Tax
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What is the latest case on the Agency legislation?
K5K Ltd v HMRC [2022] UKFTT 217
K5K Limited operated as an employment business in the healthcare sector, supplying healthcare workers and nurses to their clients. The case centred around section 44 of the Income Tax (Earnings and Pensions) Act 2003. This is known as the “Agency legislation”, which was introduced in 2014 to stop employment businesses from supplying sole traders whose employment status reflected employment, rather than self-employment. If section 44 is breached and there is a ‘false self-employment’ arrangement then the employment business is liable for unpaid tax and NI contributions that should have been paid under an employment relationship, in addition to potential interest and penalties issued by HMRC like IR35.
The case shows that HMRC has always scrutinised employment businesses compliance in this area which is one of the reasons why the REC does not recommend members engage workers as sole traders and be careful with issuing contracts. Our advice has always been if an employment business:
· engages an individual to personally perform services for a client, and
· the way in which the individual supplies services, is subject to (or subject to the right of) supervision, direction or control (SDC),
… then they must deduct income tax and NICs from the individual's pay.
In addition, the "SDC test" under section 44 is very broad, so even if there is simply a right to exert SDC by either you or your client, this would be sufficient for the legislation to apply.
The tribunal found that even though there were PSCs in the supply chain, the wrong contracts were issued so there was no contract in place between K5K and PSCs, but rather the contracts were between K5K and the individual worker. This means that the conditions for section 44 were satisfied, and the relevant workers were deemed employees of K5K.
What is the HMRC Loan Charge?
The HMRC loan charge relates to payment made to contractors and others by way of loans in place of salaries. Under the scheme – loans are not subject to PAYE and NI and were also not intended to be paid back by the recipient. This resulted in tax free payments for people as the loans would then be written off. HMRC has determined that the loans amounted to disguised remuneration and they are seeking to recover payments of the unpaid tax from employers and individuals who received the payments, by way of a loan charge.
ITEPA - The intermediaries legislation
This section is a brief overview of the “intermediaries legislation”. The REC has produced detailed guidance on Employment tax issues for recruiters.
The Government has been concerned for some time about false self-employment within or facilitated by the recruitment industry. HMRC consulted on changes to tax and National Insurance legislation between Dec 2013 and Jan 2014 to which REC submitted a detailed response. Following that consultation, HMRC amended the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) - we have set out the key points below:
- From 6 April 2014, if a temporary worker works through an intermediary on a self-employed basis but is under the supervision, direction and control of the client, the business with the contract with the end client (which will be either an employment business or a vendor) will be responsible for deducting PAYE and National Insurance contributions from the temporary worker’s pay and will be required to pay secondary (i.e. employers’) NICs. Penalties apply where the appropriate deductions have not been made.
- Where a temporary worker works through an overseas entity, the employment business supplying that temporary worker will be responsible for PAYE tax and NICs, unless it can demonstrate that the overseas entity is deducting the appropriate sums. For this reason REC recommends that members do not engage with an overseas entity unless they have had detailed and specific advice as to the merits of doings so (e.g. where they are supplying genuinely international mobile workers). Further details are in the Issue 61 of the Legal Bulletin on pages 1-3 inclusive.
- “Control” is the deciding factor and HMRC have produced guidance setting out different scenarios to explain when the legislation will and will not apply.
- If fraudulent documents have been given to the employment business/vendor, liability to deduct PAYE and NICs will pass to the business which supplied those documents. This could be either the client or the limited company which has engaged the temporary worker but it means that where an employment business acts in good faith based on information provided to it, it should not be penalised by HMRC.
- HMRC have introduced a Targeted Anti-Avoidance Rule (TAAR), to cover unforeseen avoidance tactics and to deter new avoidance arrangements. HMRC’s response specifically refers to mass, enforced use of PSCs for all workers as one such tactic where a TAAR might apply.
- From 6 April 2015, employment businesses/vendors have to report on payments made to all intermediaries or sole traders - the first report was due on 5 August 2015 and thereafter on a quarterly basis. For full details on the reporting requirements, see our 'Reporting Factsheet' guidance.
For more background information, see the consultation documents, HMRC’s response and their guidance on control. For further information you can call HMRC on 03000 555 995 or email on sdsteam@hmrc.gsi.gov.uk.
The Construction Industry Scheme (CIS)
This section is a brief explanation of the Construction industry Scheme. Members should read HMRC’s guidance or contact HMRC’s CIS helpline for more detailed advice on 0300 200 3210.
All payments made under CIS must take into account the subcontractor’s* tax status as confirmed by HMRC. If HMRC confirm that the subcontractor has gross status then the contractor can make a payment in full without any deduction. Subcontractors must meet certain conditions in order to be entitled to gross payment. (*the CIS scheme refers to contractors and subcontractors: an employment business can be both, and the individual providing their labour, or the limited company through which they work, will be a subcontractor.)
If the subcontractor cannot be paid gross, then s/he will be subject to a deduction at either the CIS rate, or the higher rate. If HMRC confirm that the payment must be made under deduction then the contractor must first deduct the cost of any materials incurred by the subcontractor (as these are not subject to CIS) and then:
- calculate the deduction to be made;
- make the appropriate deduction and forward to HMRC by the due date;
- make the net payment to the subcontractor;
- record details of the materials, deduction and payment; and,
- complete and give a statement of deduction to the subcontractor.
Importantly, payments include cash, cheques, credit, advances, loans or subs.
At the end of each financial year, subcontractors must make a tax return to HMRC. If they have been paid under deduction, sums already paid will be taken into account and the subcontractor will only be required to pay any additional tax liability. If the subcontractor has already paid more tax than required, HMRC will refund the excess.
More detailed information on CIS is available here. We are currently working on a guide to operating an agency in the construction sector which will include further detail on CIS.
See the REC's guide to VAT reverse charge in the construction sector.
Travel and subsistence expenses
UPDATE: The Government confirmed in the Autumn Statement on 25.11.15 that it will remove tax relief for travel and subsistence (T&S) costs from temporary workers working under or subject to the right of supervision, direction or control of any person. This will include individuals working through employment businesses, umbrella companies, personal service companies and other entities. The changes will come into effect from 6 April 2016.
HMRC published its response to the consultation, draft legislation and guidance on 09.12.15. The legislation is subject to change, though from a technical rather than a policy perspective (we must feedback to HMRC by 03.02.16). We have prepared the attached Briefing on Changes to Travel and Subsistence expenses relief to explain the draft legislation. The REC will keep members updated in the coming weeks and months (future webinar and meeting details). In the meantime we remind members to do the appropriate due diligence on all intermediaries they are thinking of engaging with, including umbrella companies, CIS intermediaries, personal service companies and partnerships - we have prepared an intermediary checklist for members to use. In particular ask them detailed questions about how they are going to respond to the removal of T&S relief. New models of supply are likely to emerge - we recommend that members do not sign non-disclosure agreements that do not law them to seek legal or tax advice on any alternative models.
Finally members are advised not to rely on tax investigations insurance to avoid doing the appropriate due diligence or for supplying temporary workers on contracts which state they are not subject to supervision, direction or control when the reality is quite different. Such insurance may be expensive but it will certainly be heavily caveated and will only pay out where appropriate reviews have been carried out and their results followed through. Also check who is the insured party – is it the REC member or the umbrella company/ personal service company supplying the temporary worker?
What are the current rules on claiming T&S expenses tax relief?
Despite the changes it is worth reminding members what T&S expenses tax relief is. T&S expenses claimed through pay are excluded from Class 1 NICs and are tax deductible (where certain conditions are met). Therefore temporary workers claiming T&S expenses relief can be significantly cheaper, and therefore more attractive, to clients.
Ordinarily individuals cannot claim tax relief on normal commuting costs i.e. the costs of travelling from home to a permanent workplace. However, there are rules governing travel and subsistence expenses incurred in connection with business travel. Such expenses are excluded from Class 1 National Insurance contributions and are tax deductible provided:
- the individual claiming the relief is an employee (for temporary workers this means being employed on an overarching contract of employment (by either an umbrella company or an employment business);
- the employee does not have a permanent workplace (a workplace will be a permanent workplace if the employee works there for a period of more than 24 months); and,
- the employee actually incurs those travel and subsistence costs.
The expenses are deducted from the temporary worker’s gross earnings, often by way of salary sacrifice (though this will also no longer be permissible from April 2016). These deductions do not attract national insurance or tax. Only the sum left after the deduction of the expenses attracts national insurance and tax. Therefore temporary workers whose employers applied T&S expenses relief are significantly cheaper than those whose employers do not.
Compliance activity
There have been attempts to close down some T&S schemes in recent years, some successful but others not. In 2011 the GLA refused to grant a licence to an umbrella company (FSC) operating a “pay day by pay day” model (of course that only meant that FSC could not operate within the GLA sector, it didn’t prevent FSC operating in non-GLA sectors). Later that year HMRC issued two statements saying that these schemes did not comply with T&S rules. In 2012 the First Tier Tribunal found that Reed owed £158 million in unpaid tax, NICs and interest. Reed had various dispensations from HMRC to operate salary sacrifice arrangements but were found not to have operated these correctly. Reed lost subsequent appeals to both the Upper Tribunal and the Court of Appeal. HMRC finally consulted on T&S in the summer of 2015 (Income Tax: employment intermediaries and relief for travel and subsistence) to which REC issued a response. The Government confirmed in the Autumn Statement that it will proceed with removing T&S relief from temporary workers working under (or subject to the right of) supervision, direction or control (details at the top of this FAQ).
For a historic discussion on T&S see the Jan/ Feb 2013 issue of the Legal bulletin.
How do I report suspected tax evasion or non-compliance to HMRC?
If you are aware of tax evasion or non-compliance, you can report it directly to HMRC by phoning 0800 788 887. The line is open Monday to Friday, 8am to 6pm. You can also complete a tax evasion form online which can be found here.
If you wish to report a suspected employment intermediaries avoidance scheme to HMRC, you can email: employment.intermediaries@hmrc.gsi.gov.uk.
Please note that the REC cannot formally deal with complaints about tax evasion – such complaints must be dealt with by HMRC who have the technical expertise and required access to documentation. The REC may be able to deal with a complaint under the Code of Professional Practice once HMRC make a finding of tax evasion. However, we are always interested in receive any intelligence from members that will help us understand the challenges agencies are facing, and inform our future engagement with HMRC.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.