Agency legislation reporting requirement and IR35

Does SDC apply to agency legislation reporting requirements?

In light of the new reporting requirements for agencies due to the changes in agency legislation, it is apparent that some people have confused this with the IR35 rules.

Some believe that limited company contractors are only to be included on the reports if they are working under the supervision, direction and control of the client. This is not the case; whilst there is a similarity between this and IR35, in that SDC plays a big part in determining employment and IR35 status, the legislations are separate and will run independently.

 The actual guidance from HMRC on the reporting requirements is that from July 2015 agencies have to report to HMRC all self-employed workers information, those who are not paid PAYE or already reporting through RTI. The information included on the reports will include the name, address and NI number of the worker, how they were engaged, number of hours worked during the reporting period, total amount paid to the worker, start and end date of each engagement and the company’s registration number.

What this would mean for ltd company contractors going forward is that those who provide services directly to an end client, without using an employment business and provide subcontractors or substitutes, would have to report to HMRC in the same way about workers they have supplied to the end client. This is because they would be supplying more than one worker, which means they meet the conditions and is a relevant employment intermediary. If the extra person supplied is on PAYE terms with your company and returned under RTI, then reporting is not required under the new regulations.

Whilst this information will provide HMRC with a lot more information to use at their fingertips, such as finding potential targets and calculating the possible yield from each one, it does not specify the actual working arrangements of the worker, which is how IR35 status is determined.  

Agencies have already been advising some contractors to close their limited companies because they believe contractors will be caught by IR35 due to the new reporting requirements, which is simply unnecessary. Some views consider IR35 to be ‘dead within months’ because of the new reporting requirements and the fact that if they can prove that SDC does not exist, then IR35 will not apply either. However, there is little to no connection between the two.  

The reason we believe that the agency legislation does not apply to limited companies is because a) it was heard from the horse’s mouth at an HMRC talk given at the Recruitment Live Expo in Nov 2014 and b) because of the guidance published by HMRC, which indicates why PSCs are not the intended target;

“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 as a consequence of a contract between that person and a third person;
• the manner in which 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 proposed 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: 

a) 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 new Agency legislation.

b) 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 new Agency legislation would not apply to that remuneration.

c) 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.

If neither the Agency legislation nor the Managed Service Company legislation applies then anyone working through a PSC needs to consider the Intermediaries legislation, more commonly known as IR35. This will continue to be the case under the proposed new legislation. IR35 applies where the relationship between the worker and the engager would be one of employment if the PSC and any other party in the contractual chain did not exist. ”

However, ensuring that you are not caught by the agency legislation by confirming you are not providing services under the supervision, direction and control can only be a good thing for IR35 and should always have been done anyway. We are updating our own working practices questionnaire with the option to get it signed by your end client for added confirmation of not being caught by IR35, and this could also be a useful tool in allaying the concerns of your agency.

For more independent IR35 advice, please contact Qdos Contractor on [email protected] or 01162 690 992.