Agency Legislation

Following the Autumn Statement 2013, the Onshore Intermediaries Legislation was introduced to combat the perceived problem of false self-employment created by employment intermediaries.

This is typically a payroll and contract company that sits between the end user and the worker, very much like an agency does in the typical contractual chain involving PSCs. There are distinct differences between an agency and an employment business however – the employment intermediary as well as providing payroll services to the end user, assumes the role of subcontractor to the main contractor, i.e. the employment intermediary accepts and removes the risk of employment status matters from the end user.

HMRC estimated that around 200,000 workers in the construction sector and another 50,000 workers in other sectors such as driving, catering, and security, were being ‘dressed up’ as self-employed, typically because of a bogus right of substitution.

What is the onshore intermediaries legislation?

HMRC’s proposal to combat false self-employment was to amend the current Agency Legislation contained in Chapter 7, Part 2 ITEPA 2003. The legislation is contained within Chapter 7, Part 2, Income Tax (Earnings and Pensions) Act 2003, section 44 (thus often referred to as S44). From 6th April 2014, should a worker be deemed an employee, the agency will be responsible for deducting the PAYE and NIC, from all the income earned by the worker.

Despite agencies misconceptions about this legislation, they have always been able to provide workers to end users on a self-employed basis provided that:

• The worker is not under an obligation to personally provide their services; AND
• The worker is not subject to (or to the right of), supervision, direction or control as to the manner in which the services are to be provided.

 

Draft Finance Bill 2014 however, proposed to remove the requirement for personal service and focus solely on the right of control as the determining factor as to whether a worker is self-employed or not. Where a worker is engaged by or through an employment business then there will be a presumption that there is control over the worker and it will be up to the employment intermediary to prove otherwise.

Qualifying Conditions

Certain qualifying conditions must exist for the Agency Legislation to be applicable as follows;

• the worker must personally provide services to the client, and
• there must be a contract (see ESM2036) between the client (or a person connected with the client) and a person who is not the worker, the client, or a person connected with the client (that is, “the agency”) and under or in consequence of that contract: (i) the worker’s services are provided, or (ii) the client or any person connected with the client pays, or otherwise provides consideration for the services, and
• the worker must be subject to (or to a right of) supervision, direction, or control as to the way they provide their services (see ESM2037), and
• remuneration (see ESM2038) receivable by the worker in consequence of providing the services does not constitute employment income/employed earners earnings before the agency legislation is applied.

 

Does the onshore intermediaries legislation apply to PSCs?

The consultation document contained some rather contradictory statements about the effect of the proposals on PSCs, however since then HMRC have issued a document titled “Interaction of Personal Service Companies with the Proposed Changes to Chapter 7 S44-47 ITEPA 2003 (The Agency Legislation)” which sets out various conditions which must exist for the Agency Legislation to apply to a PSC, as follows:

“For the proposed new Agency legislation to apply to a worker providing their services through a PSC, all of the following qualifying conditions need to be met:

• the worker personally provides, or is personally involved in the provision of, services to another person because of a contract between that person and a third person;
• the way the worker provides the services is subject to (or to the right of) supervision, direction, or control by any person.
• remuneration is received by the worker in consequence of providing the services; and
• that remuneration does not constitute employment income apart from under the Agency legislation.

 

As is currently the case, the Agency Legislation will not generally apply where a worker is engaged via a PSC, as all the above criteria will not normally be met. This is because:

• As set out above, the legislation will only apply when remuneration is received by the worker as a consequence of providing the services. Therefore, dividends paid to the worker as a genuine consequence of their shareholding in the PSC will not normally fall within the Agency Legislation.
• Similarly, the Agency Legislation only applies when the worker receives remuneration which is not employment income before the provisions of that legislation are applied. Any salary paid to the worker by the PSC is already employment income so the Agency Legislation would not apply to that remuneration.
• Loans are made by reason of the employment with the PSC. Beneficial or written-off loans are chargeable to tax/NICs as earnings but do not normally arise as a consequence of the worker providing the services. As such, they would not fall within the scope of the Agency Legislation. “

 

Further clarity can also be found within HMRC’s own Employment Status Manuals ESM 2004.

The agency's responsibilities

Determining Control

HMRC issued guidance on Supervision, Direction or Control in response to the consultation document, which defines each of the terms (as follows). The document also provides some detailed examples, of where contractors may or may not fall under Supervision, Direction or Control. Further guidance can be found here.

• Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate to develop their skills and knowledge.
• Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance, or advice as to how the work must be done. Someone providing direction will often coordinate the how the work is done, as it is being undertaken.
• Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.

 

Reporting Requirements

As from 6th April 2014, employment intermediaries and agencies are required to submit a simple quarterly electronic return containing details of any workers not accounted for through RTI. The first quarterly return needed to be submitted on 31 October 2014.

Penalties for incorrect or late returns were not implemented until April 2015, however should the report be late, a penalty will now automatically be charged.

The amount of the penalty is based on the number of offences in a 12-month period.

• £250 – first offence
• £500 – second offence
• £1,000 – third and later offences

 

If a report is submitted which is incorrect, penalties may also apply. An incomplete report, for example a report where information is missing, will count as an incorrect report. Penalties for incorrect reports will be determined by HMRC on a case-by-case basis.

Where there is a continued failure to send reports, or where reports are frequently sent in late, a penalty of up to £600 applies for every day that the report is late.

For more information, please contact us on 0116 2690992.