Draft regulations to hit intermediaries ‘dressing up’ the employed as self-employed to avoid tax are not aimed at genuinely self-employed freelancers, the government has claimed.
Calling for views on the regulations, which will strengthen the Agencies legislation, officials said that personal service companies (PSCs) should not be impacted any differently to how the framework already affects them.
While the officials admit that a PSC qualifies as an intermediary, they say PSCs would have to meet four conditions, including being controlled, supervised or directed, to be caught by the proposed rules, which industry can comment on over the next eight weeks.
So, as is currently the case, the Agencies legislation will not “generally apply” to PSCs because they are normally outside its scope, but PSCs will still “need to consider” the framework, “as they do now.”
The officials added: "The government does not intend that the proposed strengthened legislation applies to personal service companies differently to the way it does currently.
"The interaction between, and the order in which, the agency legislation, managed service company legislation and intermediaries legislation (IR35) apply will remain as it is currently."
Although it is the MSC legislation which is being readied for those who try to avoid the strengthened Agencies legislation, it is the latter’s interaction with IR35 that freelancers (and their advisers) can feedback on. Specifically, whether it will “cause any issues.”
The 56-page consultation document adds that employment intermediaries – “increasingly the preferred way to disguise employment as self-employment” – are defined as employment businesses and PSCs.
The stronger rules are said to be necessary because intermediaries try to sidestep the ‘personal service’ test by claiming that there is no obligation for the worker to provide their services personally and that, therefore, they are self-employed.
HM Revenue & Customs explains that this sidestepping owes to workers’ contracts claiming they have a right to substitution, meaning they are able to send someone other than themselves to do the work.
In 2011, such a clause in the contracts of cosmetic consultants led to the taxman not being to collect employment taxes from them, despite a tribunal at the time agreeing with his assertion that they were directed, supervised and controlled.
As a result, the draft regulations will remove the obligation for a worker inside the Agencies legislation to provide their services personally, with the effect that right to substitution will no longer offer a ‘get-out’ to the legislation.
Instead, and from April 2014, the Agencies legislation will apply where the worker is controlled, supervised or directed as to the manner in which the duties are carried out.
"Where a worker is engaged by or through an intermediary and meets the condition…they will be deemed to be employed for tax purposes," HMRC added.
"There will also be an evidential requirement on the intermediary where they consider the worker not to be under control, direction or supervision to be able to provide evidence of this."
Treasury minister David Gauke welcomed the measures, which are estimated to impact 250,000 workers, some of whom he believes are often unaware of the arrangements they partake in.
"[Employment intermediaries disguising employment as self-employment] was initially a problem within the construction industry," he wrote in the foreword of the consultation, referring to an estimated 200,000 workers.
"[But] these arrangements are spreading to other sectors…I believe the proposals set out in this consultation document are the best way of tackling avoidance through false self-employment without impacting on the genuinely self-employed."