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Government crackdown on falsifying employment status should prompt checks now
Growing evidence that some companies falsely classify staff supplied through agencies and other intermediaries as self-employed has led to a concerted drive to stamp out this practice. The government recently consulted on new rules designed to prevent the cloak of self-employment being used to dodge tax and national insurance payments. However, HMRC's tax reform proposals on the use of ‘onshore employment intermediaries’ are so wide in scope that they may affect many legitimate business arrangements.
New test
The current HMRC employment test focuses on the degree of supervision and control exercised by the client for whom an individual works. Other potentially relevant indicators of employment status include whether or not the individual has a right to substitute others to perform the work. However, the use of complicated contract provisions that seek to permit, while also controlling, such substitution may soon be a thing of the past. The government is proposing what it sees as a simpler test that will apply to companies involved in the supply of services through individuals whom they do not employ. Effectively, if these individuals are not already subject to PAYE and are under anyone's ‘supervision, direction or control’, the company responsible for supplying them will also become responsible for deducting tax and NI from their pay.
Uncertainty
Unfortunately, the apparent simplicity of the proposed new test masks a number of uncertainties and complexities. In its response to the consultation document, the Employment Lawyers Association (ELA) highlighted the danger that all sorts of business-to-business relationships may be caught by the new test, not just those involving employment agencies and employment businesses. Many different parties in a long contractual chain between clients and different employment businesses could be involved in exercising direction, supervision or control over individuals who would otherwise be regarded as self-employed. Potentially, any of those parties could be liable to operate PAYE, even though others in the chain have more direct involvement with the individual’s work.
The concept of ‘direction, supervision or control’ also appears so broad as to cover almost any requirement or request for the individual to do something. The proposals include a presumption that workers are under direction or supervision unless shown otherwise. The result is that many individuals formerly treated as self-employed will now be regarded as employees for tax purposes if they are supplied through an intermediary - but not if they are engaged directly.
Implications
The viability of existing arrangements with employment businesses that depend on the self-employed tax status of individuals performing contracted work will need to be scrutinised by those involved immediately. Employers should expect some difficult negotiations on future rates. Now would be a good time to dig out existing supply contracts and examine who is responsible if an individual’s tax status is challenged, each party's rights on terminating the arrangements, and whether there is any scope to vary the price.
Employment businesses may insist their clients provide some form of assurance that they are not exercising supervision, direction or control over ‘self-employed’ individuals. Clearly, this is something clients will normally wish to resist.
Individual contractors may have a strong incentive to engage directly with clients, rather than through employment businesses. But will clients wish to manage such relationships and take on the risk of an employment status challenge?
Organisations currently involved in supplying individuals who are not their employees to other companies should also now be considering their response to the forthcoming changes.
It remains to be seen whether the government will reassess these proposals in the light of responses to its consultation. In the meantime HR professionals would be well advised to prepare for a new regime in which the use of self-employed contractors is likely to carry more risk and expense than it does currently.