Government Self-employment Crackdown: Is the Legislation Fit for Purpose?

Since the government published proposals to clamp down on perceived ‘false self-employment’ through onshore employment intermediaries back in December 2013, the REC has held meetings with HMRC and worked closely with members and stakeholders from the intermediary and freelance sectors to start formulating our response.

We will post a ‘key points’ briefing document on the REC website on Friday. Early next week we will publish our draft response and encourage as many REC members as possible to read these documents and use them to draft submissions of your own and email to consultation.intermediaries@hmrc.gsi.gov.uk.

The government is committed to tackling what it views as widespread avoidance of employment taxes where individuals working through employment intermediaries are rendered “self-employed” simply by the inclusion of a clause in their contracts giving them a right to send a substitute.  This “substitution clause” is being removed entirely from tax law, with “direction, supervision and control” becoming the primary factor in establishing whether an individual is genuinely self-employed.

As an industry, we must accept this and be frank in acknowledging that there are issues with the level of self-employment in some sectors, even if this growth has been driven by client pressure on margins and pay. However, we must be equally forceful in ensuring that legislation which does come into force is fit for purpose and doesn’t open up new avenues for avoidance, putting compliant agencies out of business.

With enforcement to be based almost entirely on information supplied by agencies via the new electronic reporting requirements, HMRC will be powerless to enforce against businesses that just do not send in reports – they won’t know these businesses are supplying workers to clients. With no liability or reporting requirements for end-users, there is nothing to stop end-users engaging with such ‘off-radar’ businesses, to the detriment of compliant REC member agencies. If clients do work with labour suppliers that ignore the reporting requirement, HMRC will have an incredibly tough time hitting its £500 million annual revenue target, and the legislation risks failure.

Time is another major problem. While our industry must be willing to take action to combat contrived self-employment arrangements, it is unreasonable  for the government to expect employment businesses to renegotiate contracts in four weeks, particularly when these changes could increase the cost of labour by as much as 25% in sectors where self-employment is the norm. There is just one month between the expected publication of the final government guidance at the end of February and implementation on April 6th 2014, yet these changes could be as wide-reaching as AWR and pensions auto-enrolment, both of which had lead-in times of years, not days.

There is some good news for agencies that supply individuals working through Personal Service Companies (PSC) – HMRC have been very clear in meetings that they view genuine PSC arrangements as out of scope of these proposals. HMRC is satisfied that money can only be permanently extracted from a PSC in two ways, and that both methods are already taxed appropriately: as a dividend payment unrelated to employment services rendered, or as a salary payment which would be subject to PAYE already. Employment businesses that engage with PSCs will still have to report these payments in the new quarterly electronic returns that will be required under this legislation, but HMRC have conceded that when it comes to PSCs, the name of the individual supplied by the PSC, the PSC name, and the amount paid to the PSC by the employment business will likely be sufficient.

We believe there is room for movement on implementation timescales and end-user liability if, as an industry, we make it clear to the government their end goal of reducing false self-employment and increasing tax revenue – a goal we share – will not be achieved as things currently stand.