There has been much written about the new regulations and legislation included in the 2014 Finance Act. We have also found that there is much confusion on what the new legislation means, and who it impacts. This short article will outline the rules, why they were brought out and how they should be interpreted.
The government was aware that a number of agency arrangements were set up in such a way that the “worker” would be self-employed – and so no employers’ NI would be payable on the services provided. The worker would be able to claim additional expenses as a result of being self employed, and so it was a win-win situation for each of the client, agency and usually the worker (although they would have less employment rights). The way that these contracts were set up were to include a substitution clause within the contract, so that the Agency legislation did not apply (i.e. there was no personal service requirement).
Finance Act 2014 removed the necessity for personal service to apply – and what is now required is that the worker should be subject to a “right of control, supervision or director as to the manner in which the duties are carried out”.
Consequences for contractors
These rules do not really have a major impact on Ltd company contractor clients. These rules have been brought out to avoid false self-employment in arrangements not involving a worker operating through a Ltd company. IR35 rules will still apply and these rules do not disturb anything to do with IR35. They are additional tools for HMRC to use to ensure that agencies are categorizing their workers correctly.
Consequences for agencies
Agencies will need to take note of these changes, as they will be the party that HMRC holds responsible in cases where a worker should have been categorized as employed rather than self-employed. The agency will have to prove their treatment of workers, and they may be required to pay out additional PAYE/NI in cases where they have not used the correct treatment. It is essential that agencies are made aware of these risks so that they can put procedures in place to mitigate the risks.
From April 2015 agencies will be required to submit quarterly electronic returns to HMRC to provide information on which workers have been paid gross, and the reasons why the agency does not believe they are subject to the rules.
It is essential that agencies are aware of these changes, and that the correct procedures put into place so that information is held on treatment of workers, and so that the treatment can be justified in the case of challenge from HMRC.
For agencies that only take on workers as employees or through a Ltd company structure these rules will not impact – although contractors operating through a Ltd company will need to consider their IR35 status.
If any agencies require advice on this complex area, please get in touch with Gavin Fernandes FCA, CTA (firstname.lastname@example.org)
Written by: Gavin Fernandes FCA, CTA
5 October 2014