Tax regime changes relating to employment intermediaries

On 26 March 2015, Osborne Clarke brought together businesses from across the staffing industry to look at the impact of changes in the tax regime relating to employment intermediaries and what that means for the supply of staff in the UK in future. An overview of the event is set out below.

1. 2014 changes

In 2014, HMRC had two main concerns. The first was that offshore intermediary set-ups were avoiding the payment of employer’s national insurance contributions (“NIC”s). The Government amended the law in relation to offshore intermediaries and this effectively removed the problem overnight. The second concern was that a growing number of people were falsely claiming self-employment and this was being facilitated by employment intermediaries. The Government was concerned that the offshore changes would make this position worse.

2. False self-employment

With regard to false self-employment, HMRC stated that employment intermediaries were labelling workers as self-employed when, in fact, they weren’t. The law under sections 44-47 ITEPA has now been amended. This means that where a worker is provided through an intermediary such as a staffing company or umbrella, HMRC deem there to be an employment relationship between the worker and the last entity involved in the chain before the end user, i.e. the intermediary (known as ‘Intermediary 1’ in HMRC guidance), for tax purposes. This rule applies unless the worker’s pay is already taxed as employment income or there is no supervision, direction or control of the worker by the hirer or any other person in the supply chain. The effect of this is to create a default position in which Intermediary 1 is liable for NICS and PAYE. The changes in law have shifted the burden of proof on to Intermediary 1 to show that there is no element of supervision, direction or control by any person.

HMRC have provided some level of protection by stating that if an intermediary relies on information (e.g. about control etc.) provided to it from an entity directly next to it in the chain and that information was provided fraudulently (i.e. with the intention to deceive) then the PAYE/NIC risk passes to the provider of the fraudulent documents. In practice this defence is unlikely to be commonly available because it is hard to prove fraud.

3. Targeted Anti-Avoidance Rules and MSC

In addition to the above changes, there was considered to be a risk that staffing companies and others might encourage individuals into personal service companies (“PSC”s) to avoid the consequences of the amended ITEPA provisions. The 2007 MSC legislation was designed to prevent this but HMRC appear to find it hard to enforce HMRC and so the Targeted Anti-Avoidance Rule (“TAAR”) was introduced in 2014. The TAAR has been widely drafted and applies if:

(a) an individual personally provides services to another person (i.e. a client);

(b) a third person (i.e. the staffing company but it can be any person including an entity further down the supply chain) enters into “arrangements” whereby, the main purpose or one of the main purposes is to secure services are not caught in section 44 ITEPA; and

(c) but for the arrangements, section 44 ITEPA would have applied.

If the arrangements are caught by the TAAR, the individual is deemed (for tax and NIC purposes) to hold employment with that “third person” who has entered into relevant arrangements, and any remuneration received in relation to the services, from any person, is considered earnings. Interestingly, where TAAR applies, it is the person who makes arrangements rather than Intermediary 1 who will be liable for the tax and NICs. Of course sometimes it will be Intermediary 1 who is deemed to make the arrangements.

This is an area of concern for a number of intermediaries in the sector as many prospective contract workers are referred to advisers who discuss options with the workers, including that of setting up as a PSC. Therefore, it is very important for intermediaries to be sure that their arrangements are justifiable and do not pull them into TAAR. Whilst the burden of proof under TAAR will (unlike the burden of proof in other parts of the Intermediaries Legislation) lie with HMRC, the potential personal liability of directors under TAAR means that intermediaries must very carefully look at whether anything they say to or do for individuals could be deemed an “arrangement” mainly to help get round s44.

Obviously the MSC legislation (ss 61A-J ITEPA) sits alongside TAAR. Under MSC, where a person (such a staffing company) has encouraged an individual into a PSC arrangement which involves someone (a “MSC Provider”) effectively running the company for the individual then the encourager may be liable for PAYE and NICs relating to that PSC contractor. Again the burden of proof relating to this lies with HMRC, and in fact HMRC has a number of things to prove before liability will pass to the “encourager”. However, as with TAAR, there is potential personal liability for directors etc. and so MSC also means that intermediaries must very carefully look at whether anything they say to or do for individuals could be deemed an “encouragement” of the contractor to a MSC Provider.

4. Reporting obligations

Reporting obligations on intermediaries come into effect from April 2015 (it is Intermediary 1 that has the reporting obligation). Information on all individuals in respect of whom the intermediary makes a payment (other than where that intermediary itself accounts for PAYE and NICs) must be provided to HMRC along with the reasoning as to why no PAYE and NICs were accounted for by that intermediary. Specific deadlines provided by HMRC are as follows:

Fines for late reports and failure to send reports will be enforced (£250 for the first offence, £500 for the second offence and £1,000 for the third and later offences).

These penalties can accrue on a daily basis. These reporting obligations will allow HMRC to monitor any surge in the use of PSC arrangements, which highlights the importance for intermediaries of being sure of lack of exposure to tax debt transfer liability for MSC and TAAR purposes.

5. Budget 2015

Following the recent Budget, the use of arrangements which allowed umbrella companies and PSCs to benefit from tax relief for travel and related expenses was specifically targeted. The Government’s view is that although these arrangements are often within the rules, they create an unfair playing field in terms of those who can benefit and those who cannot. The Government has declared that changes to level the playing field in respect of these benefits will be introduced from April 2016. A consultation on the legislation will be issued later this year.

The legislation seems, at this stage, most likely to apply where an individual is employed by one entity but works for (or works under the supervision, direction or control) of another person i.e. the hirer. This of course is how umbrella arrangements normally work. Where that is the case, the individual’s travel and related expenses will no longer be payable tax free. The same will apply to PSC expenses, which is a major development that not everyone expected.

6. What could this mean for the shape of the future of contract staffing in the UK?

These changes will have a significant impact on how umbrella companies operate and the savings they help generate for workers, staffing companies and hirers. The take home pay of PSCs will also be affected. It is not yet clear as to what these changes will mean for the future of the sector but a number of possible options were discussed:

(a) If a PSC cannot benefit from tax free expenses, will this model be less appealing to some aspiring contractors?

(b) Will self-employment continue for some with the supply chain putting in measures to evidence no supervision, direction or control?

(c) Will umbrella companies evolve as they are still needed in the supply chain?

(d) Will there be consolidation in the number of umbrella companies in the market?

(e) Will more entities offer a ‘service’ rather than workers and take the contractual and liability risks associated with such an approach?

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