Draft rules to tackle intermediaries who avoid tax by disguising the employed as self-employed contain a “significant let-out” for most freelancers as long as they use limited companies (Personal Services Companies) in a typical way, a law firm has revealed.
In a game-changing announcement to a packed London seminar which it hosted, Lawspeed said that a dividend would not count as “remuneration to be in consequence of providing services” -- a condition which must be met for the measures (designed to strengthen Section 44-47 of ITEPA) to apply.
The firm says that following talks with HMRC -- which attended the seminar -- it is “very confident” that a typical PSC paying its worker by way of dividend (or partly by way of dividend) would not bring into place the proposed measures, which are open for consultation until February 4th.
Similarly, a director’s remuneration, salary or loan -- the three other ways that a typical PSC generally pays the money inside it to its worker -- also fail to qualify as ‘remuneration in consequence,’ a criterion without which the measures cannot bite.
So while it is true that PSCs are in reach of the attack on ‘false self-employment’, not least because the draft legislation to enact the measures offers them no immunity, the four favoured ways a conventional PSC pays its worker should, in effect, insulate it.
Speaking to FreelanceUK after delivering this analysis, Lawspeed’s managing director said that HM Revenue & Customs would shortly publish a document spelling out why it is that the strengthened Agencies Legislation will not generally apply to the typical PSC.
“But anyone that says it does not apply to PSCs is wrong,” caveated Adrian Marlowe, who is also the chairman of the Association of Recruitment Consultancies (ARC).
“It does apply to PSCs… they are going to be in scope because a PSC always effectively controls the ‘involvement of the worker in the provision of the services’ [-- a new condition in the legislation which replaces the personal service obligation].
“But remuneration that’s paid by a PSC -- the payment of the money to the worker under a typical PSC arrangement -- means that all of the conditions under Section 44 are not complied with, so S44 doesn’t apply to that typical kind of arrangement.
“[So] there is this significant let-out [in the legislation because] so long as a PSC pays its worker either by way of dividend, or director remuneration or employment income or by loan -- any of those 4 ways of rewarding the worker -- these do not count as ‘remuneration’, so the conditions won’t apply.”
As to where the strengthened Agencies Legislation is likely apply to PSCs and, also from April, see HMRC presume the worker is controlled and must therefore have the agency account for PAYE and NICs (unless it can demonstrate no supervision, direction or control), Mr Marlowe postulated a couple of scenarios.
One of them involved a PSC where it is engaged on a contract for services using a different worker who is being substituted in the context of avoiding IR35, and where that worker is paid by the agency in gross.
But generally-speaking, agencies that continue from April to pay workers in gross that they supply and who claim to be self-employed will need to have “solid evidence” that such an individual is not subject to supervision, direction or control.
Other intermediaries (the PSC for example) in the supply chain were also recommended yesterday to collect and keep such evidence, which must be readily available to hand to HMRC.
Yet it is the agency – as the deemed employer or the party who has the contract with the client – that will be liable for tax purposes or, as the seminar also heard, will “get it in the neck” from the taxman.
“If there’s any kind of control on workers, even those that HMRC once generally accepted to be genuinely self-employed -- then you [the agency supplying that worker] -- are going to be liable for S44-47 tax,” the ARC chair said.
“It’s curious, but you might want to encourage that worker to operate through their own PSC because then the liability falls away from you [the agency], assuming the worker is paying by way of dividend or director’sremuneration or the [two] other ways.”
But the legal specialist was quick to point out that the Managed Service Company legislation remains in place and, where HMRC perceives the agency to be trying to avoid tax, will use it to come down on those of them that encourage workers to operate via companies.
He added: “Directors of MSC providers and those encouraging workers to make use of MSCs can be personally liable. That said, the MSC legislation is chiefly in place to stop [mass] tax avoidance vehicles, rather than individuals just sorting out their own affairs.”
Further comment and analysis from Lawspeed’s seminar on S44-47’s application to self-employed workers – and the outfits they are involved with -- has been summarised below.
Onshore Employment Intermediaries: False Self-Employment – HMRC’s Objective:
- Ensure that individuals operating through intermediaries (such as an employment business or PSC) pay the same tax as PAYE individuals traditionally supplied through an agency i.e. where SS44-47 ITEPA apply
Employment Intermediaries: False Self-Employment – The Targets: Self-employed
- Those shifted from employment through intermediaries as self-employed
- Those forced to work through intermediaries as self-employed
- Those supplied by recruitment businesses that do not use employment arrangements
- Those that are charged a fee by an intermediary for self-employment arrangements
Onshore Employment Intermediaries: False Self-Employment – Misc
- From April 2014, introduce a new basic presumption -- not set out in law -- under which HMRC assumes there is ‘Control’ of the worker
- This means that HMRC no longer needs to prove existence of Supervision, Direction, or Control (S, D ,C), because there will be a presumption that it does exist.
- However if ‘the agency’ (the party who has the contract with the client) can show HMRC solid evidence there is no S,D or C of the worker then the rules do not apply
- To reiterate, HMRC says that (from April) there will be a presumption that where a worker is engaged by or through an intermediary, there is control over the worker
- Thus the onus will be on the intermediary (this could be a PSC, an employment business or other intermediary) to evidence there is no S,D or C (or the right of these)
- If the regulations go ahead from April without changes, the ‘agency’ will be the liable party for tax purposes.
How agencies can tell if a worker is falsely self-employed or genuinely self-employed?
HMRC says that the ‘Directed, Supervised or Controlled’ test must be applied by the agency on an individual basis to self-employed people it provides.
Even with ‘professionals’ who HMRC traditionally accepts are genuinely self-employed:
- the tests still have to be applied; and
- the agency could still be liable; and
- any reason for paying the worker gross has to be logged and kept on record by the agency.
Elsewhere at the seminar, there was disquiet over the short period of time that HMRC has allocated for freelancers and industry providers to have their say on the draftregulations, described as a "knotty issue" with potentially far-reaching consequences for many players in the self-employed labour market.
afterwards, Ben Grover, senior legal consultant at Lawspeed reflected: "It
was the general view of delegates that the scope of the proposed legislation is
far too wide and will bring a great number of arrangements into scope beyond
the stated intention."