Agency Legislation Trumps IR35?

Consequences of new agency reporting for contractors

There is a school of thought that suggests the new agency legislation, that took effect from April of last year, could replace IR35 and that thinking is supported by the reporting requirements that all employment intermediaries have to adhere to as from 6th July 2015.

From April 2014 employment businesses and agencies have been required to prove to HMRC, if asked, why a worker wasn’t treated as an employee. This requires obtaining suitable evidence from both the end client and the worker to be able to justify the workers’ employment status.

Let us be clear though as to who the new Agency legislation is aimed at and why. The primary legislation has been around for quite some time and prevented agencies from treating individuals as self-employed if their personal service was a requirement of the contract and if they could be subjected to control by either the agency or the agency’s client. HMRC amended the legislation because of widespread abuse by employment businesses, particularly in the construction industry, whereby self-employment was being ‘falsely’ created. So, as from 6th April 2014, the personal service requirement was dropped leaving only a right of control as the solitary test to indicate whether or not a worker is an employee.

In February 2014 HMRC published a note in response to concerns that had been raised during consultation and confirmed that for the new Agency legislation to apply from 6th April 2014 all of the following qualifying conditions need to be met:

• the worker personally provides, or is personally involved in the provision of, services to another person as a consequence of a contract between that person and a third person;
• the manner in which the worker provides the services is subject to (or to the right of) supervision, direction or control by any person.
• remuneration is received by the worker in consequence of providing the services; and
• that remuneration does not constitute employment income apart from under the Agency legislation

The Agency legislation therefore will not generally apply where a worker is engaged via a PSC, as all the above criteria will not normally be met. This is because:

1. the legislation will only apply when remuneration is received by the worker as a consequence of providing the services. Therefore dividends paid to the worker as a genuine consequence of their shareholding in the PSC will not normally fall within the new Agency legislation.
2. the legislation only applies when the worker receives remuneration which is not employment income before the provisions of that legislation are applied. Any salary paid to the worker by the PSC is already employment income so the new Agency legislation would not apply to that remuneration. 
3. Loans are made by reason of the employment with the PSC. Beneficial or written off loans are chargeable to tax and NIC as earnings but do not normally arise as a consequence of the worker providing the services. As such, they would not fall within the scope of the Agency legislation.

As there are no rumours or rumblings that IR35 will be displaced by this legislation we can, for the time being, assume that IR35 will function as it does now and involve the whole range of employment status tests rather than just the one. That however is not the end of the story for freelancers because of the information that agencies are compelled to provide starting in the summer.

From 6th July 2015 agencies and employment businesses will have to send HMRC reports that contain details of all workers and their payments where PAYE was not operated. Reports will then have to be filed on a quarterly basis as follows:

These reports will contain detailed information such as:

• Workers name, address and N I number
• How the worker was engaged, e.g. through a limited company etc.
• Start and end date of each engagement
• Number of hours worked during the reporting period
• Total amount paid to the worker
• PSC’s company registration number

Hey presto, HMRC have even more information at their fingertips to help risk assess, much more rapidly than before, a contractors’ potential IR35 exposure. The IR35 net can be flung further afield but whether or not this will mean more enquiries depends on resources. As the Revenue are only committed to 250 new investigations each year, then probably not but their focus is now likely to  more finely sharpened by this new and steady flow of relatively real time information.