The taxman has partly bowed to criticism of his proposed crackdown on false self-employment by conceding he needs to make “a number of small changes” to the legislation before it comes into force next month.
In a document summarising responses to a consultation on the draft rules, HM Revenue & Customs says the agency legislation will still be strengthened to stamp out false self-employment, but via an “amended approach”.
The rethink follows HMRC’s admission last month that the rules “might be too wide,” as industry representatives, 106 of whom responded to the consultation, told officials, on behalf of freelancers, agencies, intermediaries and end-users.
In fact, the HMRC document says that no longer will agencies and other affected parties bound by new reporting requirements have to file the first return for the second quarter of 2014 by November 5th, as was originally proposed.
Instead, the first return under the new rules covering the first quarter of 2015/16 will not have to be filed until August 5th 2015, said the Revenue, recognising industry’s concerns over cost and uncertainty of who is required to make the return.
This delay to reporting requirements will also help iron out any “IT issues” before the system goes live, added HMRC which, since the consultation, is now exploring a reduced return requirement in relation to personal service companies.
But it is the buyers of composite services that have forced HMRC to make another change, because it says such buyers should not be caught by the incoming legislation, yet could have been under the original proposals.
So Section 44 (1) (a) will be amended, with the effect that where an individual is engaged on a self-employed basis and buys a composite service where there are a number of companies in the supply chain, such an arrangement will be out of scope.
A third amendment relates to agencies warning HMRC about the challenging ‘due diligence’ required of them to ascertain whether a worker is or isn’t subject to control (or right of control), and has or hasn’t deducted income tax and NICs via PAYE.
In the event that the worker provides the agency fraudulent documents purporting to show there is no control (or right of control) over them, or that employment taxes have been deducted, agencies were concerned that, unfairly, they’d still be the liable party.
As a result, a provision in the proposed legislation will be introduced so that where fraudulent documents have been provided to the agency, the company which has provided the false documents would be liable to operate PAYE and NICs.
Of the provision, which will come into play where multiple agencies are in the supply chain, HMRC reflected: “This change will ensure that those who act responsibly are recognised and protected from those who provide false documents with the aim of avoiding the liability.”
Accompanying concerns about the ‘control’ test from industry groups have also prompted HMRC to commit to handing them “extensive guidance” detailing examples of where the worker is not subject to supervision, direction or control (or the right of these).
If there is still uncertainty, the Revenue used the document, published on Friday, to point out that its “compliance officers” will be on hand to “help customers to make considered decisions in relation to the new legislation.”
However it is the uncertain position of PSCs and IR35 in relation to the attack on false self-employment that has generated the most angst, partly evidenced by the fact that almost all 106 respondents to the consultation raised the issue.
The nearest HMRC gets to offering the ‘unambiguous statement’ on the issue that freelancing tax specialist ClearSky has called for is at 3.55 of the document – Onshore Employment Intermediaries: False self-employment – Summary of Responses. It states:
“It is not the policy intention that the interaction between the amended agency legislation and IR35 will change from the existing interaction.
“In most cases the agency legislation has never applied, and will continue not to apply, to PSCs because the agency legislation does not apply where:
1) the remuneration is already taxed as employment income because of other provisions within the Taxes Acts; or
2) the remuneration is not in consequence of the worker providing their services under the contract.”
HMRC explains that this means that where a worker withdraws profits from their limited company as salary (employment income), the agency legislation would not apply because income tax and NICs will already have been deducted.
And the legislation will also not apply in “most cases” where profits are withdrawn as dividends as this is a return on capital distribution, not remuneration in consequence of the worker providing their services.
Put together, these two follow-up explanations make clear that the Revenue is retaining the right to reclassify dividend income as employment income if it deems the incorporation of a company by a freelancer to have been tax-led.
Indeed, the final and potentially only unwelcome element of HMRC’s “amended approach” is to introduce a Targeted Anti Avoidance Rule, designed to deter avoidance of income tax and NICs by setting up a limited company.
“[TAAR] is designed to enable HMRC to consider both the motive for setting up the arrangements – whether it is set up with the motive of avoiding income tax; and what it achieves – whether it result in less income tax being paid.
“This means,” the department continued, “that people who set up PSCs for a reason other than reducing tax -- such as the limited liability protections incorporations provides – would not be within the TAAR.
“However HMRC would be able to use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up PSCs to avoid the new legislation. HMRC will continue to monitor activity in these areas.”
Elsewhere in the document, the Revenue rejects a call by PCG and other supporters of freelancers to delay implementing the crackdown on false self-employment on the basis that doing so would lead to more avoidance.
“The government believes delaying implementation would provide the opportunity for new avoidance arrangements to be put in place and therefore implementation will not be delayed.”
authority added: “The government has decided that the legislation will be
brought in from 6 April 2014 as previously signalled. This legislative change
is to address mass-marketed avoidance of the existing legislation and delays in
bringing it in would provide a window for those trying to circumvent the
legislative intention, in which for them to devise new avoidance arrangements.”