Agency Workers: Closing the Tax Loophole?

24.01.14

Amid increased scrutiny by HMRC of the distinction between employment and self-employment (which we will be looking at in a series of e-bulletins) we consider the on-going consultation on agency workers and ‘false self-employment’. Although this issue first arose in the construction industry, HMRC believes it is now widespread.

Employed or self-employed: why does it matter?

Courts and tribunals are frequently asked whether individuals are employees or self-employed. The answer is not always straightforward. The label given to the relationship by the parties is not conclusive and all the facts and circumstances will be considered.

These cases arise time and again because an individual’s employment status has significant implications for their employment rights and tax liabilities, for example:

Employee

Self-employed

- Employer deducts tax and NICs under PAYE and accounts to HMRC for such

- Employer NICs are due

- Certain terms are implied in a contract of employment, including the implied term of mutual trust and confidence

- Certain employment rights only apply to employees, including the right not to be unfairly dismissed

- Employers can be liable for the acts of employees in the course of employment

- Employers must take out employee liability insurance to cover the risk of employees injuring themselves at work

- Employers owe statutory duties relating to health and safety

- Engager does not administer PAYE

- Individual must register with HMRC and is responsible for their own income tax and NICs

- No employer NICs are due

 -Individual pays lower rate NICs

 -Individual can claim more generous tax and NICs free expenses

- If an employer wrongly treats an individual as self-employed, the employer will be liable to HMRC for tax, NICs, interest and penalties

Note, however, that some employment rights (such as the national minimum wage and the right to paid holiday) apply not just to employees, but to a wider category of ‘workers’.

Agency workers: employment status can differ

An individual’s employment status can be different for the purposes of employment rights and taxation. A determination by HMRC that an individual is an employee for tax purposes does not mean that an employment tribunal will reach the same conclusion on employment rights. The employment status of agency workers can be summarised as follows:

Employment Rights

Taxation

- Can be employees of the agency, or the client. If so, they have all the usual rights of employees against that party.

- But in many cases, agency workers are not employees of either.

- The Agency Workers Regulations 2010 gave agency workers the right to the same pay and other ‘basic working conditions’ as equivalent permanent staff after 12 weeks but didn’t change the employment status of agency workers.

- If an agency worker is an employee of the agency or client, that party will be responsible for PAYE and employer NICs as with any other employee

- However, even if an agency worker is not an employee of the agency or client, specific ‘agency legislation’ places responsibility on the agency for paying employer NICs and deducting income tax and employee NICs, and accounting for this to HMRC.

Agency Workers: The Loophole

HMRC considers that some agencies have been avoiding the ‘agency legislation’ which deems them responsible for employer NICs, and deducting income tax and employee NICs.

Before the ‘agency legislation’ applies, a number of criteria must be met: one being that the worker is obliged to provide their services personally. Agencies have attempted to claim that the legislation does not apply to them by, for example, including clauses in contracts stating that workers are entitled to send substitutes to do the work (even if this would never actually be permitted in reality). The individuals then pay tax and NICs on a self-employed basis.

The end client is protected if HMRC concludes that the individual was wrongly classified as self-employed: HMRC will seek to recover tax, NICs, interest and penalties from the agency, rather than the end client.

Closing the loophole

The government’s consultation ‘Onshore employment intermediaries: false self-employment’, which is aimed at closing this loophole, can be accessed by clicking here. Responses to the consultation must be submitted no later than 4 February 2014, and (if it gets Parliamentary approval) the new legislation is intended to take effect from 6 April 2014.

HMRC has also issued draft guidance which can be accessed by clicking here.

In summary, the government plans to remove the obligation for personal service from the agency legislation and, in determining whether or not the legislation applies, the focus will shift to whether a worker is subject to (or to the right of) control, supervision or direction as to the manner in which the duties are carried out.

HMRC’s position is that the new legislation will not affect those who are genuinely self-employed as they will not be subject to (or to the right of) direction, supervision and control.

Impact on employment rights

If these changes come into effect, they will not impact directly on the employment status of agency workers for employment rights purposes (as discussed in the ‘employment rights’ box above).

However, HMRC considers that workers have been engaged through agencies on a false self-employment basis, primarily to avoid employment taxes. With the loophole closed, there will be less incentive (at least from a tax and national insurance perspective) to engage individuals via agencies, rather than directly as employees.

Record Keeping and Reporting

Under the proposals, from 6 April 2014, agencies will need to keep additional records and submit a new quarterly electronic return. In particular, they will need to keep records of the reasons why income tax and NICs have not been deducted. If this is because the agency does not consider that the individual is subject to the supervision, direction or control required by the new legislation, they will need to keep evidence of this. If the agency is unable to provide satisfactory evidence when requested, HMRC may recover tax and NICs from them.

Whilst agencies with a reporting requirement will be expected to make returns through HMRC from 6 April 2014, they will not need to submit the first quarterly return until 31 October 2014, and the government will delay the penalties for late or incorrect returns until April 2015.

Offshore Agencies

Separately, the government has consulted on tackling tax avoidance by offshore employment intermediaries. Such schemes are often not legal under current legislation (and remain open to challenge) but the government intends to strengthen the legislation from 6 April 2014. In summary, the impact of the changes will be as follows:

  • Where there is a foreign employer or agency by or through whom the worker is supplied then the PAYE and NIC obligations will fall on any UK agency in the contractual chain. If there is no UK agency in the contractual chain, the end client is responsible for operating PAYE and NICs.
  • For UK Continental Shelf workers employed by a company outside the UK, the employer’s UK associated company will be treated as the employer for PAYE and NICs. If there is no such UK associated company then the oilfield licensee will be treated as the employer for PAYE and NICs. The new legislation also unifies the tax treatment of oil and gas workers whether they are on a fixed or floating platform installation.

Tailored Advice

If you have any concerns about the basis on which you contract with an agency, or how these rules apply to agency workers, please get in touch with your usual contact from our employment or tax teams.

Key Contacts

Joan Cradden

Alan Barr

Juliet Bayne

Tony Hadden

Lynne Marr

Paul McMahon

Alison Shackleton