HMRC explains 6 April agency tax changes

HMRC has published new guidance on how proposed changes to prevent the use of employment intermediaries to avoid national insurance contributions (NICs) and income tax interact with IR35 tax rules for contractors.

The guidance comes as HMRC consults on plans to update "agency legislation" in chapter 7 s44-47 ITEPA 2003.

HMRC said the guidance responds to concerns raised during the consultation on "onshore employment intermediaries: false self-employment". Following the autumn statement announcement, the PCG asked the government to clarify the planned changes to agency rules and warned that they risk "cutting off access to the freelance sector for agencies".

The proposed changes are part of a wider crackdown on tax avoidance. 

Temporary workers make up around 5% of the workforce, with the businesses supplying them sometimes employing them directly, using agency contracts, and sometimes using sub-contractors. The tax, NIC and employment law position is different in each case, so the employing organisations have tended to go for the cheapest options, which often involve reduced tax costs and less paperwork.

The government has said that it will take action against temps who are sub-contractors. The Pay As You Earn and NIC rules for temps currently don’t apply if the worker is not obliged to provide personal service, accepting that a self-employed worker finding work through an agency is still self-employed and should be taxed as such. But that will change from 6 April 2014.

The proposed new legislation will apply, as the current agency legislation does, where a worker is supplied by or through a third party. 

The third party (described in the legislation as the ‘agency’) is any structure interposed between the person in receipt of the worker’s services (the engager) and the worker, HMRC's guidance says. 

The third party includes employment businesses and personal service companies (PSC). 

People working through PSCs will need to consider the agency legislation in the same way as they do now; both where the PSC engages directly with an engager and where the PSC is engaged through other parties such as employment businesses, HMRC says.

For the proposed new agency legislation to apply to a worker providing their services through a PSC, all of the following qualifying conditions have 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 

Remuneration does not constitute employment income apart from under the agency legislation. 

If neither the agency legislation nor the managed service company legislation applies then anyone working through a PSC needs to consider the Intermediaries legislation, more commonly known as IR35. 

As has been the case with previous attempts to reduce abuses in this area, tax experts are concerned about the motivation and effectiveness of the planned changes.

David Heaton from Baker Tilly, for example, recently took issue with the phrase "false self-employment" as a misnomer that makes it sound as if workers are somehow cheating.

"Legally, workers who genuinely don’t need to provide personal service cannot be employees – they’re self-employed and taxed as such. The income is taxable, but no PAYE is legally deductible," Heaton said.

"If agencies and workers only pretend to send a friend to do work, that’s evasion not avoidance. This could be dealt with under existing law if HMRC had resources to do it.

"But making it appear as if all temps are doing the same nefarious thing, HMRC is justifying dragging all genuinely self-employed service providers who work through agencies into the PAYE and NIC net. That was never the intention with the old agency rules. The sweep of evasion and avoidance schemes is set to catch a lot of innocent temps - and a surprising number of other workers who shouldn’t be caught - from April."

Alastair Kendrick, tax director at MHA MacIntyre Hudson, warned of the potential impact on the construction industry, where contractors will be tied into projects on historical agency rates that could put them in the red. "Those rates or arrangements may need to change in April to reflect added direct employment costs either incurred by the agency or the contractor," he said.