New Members of IR35 Club?

Will proposed changes to agency legislation lead to new incorporations?

Following on from the Autumn Statement of last week, draft Finance Bill 2014 clauses have now been published shedding a little more light on the Government’s intentions to crack down on false self-employment.

It is proposed that Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003, aka the Agency Legislation will be revised in an attempt to reclassify certain workers as employees thereby forcing an employment intermediary to deduct income tax and NIC.

Currently the legislation applies where a number of criteria are met, including an obligation for the worker to be providing personal service. As from 6th April 2014, the need/obligation for personal service will be removed therefore narrowing the criteria for an agency worker to be treated as self-employed.

The measures appear to be targeted predominantly at the construction industry where HMRC reckon around 200,000 workers are engaged through employment intermediaries. The Revenue also estimate that 50,000 are working in other sectors but engaged in the same way.

Whilst it is the Agency Legislation that is to be tinkered with it will apply to any employment intermediary who falsely treats workers as self-employed. Over recent years firms have emerged, particularly in the construction sector, who interpose themselves between the main contractor and the workforce effectively assuming the role of the engager. It is these sort of companies that this legislation appears to have in mind and which is borne out by a HMRC spokespersons recent comments to the PCG, when they said, “We wanted to clarify that the measures are targeting mass-marketed schemes, where workers can be moved en-masse into self-employment, even though they should be employed. Often the workers are low-paid and unaware that they are being engaged on a self-employed basis until they try to claim employment rights. The measure is designed to stop this from happening.”

A power for regulations to be made in respect of record keeping, return requirements and penalties will also be introduced.

Currently, the agency legislation does not apply where the contract for the supply of services is between the agency and a company rather than the agency and the worker. So will these proposed legislative changes see a glut of incorporations driven by employment intermediaries who believe the risk is too great and force workers to form PSCs? Or would this not matter, as the legislation is to apply where three conditions are present, the final one being, ‘payments receivable by the worker under or in consequence of the contract is not chargeable elsewhere as employment income, for example the worker does not have income tax deducted because they are an employee of another company.’  If this were intended to ignore the corporate wrapper then the legislation could have ramifications for all contractors, which does not appear to be the desired consequence.