Will new agency legislation include PSCs?
Last week saw the publication of draft Finance Bill 2014 clauses and alarm bells have already started to sound as to whether the proposals to amend Chapter 7 of Part 2 of Income Tax (Earnings and Pensions) Act 2003, commonly referred to as the ‘Agency Legislation’ will catch Personal Service Companies (PSCs) as well as individual self-employed workers.
Currently the legislation requires an agency to treat a self-employed worker as employed and deduct PAYE and NIC where that individual:
- personally provides or is under an obligation to personally provide their services to a client;
AND - is subject to (or to the right of) supervision, direction or control over the manner in which the services are provided.
It is proposed however, that as from 6th April 2014 the obligation for personal service will be removed leaving only the control issue as the determinative factor as to whether a worker is an employee or self-employed. Furthermore, Chapter 7 will not be confined to agencies but any employment intermediary.
It will no longer matter whether or not a person has a right of substitution or engages other workers to assist them, if they are deemed to be under the control of the end client then the legislation will apply and the agency/employment intermediary will be liable for the PAYE tax and NIC.
The propositions are primarily aimed at employment intermediaries operating in the construction industry. HMRC consider that there are around 200,000 workers in the construction sector and another 50,000 in other sectors, such as driving, catering and the security industry, who are being falsely categorised as self-employed. There is however concern that the revised legislation could include PSCs as well as individuals because the wording extends to a worker who is ‘personally involved in the provision of services.’
Whilst HMRC have stated in their consultation document, ‘Onshore Employment Intermediaries: False Self-Employment’ that the Government’s proposals are not intended to apply to PSCs differently to the way it does currently it makes a contradictory statement at 4.7 of the document:
“The proposed new legislation will apply, as the current Agency Legislation does, where a worker is supplied by or through an intermediary. Intermediaries are any structure interposed between the engager and the worker including Employment Businesses and personal service companies (PSC). Those working through PSCs will therefore need to consider, as they do now, the agency legislation.”
Then, in 4.8, a contradiction to the contradiction which states that the Agency Legislation will not generally apply to PSCs as the worker will not be subject to (or under the right of) control, supervision, or direction as to the manner in which the services are performed nor will they have to provide their services personally. “This means that, as is currently the case, the Agency Legislation will not generally apply to PSCs as they will not meet all of these criteria” .
If that is the case, then why do HMRC take pains to argue these issues during an IR35 enquiry? Furthermore, when undergoing such an investigation can contractors make reference to HMRC’s own statement and ask why they are the subject of an enquiry when the Revenue believe that personal service and control are not generally an issue for PSCs?
HMRC’s Employment Status Manual 2004 currently states that the agency legislation does not apply to contracts between third parties and companies. So where an agency has a contract with a company, the legislation will not operate to treat services rendered under that contract as being one of employment. Hopefully, this guidance will remain unaltered after 6th April 2014 but at the moment there is a need for the Revenue to clarify its position.
Whilst it may not be the intention of HMRC to bring PSCs within the revised legislation it would not surprise many if they wanted to leave themselves with two bites of the cherry, i.e., if we don’t get you with IR35 then we can fall back on the agency legislation. It would probably be more convenient for them to simply bypass IR35 and use the agency legislation as they would only need to prove one employment status test rather than several. A sobering thought indeed.
The consultation runs for 8 weeks and the full document can be found by visiting the Onshore employment intermediaries: false self-employment page.
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