For those not aware, the legislation enacted in S44 ITEPA effectively prevents self employed workers, supplied by an employment agency to an end user but paid via an Intermediary, from remaining self employed. The definition of Supervision, Direction or Control, (or the right thereto), captures virtually every worker who, for many years, has been engaged on a self employed basis and instead subjects their earnings to PAYE and NIC. HMRC say there is a growing problem of "False Self Employment" with perhaps 200,000 individuals being engaged under sham contracts which deny them basic employment rights AND circumvents tax legislation, with a loss of Employer NIC Contributions. False Self Employment is said to be a problem in many sectors but it is clear these measures fall particularly harshly on Construction, where even the most skilled, most qualified trades people, who are generally represented, prepare accounts and file self assessment, now find themselves instantly converted to pseudo employees.
The legislation was clearly targeted at the low paid and in construction, self employed labourers are paid at rates as low as £6.50 per hour. Construction is only now coming out of recession, margins remain very low and there is very little money available to pay these workers a rate which, when taxed under the new legislation, delivers at least National Minimum Wage, Work Place pensions or holiday pay. To meet these costs the low paid would need to receive hourly rate increases of £2 to £3 per hour, £150 or more per week. Against a backdrop of thin margins and supply chain cost pressures, how is the sector reacting.
Bring on the "Elective Deduction a Model".
This is an engagement model where the worker remains on a self employed contract for services BUT his earnings are taxed as required under S44. Driving a wedge between Employment and a Tax law, the architects of these schemes say that, because the man is self employed he is not entitled to National Minimum Wage, pension, holiday pay, notice pay, SSP and other employment rights. Even more aggressively, they also say the man can offset his employment expenses, deducting these and taxing the remainder, meaning, in practice, that the earnings subjected to tax and NI will be below the tax free allowance and NI Lower Earnings Limits. The result, a worker who last week paid £60 in CIS tax, will this week pay £0! If all 200,000 so called falsely self employed workers move to an EDM, the loss is CIS tax alone would amount to £600 million per annum.
HMRC have said that they are aware of EDM, it is outside the spirit of the legislation, should be avoided by users of labour and will be targeted in concert with other departments. My questions.
* Is there a view on the technical structure, that there is a clear division between employment and tax law that HMRC cannot attack under S44
* Can employment expenses be offset and the remainder subjected to tax and NI, even if the effective hourly rate it's below NMW
* Will HMRC USE their powers under NMW legislation to at least get inside EDM intermediaries, as the only weapon in their armoury
* Can we expect NMW and Holiday Pay challenges, particularly Union sponsored ET claims
Replies (3)
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CIS Taxes
Surely the taxpayer would receive a refund of some CIS Taxes when completing Self Assessment.
In any case I doubt HMRC will allow this contrived Elective Deduction A Model to take a foothold in the market.
I think you missed my point
You missed the point I was making. Not to worry.
I was trying to highlight that under CIS the guys would be due a refund of taxes anyway so the loss to the exchequer is probably not as high as you estimate but it really isn't important.
Happy Friday! (Thursday is the new Friday this week)