New legislation that will come into force on 6th April 2014 will remove the key criteria of ‘Personal Service’ (the right of substitution) as an argument for a worker claiming to be Self Employed. With a presumption of control over the worker the burden will be on the intermediary furthest up the supply chain (i.e. Agency) to prove a lack of supervision direction or control in cases of legitimate Self Employment. Of significant concern to employment intermediaries, in the event that a worker is not proven to be Self Employed, any liabilities for unpaid PAYE and National Insurance will rest with the intermediary furthest up the supply chain, in most cases the Agency.
HMRC has issued guidance notes to assist in the interpretation of the control test and it is clear from the examples given that the many of the drivers previously engaged on a Self Employed basis will soon be deemed to be employees. In my opinion it will be difficult for a driving agency working for clients of any size or standing to prove a worker to be genuinely Self Employed. And it’s not just the day to day control as illustrated in the guidance notes that is in focus – if an agency’s contract with its client contains a clause giving the client a right of control over the worker, the legislation applies. This is because an unexercised right of control is sufficient to make the new legislation bite. Most agencies’ standard terms of business contain such clauses, and removing them presents liability and insurance issues for agencies.
It is worth noting that an agency will be able to rely in good faith on a representation by either the client or an umbrella that there is no control. If such a representation turns out to be false, the party making the representation will become liable. We have yet to see the detailed legislation on this part of the proposal, but it is likely that this will only be useful if the agency has changed its contracts of employment.
So with fewer options available to the agency, what solutions remain open?
In the build-up to last week’s announcement from HMRC, some agencies pointed to the PSC model as the viable alternative to Self Employment. Indeed, HMRC has confirmed that PSC’s should not be affected by the new legislation where remuneration is already taxed as employment income or remuneration is not in consequence of the worker providing their services under the contract (i.e. dividends). HOWEVER…HMRC has also made it very clear that they will be watching out for this and have explicitly stated that there will be a Targeted Anti-Avoidance Rule to be aimed at the mass incorporation of workers into their own limited company. We spoke to a senior executive at HMRC, who has been personally involved in the new legislation, and he confirmed that they are very keen to hear of any such mass migrations.
With the win-win commercial value to the employee and the agency it seems the umbrella solution remains the best alternative as it presents the optimum mix of low risk and least cost to the agency.