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UK: Employment intermediaries and false self-employment: The "Agency Legislation"

Tuesday, 10 March 2015   (0 Comments)
Posted by: Author: Jane Innes
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Author: Jane Innes (Goodman Derrick LLP)

There is confusion over the new Agency Legislation and businesses should treat it with care and determination.

Changes to the agency rules requiring PAYE to be applied to payments made by intermediaries to workers have produced uncertainty as well as giving rise to potentially onerous requirements on agencies.  They require immediate thought and action by all agencies.

The agency rules have been around in a variety of forms for decades.  In summary the intention of the legislation is to bring payments made by agents to workers who would not normally be regarded as employees, within the PAYE code.

The obligation is on the agency to account for PAYE.  Like all PAYE, this is a liability of the "employer" to HMRC.  It is not a tax liability of the worker.  The employer/agency would usually recoup the income tax and employee NIC charge from the worker under their terms of engagement. They are therefore simply left with the cost of employers' NIC.  However to HMRC the entire debt is one of the agency.

Recent publicity highlighted the number of workers being provided by offshore agencies to government run institutions, particularly schools and hospitals.  Often such agencies were not regarded, often correctly, as being within the old rules.  This was rather dramatically seen by HMRC as avoidance.

It was therefore not a surprise when in the Budget 2013 it was announced that the rules applying to offshore agencies were to be tightened.  What was more surprising was the announcement in December 2013 that the rules were to include onshore intermediaries to tackle "false self-employment".  HMRC meant business and made clear that despite all protests the changes would be introduced with effect from 6 April 2014.

The legislation that has followed has produced further uncertainty in its scope and application.  What is clear is that HMRC have a huge amount of discretion. How they will operate in practice will be determined by guidance and practice evolving over time.  This leaves agencies, and indeed anyone providing workers in difficulty.

The intention of the new rules are that where the services of a worker are provided to the client through a contract between the client and another party (the intermediary), PAYE will be accountable to HMRC by the intermediary.  If there are a chain of intermediaries, then it is the intermediary that contracts with the client that is liable. Advice should be sought if that intermediary is offshore to determine where the PAYE liability lies.

Given that an intermediary can be any entity it is clear that this rule is extremely broad.

There will be a duty on the intermediary to either account for PAYE or to provide a quarterly report to HMRC telling them about payments that have been made gross with an explanation of why the rules don't apply. These reporting requirements come into effect in April 2015 with first reports due in August 2015.  The details required are yet to be published. This puts the onus on the intermediary to justify payments that are regarded as outside the scope of the rules.

The only two circumstances in which the PAYE will not be due are where:

  • The worker is not under the supervision direction and control of anyone in providing their services; or
  • The remuneration would not be employment income in any event.

Given that the agency rules are applied before other rules such as the managed service company rules and IR35, the only real way out of the rules is on the basis that the worker is not supervised managed or controlled.

HMRC have published guidance on what they will regard as supervision, management and control.  While the guidance runs to 19 pages, the examples are extreme and unrealistic.  They also notably do not give guidance on the position of professional workers who would not normally regard themselves as "supervised".  Given the importance of the judgements that all intermediaries, not simply employment businesses are going to have to make on the issue, the guidance is disappointing.

Two points are worthy of note. The concept of supervision, management and control has been around for some time and previous case law helps.  Notably however on an unrelated point, HMRC lost a recent case where it was said that night security guards provided by an agency were not supervised managed and controlled.  Under HMRC guidance they would be so regarded and HMRC would regard PAYE as being due.

In addition recent experience shows that HMRC are aware that some of their guidance would be vulnerable on scrutiny from a tribunal.  Therefore careful consideration should be given as to how to respond to any enquiry to ensure HMRC are aware that they will need to justify their position.

Adding to the lack of co-ordination between the legislation and their implementation is fact that HMRC have been at lengths to say that they would not ordinarily regard a personal service company (PSC) as being an intermediary and coming within these rules.  This is on the basis that payments from a PSC are usually in the form of dividends rather than remuneration for the services.  Counsel's opinion has confirmed that this is not the basis on which the legislation is drafted. It is clear though that generally HMRC is being taken at its word and payments to PSCs are not being treated as within PAYE.  Care should be taken as the HMRC guidance states that where workers are being forced to contract through PSCs, anti-avoidance legislation will be used to bring the services of the worker back within the new rules, and PAYE claimed.

It is recommended that the following steps are taken to administer and comply with the new rules:

  •  Review your contracts.  This is critical.  Even in the most simple relationship any intermediary will now need to ensure that:
    • they can pay the worker after deducting income tax and employee's NIC if required to do so;
    • ideally they can reclaim any income tax and employee's NIC claimed by HMRC from the worker, or at least have the worker co-operate with any claim to offset tax the worker has paid on the same amounts through self-assessment;
    • they can obtain the details necessary from the worker to comply with the reporting obligations;
    • If the worker is receiving payment gross, agree the terms for doing so and how this will be reported to HMRC and where the risk of disagreement with HMRC lies;
    • If there are other intermediaries in the chain, for instance, a contract with an umbrella company this information and protection should be claimed from them.  The terms between the parties will need to reflect the fact that it will not be the entity paying the worker who will be paying the PAYE to HMRC.  If workers are to be paid net, the terms of payment to the other intermediaries will need to be reviewed.  Where the cost of employers' NIC is to be borne will also need to be negotiated.

Review any situations in which workers are being paid gross to determine how this is to be reported and justified to HMRC.

And finally, if HMRC do question the status of any worker, do not be defensive.  HMRC may appear to have all the powers but their interpretations of supervision direction and control are aggressive and it is predicted will, in some cases, not stand up to close scrutiny.

This article first appeared on 



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