There is a change to legislation effective from April 6th 2014 which will impact freelancers who are currently working as sole traders, via an intermediary who pays them without the deduction of tax and National Insurance (NI).
The change is being driven by concern from HM Revenue & Customs that this way in which freelancers get paid can result in tax and NI being avoided, writes Matthew Fryer of Brookson, an accountancy firm specialising in freelancers’ tax affairs.
These models have been prominent in the construction sector and allow freelancers to be paid gross (as sole traders) or with deduction of a 20% withholding tax.
What the taxman is tackling
More recently these models have started to be used in other sectors outside of construction, predominantly in catering, security and transport.Providers of these models interpose themselves between the recruitment agency and the freelancer and use the contractual terms to classify the freelancer as a sole trader and therefore not subject them to PAYE, resulting in lower rates of national insurance being paid.
HMRC have addressed this by proposing to change the law from 6 April 2014 to shift the self-employment test to focus on whether the freelancer is under the ‘supervision, direction and control’ of the end client.
HMRC is also proposing to amend existing legislation to make the recruitment agency who has placed the freelancer responsible for reviewing the self-employment status and deducting PAYE from the freelancer, if such a worker is working via a self-employment intermediary and the recruiter believes that the ‘control’ test is failed.
The position of Limited and Umbrella Companies
We have held several meetings with HMRC on this topic and it has been confirmed to us that a compliant umbrella company which employs temporary workers and deducts PAYE from their earnings are outside the scope of this change.
In addition, HMRC has confirmed to us that if a freelancer works through their own limited company and pays themselves by way or dividend and / or directors fee, then they will also be outside the scope of the legislation.
Sole traders already being told to switch
We believe that, should these amendments go through as expected on April 6th 2014, this will result in many recruitment agencies reviewing the payment models used by their freelancers and if they identify that payments are being made via a self-employment intermediary, they are likely to request that the freelancer switches to either an umbrella company or sets up their own limited company.
We are already aware of several recruitment agencies starting this process and are also aware of several self-employment providers ceasing to operate this model.
Editor’s Note: Further Reading on False Self-Employment –