid workers pushed into self employment, the scope [of the proposals is] far wider.

“[They] could affect all PSCs involved in contracting and the application of IR35, as well as PAYE, and those operating in the construction sector.”

Editor's Note: Further Reading on 'false self-employment' -

False self-employment rules offer PSCs an 'out'

Contractors' Questions: Who'd be liable for false self-employment?

Why you may be taxed like an employee, minus their protections

False self-employment rules might be too wide, HMRC admits

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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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