The 2014 Finance Act amended s44 ITEPA 2003 and introduced measures designed to tackle so called 'False Self Employment': preventing employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self-employment.
Please see Agency Workers, new rules.
From 6 April 2017 where an individual works via a Personal Service Company for a client in the public sector, responsibility for operating PAYE and effectively IR35 moves from the PSC to the public authority or agency supplying the worker. See Personal Service Companies & tax.
Background to the measures (of historical interest only)
What is False Self Employment?
The new measures are aimed at preventing employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self-employment.
Agency workers are generally treated as employees for tax under the Agency Legislation unless they are engaged to work via their own personal service companies. In order to avoid the Agency Legislation or the need to use a personal service company, agencies have created carefully constructed contracts of self employment which means that they do not have an obligaiton to deduct PAYE and the worker is paid gross. The worker being self-employed can claim tax relief on their expenses and so the arrangement provides a win-win outcome for all parties. In construction companies there is the added burden of the Construction Industry Scheme however the key advantage is flexibility for the parties.
HMRC's concern is that the agency contracts create false self employment which avoids tax and NICs and so it is keen to tax the workers as employees.
Law to 5 April 2014
- For Income Tax, the relevant legislation is known as the Agency Legislation and is found at Chapter 7 Part 2 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
- This legislation places the responsibility for deducting income tax and National Insurance contributions (NICs), and paying this to HM Revenue & Customs through RTI and paying employer NICs, on the agency that has a relationship with the worker.
- For this legislation to apply a number of criteria need to be met, including an obligation for the worker to be providing personal service.
- For NICs, the relevant legislation is contained within The Social Security (Categorisation of Earners) Regulations 1978 and The Social Security (Categorisation of Earners) (Northern Ireland) Regulations 1978.
- These regulations dictate that a person, the worker, will be treated as being an employed earner for the purpose of NICs when all of the stipulated conditions are met, including, again, that the worker provides (or is under obligation to provide) their personal service.
Revision from 6 April 2014
- Chapter 7, Part 2 ITEPA 2003 is amended to remove the need for personal service and the obligation for personal service for recruitment businesses and other intermediaries based in the UK.
- Workers who are supplied through an intermediary agency and are subject to (or to a right of) supervision, direction or control by the end client, are treated as employees and the employment intermediary is required to operate PAYE