The Key Issues with Proposed Onshore Intermediary Tax Rules

By Lewina Farrell, Head of Professional Services

Having sought members’ views throughout January, REC submitted a detailed response on 4 February. 

We made it clear that we support any attempt to tackle tax evasion by eliminating false self-employment.  We have long been concerned that compliant businesses are undercut by those willing to supply temporary workers at rates which can only be achieved by non-compliance with tax, NICs or other statutory requirements. 

However we have grave concerns that the proposals are ill-thought out, rushed through and will not achieve HMRC’s aims.  There are a number of key issues including:

• There is no liability for either the client or the individual supplied. The proposals require the employment business to deduct PAYE and NICs from individuals working under the “supervision, direction and control” of a client (except where the individual is employed by the onshore intermediary). It can already be quite difficult to clarify with the client what the extent of supervision, direction and control is. 

• The impact assessment. We believe that the impact assessment has not properly considered all of the possible impacts, including what we consider to be some unintended consequences.   We are particularly concerned that the government considers annual costs of £100,000 (or one off costs of £3 million) to be negligible

• Real sectorial risks. The consultation identified the construction sector as one of the sectors having a particular problem with false self-employment.  We calculate that the proposals would add up to 25% extra on the cost of supplying a temporary worker within that sector.  Margins are low in this sector, contracts are negotiated and costs agreed years in advance and the “missing PAYE and NICs” are simply not accounted for in rates;

• The speed of the proposals coming into effect. This is too short to allow for the necessary negotiations and contractual amendments to take place and for the appropriate due diligence processes to be put in place;

• The inclusion/ exclusion of Personal Services Companies (PSCs). The consultation states that PSCs are excluded.  However it is not clear from the draft legislation that they are and there is no statutory definition of a PSC. They will not provide a statutory definition of a PSC but that businesses will simply have to check the bona fides of a company to check that it is a PSC. We are waiting for detailed guidance on this and more information can be found in our response.  

• Additional software requirements. These proposals will require additional investment in software which will require time and costs to develop. 

• Unintended consequences :
- We expect to see a significant increase in the number of PSCs employment businesses and HMRC will have to engage with; 
- We may see an increase in claims brought under the Agency Workers Regulations 2010 (AWR), including some backdated AWR claims, by individuals now subject to higher levels of deductions and who may argue that they were agency workers all along.  
- Increased VAT costs – already clients seek imaginative ways to mitigate VAT including in the public sector (healthcare in particular). 

REC recommendations:  We made 13 recommendations to HMRC and the key ones include:
• Delaying the legislation to April 2015;
• Revising the legislation to: 
- include client liability;
- impose reporting requirements on clients;
- introduce a “reasonable steps” defence;
- include a statutory definition for PSCs; 

- expressly exclude PSCs;
• Properly enforcing IR35;
• Providing proper, detailed guidance.

What next?
The government’s response to the consultation submissions could be made before or within the next budget on 19 March 2014, though obviously the later the announcement, the less time to prepare if the proposals do go ahead on 6 April 2014. 

For more information on the latest legal news – you can read the REC’s Legal Bulletin at https://www.rec.uk.com/legal-resources/legal-bulletin.