Onshore Intermediaries
GOVERNMENT TO PROCEED WITH ONSHORE INTERMEDIARIES LEGISLATION
We announced on 10 March 2014 that HMRC intended to publish its findings following the consultation concerning ‘onshore intermediaries’ on 13 March 2014. Our announcement was proved to be accurate and as we stated yesterday the legislation is due to be implemented (subject to parliamentary approval) in April 2014. This legislation will make it very difficult for individuals to be paid on a self-employed basis where an intermediary is in the ‘chain’. Given the potential ramifications of this legislative change we have provided a report below for you to use as a basis for making future plans and seeking future advice.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General
The Government’s response can be broadly segmented into the following key topics:
- Intended date of enactment
- Reporting requirements
- Greater ‘specificity’
- Supervision, direction or control
- Fraudulent documents
- Interaction with IR35
- Anti-avoidance
We have addressed each of these topics below and have referenced some of the important paragraphs within the Government’s ‘summary of responses’.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intended date of enactment
The Government has confirmed that the legislation will come into force on 6 April 2014. The tax elements of the legislation will be introduced via the Finance Bill 2014 and are still subject to parliamentary approval. From a National Insurance perspective the relevant legislation is housed within regulations and therefore the process to becoming law is easier.
Whilst the Government was keen to stress that they had ‘considered’ suggestions for delaying these measures they have decided that they should come into force on 6 April 2014. Given the short time frame until the legislation is in force it is crucial that affected businesses start making plans now.
References: 1.5, 2.1, 3.15
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reporting requirements
Despite not moving the enactment date the Government has taken on board the feedback regarding the reporting requirements that HMRC is seeking to introduce and these will be delayed. The first return due will be delayed until the first quarter of 2015/16. This is of course welcome and allows HMRC the opportunity to develop and test their requirements whilst also allowing those affected more time to implement the appropriate systems. According to HMRC they are also reviewing a reduced return in relation to PSCs.
Once we have more detail on the reporting requirements we will of course update you. It is important however that affected businesses are aware that whilst the reporting requirements are being delayed the legislation is not. From 6 April 2014 the legislation will be in force (subject to parliamentary approval) and form part of HMRC’s armoury.
References: 1.6, 3.21, 3.22
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater ‘specificity’
One of the major problems with the proposed legislation was the extremely wide ambit of application. As originally proposed the legislation could apply to any chain of contracts even where there is no employment agency or ‘intermediary’ in the chain. This was a particular problem for the construction industry where contractor and subcontractor chains are commonplace and something that we highlighted back in January 2014.
The Government has indicated that it intends to amend the proposed Section 44 (1)(a) to ensure that there is greater clarity and ‘specificity’ with regards to the legislation’s ambit of application in particular with regards to the definition of an ‘intermediary’.
At the time of going to press this detail is not yet available from HMRC. However, the Government in its summary of responses is clear that the legislation is not aimed at those providing a ‘composite’ service where there are a number of companies in the supply chain. As stated, at present there is no detail but ‘composite’ services would in our opinion be services where more than mere individuals are provided to an end user. The ‘service provider’ would actually be providing a service rather than just individuals. Once we have the detail we will advise further. On the face of it though, this is good news for genuine commercial contractors that are not acting as agencies or mere intermediaries.
References: 1.7, 3.25, 3.31
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervision, direction or control
As we have outlined in previous reports, where the structure set out in the proposed legislation is in place then unless it can be shown that the individual is not supervised, directed or controlled (or subject to the right of supervision, direction or control) by any party as to the manner in which the services are provided then the legislation will bite and the individual cannot be ‘self-employed’ for tax purposes.
Despite the protestations of many; that this test was vague, practically inept, required affected parties to ‘prove a negative’ and not a true reflection of the employment status test developed by the courts over time, HMRC have decided to proceed with the test.
This is not a surprise as it is the area that HMRC have actually had some success in arguing in Tribunal proceedings. Furthermore, any party seeking to ‘show’ that there is no ‘control’ will find themselves having to clear a high hurdle. This does not mean that it is impossible but it does mean that a thorough examination of the facts will be required as well as liaison between all involved parties.
In light of the responses to the ‘control’ test that the Government received, HMRC have provided ‘extensive’ guidance in order to assist those affected with understanding the test. The guidance can be found on the onshore intermediaries page at: https://www.gov.uk/government/consultations/onshore-employment-intermediaries-false-self-employment
Having analysed the guidance it is clear that the drafters were not subject to any supervision, direction or control as it is largely inane in nature and of little help to anyone seeking guidance on real life situations. Furthermore, some of HMRC’s proclamations do not appear to tally with the case law and reading their accounts of some of the cited cases you would be forgiven for thinking they had actually won those cases, when in reality they didn’t!
HMRC’s guidance and the examples therein are in our opinion riddled with inconsistencies and inaccuracies. Take ‘scenario 1’ for example. This is supposedly a ‘retail clothing company’ that is happy to engage an external IT consultant to design their website and happy to have no say whatsoever in how that website looks. Furthermore, according to the example ‘Paul’ has the scope to design the website and place it on line without the client company even checking they are happy with how it looks. Clearly this example bears no relation to the real world and we imagine most companies (retail or otherwise) like to at least have a passing interest in how their own website will look.
What is even more startling is that HMRC neglect to provide any real focus on the contractual rights of control that may exist (for good reason) in the contracts towards the top of the chain. This is an obvious deficiency in the guidance and those affected by the legislation cannot afford to make the same mistake.
It is important to remember that this is only guidance and therefore not binding and the courts are entitled to take their own view. HMRC are also entitled to depart from their own guidance where it suits them and consequently it is dangerous to rely on their examples. However, what it does do is provide you with an insight (no matter how inane) into what HMRC view as the necessary ‘supervision, direction or control’.
References: 1.8, 3.32-3.47, ancillary guidance
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fraudulent documents
It is apparent that a common response to the consultation was a genuine fear that parties would present agencies or clients with documentation that seeks to fraudulently circumvent the legislation by taking advantage of the control exemption (discussed earlier). It was argued (quite rightly) that those who are provided with said fraudulent documents should not be the ones that bear the cost of a failure to comply with the legislation. It was also argued that by placing the liability on the agency closest to the end user the Government is exposing this agency to unscrupulous intermediaries who could continue taxing individuals as self-employed whilst telling the agency they were operating PAYE.
HMRC have heeded these concerns and intend to introduce a provision that provides that; where ‘Agency 1’ is provided with fraudulent documents and relies on these in good faith then the liability (that would usually lie with ‘Agency 1’) will be passed on to the party (in the contractual chain) that provided the fraudulent documents. Responsibility can also be passed down the chain by ‘Agency 1’ where it can be shown that they relied in good faith on another party’s assurance that PAYE was being operated.
Once we have the wording of these provisions we will issue an update.
References: 1.8, 3.46, 3.47
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interaction with IR35
This was a part of the consultation that received significant responses prompting HMRC to produce a technical note to clarify its intentions. Many asked that PSCs be removed from the scope of the proposed legislation entirely. HMRC have refused to do this and the proposed legislation remains a factor to consider for PSCs.
HMRC make the point that there is no intention for the interaction between IR35 and the agency legislation to change and therefore in ‘most’ cases it will not apply. HMRC highlight that where a worker withdraws profits as employment income then the new agency legislation (and current legislation) will not apply and in ‘most’ cases it will not apply to dividends either.
It appears that HMRC do not intend for the new legislation to work any differently than the current legislation does with regards to PSCs. However, they have not (as urged by some) ruled out its application in appropriate circumstances.
References: 1.9, 3.5, 3.55, 3.56-3.57
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-avoidance
This is possibly the biggest development to arise from the Government’s summary of responses. The Government is on the warpath and intends to introduce a Targeted Anti Abuse Rule (TAAR) to prevent companies from finding new ‘vehicles’ that seek to avoid/reduce income tax and NICs. They are hoping that TAAR will act as a deterrent to such ‘vehicles’.
The TAAR will allow HMRC to consider the motive for the setting up of the arrangements (was the motive to avoid income tax?) as well as whether the result has been achieved (in whole or in part).
HMRC has also been clear that the TAAR has been designed to combat the mass incorporation of PSCs where the reason for their incorporation is the avoidance of the agency legislation. Again, at the time of going to press we do not have the proposed wording for the TAAR but given its potential impact as soon as we do we will be analysing it carefully.
References: 1.10, 3.68-3.69
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUMMARY
In short, other than what the government define as ‘small changes’ the legislation is due to be in force on 6 April 2014 with the reporting requirements delayed until 2015/16. The major developments and ones that you should be checking the detail on (when it is available) are the proposed clarification of what an ‘intermediary’ will constitute and the application/ambit of the TAAR. Whilst we are still waiting for some detail, what we have now is the clarity that this is happening and that it is happening soon. As always we will keep you updated.
If you require independent advice on the incoming legislation, its impact and your options moving forwards please do not hesitate to contact us.