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AS2013 (2): 'False self-employment' and the fear of unintended consequences
by Susie Hughes at 17:06 06/12/13 (Political News)
The Chancellor's Autumn Statement introduced a new description into the already complex world of employment status jargon - that of 'false self-employment'.
Contractors will be very familiar with the idea of 'disguised employment', the status which was introduced over 10 years ago and led to IR35. So it was not surprising that the Chancellor's threat to tackle 'false self-employment' brought flashbacks and renewed concerns to those who had previously been dubbed 'disguised employees' might now become 'false self-employees'.

Before the dust settled on the Dispatch Box, there were hand-wringing anxieties that this could be a fresh attack on contractors. One man's 'false self-employment' could be another man's 'disguised employment'.

However, as a new day dawned and analysts and experts had had an opportunity to read between the lines of the small print, it seemed (and was hoped) that the target was more to do with vulnerable workers (examples of the construction and catering industries were given) who were forced into self-employment so employers could avoid their fiscal obligations.

But, wait a minute, didn't IR35 start off as a laudable attempt to protect vulnerable workers, such as train drivers, who were forced out of employment on a Friday, and into a form of self-employment on a Monday - the so-called 'Friday to Monday' scenario? But somehow that net spread to the all-encompassing IR35 legislation, as we know it today.

But we are getting ahead of ourselves....

Shades of IR35?
In summary, the Chancellor actually said a sentence: "We’re going to tackle the growth of intermediaries disguising employment as false self employment, depriving workforces of basic employment rights like the minimum wage in a bid to avoid employer national insurance."

Freelancer trade group, the PCG was one of the first to ring the alarm bells of Budgets-past. Simon McVicker, Director of Policy and Public Affairs said: “False self-employment is wrong but the Government must take care that in attempting to tackle it they do not affect genuine freelancers and their clients. The last time Government tried to legislate in this area we were left with IR35 - a confusing and inappropriate measure that has affected many thousands of legitimate microbusinesses.

“The Government must ensure that any measures designed to tackle false self-employment are targeted appropriately and selectively and do not affect genuinely self-employed people and freelancers running their own businesses. Previous attempts to tackle this issue have hindered the ability of freelancers to contribute to the British economy, and what’s more failed to tackle the abuse of vulnerable low paid workers.

“PCG will be seeking urgent clarification from the Government on exactly what these measures entail.”

Clarification
That urgent clarification - though how clear it was is debatable - came reasonably quickly.

The full, supporting documentation released after the Statement said that the Government will:

  • clamp down further on tax avoidance and aggressive tax planning, including by preventing employment intermediaries from disguising employment as self-employment to avoid tax, and by introducing a new power requiring taxpayers using avoidance schemes that have already been defeated in the courts to pay the tax they are trying to avoid upfront.

There was renewed concern when the clarification (in para 1.306) started talking about the old IR35 chestnuts of 'level playing fields', recognising 'genuine' self-employment......and raising £400 million a year via this clamp-down.

It said:

  • ......As the next step, Autumn Statement 2013 announces action to prevent employers and employment intermediaries from avoiding employer NICs and circumventing their employer obligations. The Government strongly supports enterprise and those who choose to work for themselves, and believes that the tax system should continue to recognise the additional risk someone who is genuinely self-employed takes on. But the Government is acting now to level the playing field so that companies cannot use employment intermediaries to disguise employment as self-employment and thus avoid employment taxes and deny employment rights to their workforce. The Government will legislate to prevent employment intermediaries from being able to use contrived contracts to disguise the employment of workers. This will take effect from April 2014 and raise around £400 million each year.

Existing legislation
And if alarm bells were merely tinkling at this point, they went into full on choral peel when later in the document (para 2.129), it said:

  • Employment intermediaries facilitating false self-employment – The Government will amend existing legislation to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self employment. The Government will consult on strengthening existing legislation to ensure the correct amount of tax and NICs are paid where the worker is, in effect, employed, with effect from April 2014.

The absence of specifying which 'existing legislation' would be strengthened led to some concerns that son of IR35 was about to be born.

Clarficication
HMRC had to step in and calm the troubled waters with a clarification of their clarification; An HMRC spokesman said: "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.”

This led to cautious sighs of collective relief:

Comforting Simon McVicker from the PCG said: "It is comforting to hear that the measures will be confined to a specific problem area and will not affect legitimately self-employed contractors and freelancers. It is also very encouraging to see HMRC engaging in clear and open dialogue with the bodies that represent freelancers and small businesses in order to clarify the situation so quickly.”

Unintended consequencesDerek Kelly, managing director at Optionis (umbrella Parasol and accountant ClearSky) stressed that legitimate umbrella and limited company contractors have nothing to worry about.

He said: “Professional umbrella contractors who use compliant, legitimate employment providers will not be affected by measures announced by the Chancellor. Nor will limited company contractors or those who are genuinely and legitimately self-employed.

“We welcome all efforts to raise standards and address any abuses in the sector, particularly with regard to low-paid, vulnerable workers and operators of unethical schemes that seek to exploit such workers.

“We look forward to discovering the contents of the draft legislation on December 10. It is vital that policymakers tread carefully in order to avoid any unintended consequences, such as an increase in red tape for skilled, professional contractors.

“As always the devil will be in the detail, but we are hopeful that the Government will demonstrate an understanding of the workings and complexities of the flexible labour market by making a distinction between low-paid workers and highly skilled professionals.”

Benefits Specialist accountants, Brookson, took heart from the positive recognition of the genuinely self-employed and interpreted this as a sign that the Government has formally shown its support for contractors, freelancers and self-employed professionals and has gone as far as saying that it 'believes that the tax system should continue to recognise the additional risk someone who is genuinely self-employed takes on'.

Although recognising that details were sketchy, Brookson MD, Martin Hesketh believed that the real target for this false self-employment were the vulnerable workers who were forced into a self-employment status, although he did issue a note of warning in line with a sledge hammer and nut approach. He said: "My initial interpretation is that this announcement has been made to target the practise of ‘industrial avoidance’ by end client companies engaging employees as sole traders; an avoidance technique particularly impacting lower paid, lower skilled and potentially vulnerable temporary workers.

"This anti-avoidance measure is expected to be legislated in April 2014 and raise around £400 million each year. At this stage there is no further information on how the Government plan to amend existing legislation to address this but I would hope it is introduced with adequate consultation so as not to inadvertently impact the genuinely self-employed workforce and those employed by compliant umbrella companies."

VulnerableThe Low Incomes Tax Reform Group (LITRG) welcomed this as they saw it as a step int he right direction to help the vulnerable areas of the work-force who had self-employment thrust upon them. They also issued a warning against those who exploit these workers.

LITRG Chairman Anthony Thomas said: “Since the removal of the upper earnings limit for Class 1 secondary NIC, workers and business have sought out ways to avoid being in a relationship of ‘employment’. Whilst some self-employed arrangements may be wholly legitimate, there are significant numbers of workers who are treated as self-employed for income tax and National Insurance despite the fact that the way in which they work on a day to day basis demonstrates that they could, in fact, be employees.

“This means that they pay their tax through self-assessment, rather than PAYE, pay less by way of National Insurance and are able to deduct more generous expenses than would normally be allowable for those who are in employment.

“The UK has particularly high levels of ‘self-employment’ which is partly due to the difficultly people have in applying the complex ‘status’ tests. In the construction industry, for instance, there is a lot of grey area and it is the norm for workers to be considered their own bosses, because they provide some of their own tools and equipment or are responsible for correcting any defective work caused by their actions.

“However, under the relatively new trading structure of a 'self-employed umbrella', there is little room for doubt that the tests are being distorted and the incidence of 'self-employment' is growing amongst workers who are very unlikely to be in business on their own account. For example it is not uncommon to find self-employed waiters and waitresses and factory workers.

“This is false self-employment. Not only does it deny the Exchequer tax that is properly due, but it is also unfair to other workers who may be doing exactly the same job as the incorrectly classed 'self-employed' person but on an ‘employed’ basis. LITRG also have concerns that it is often the worker rather than the engager of the worker who finds themselves under HMRC's spotlight, when actually it is the latter that should be HMRC’s first port of call. Furthermore a person’s employment status has much wider implications in terms of employment law rights and protections, and so false self-employment can leave low paid workers in a very vulnerable position.

“We therefore look forward to a thorough, comprehensive review of this complex area and a simplification of the rules, something we have called for on many occasions.”

SubstitutionJust as it was seeming that this might be some tinkering around the edges of Agency legislation, the agenices' own representative body, REC, threw a it of a spanner in the works by claiming it was likely to focus on one of the Holy Grails of employment status - the right of substitution.

In REC's post-Statement briefing, Ben Farber, their Senior Policy Advisor said in relation to the 'crackdown' on the use of employment intermediaries that enable ‘false self-employment’..."Whilst we support the principle, we are wary of the rhetoric that might tar legitimate contractors with the same brush.

"However, HMRC got in touch with us directly immediately following the conclusion of the Autumn Statement to clarify the Chancellor’s comments, and we understand from them that this crackdown will be focused on the ‘personal service obligation’ - the right to send a substitute.

"The initial steer we’ve received from HMRC is that the right to substitution will no longer be a consideration when determining whether or not someone is genuinely self-employed. The sole consideration will be the reality of the employment relationship, i.e. whether the worker in question is working under the direction, supervision and control of a client. This measure will be included in the draft Finance Bill which will be released next Tuesday (10th December)."

Familiar terms
However, for those with long memories,

  • 'false self-employment' has a ring of 'disguised employment' - the former being the latest target and latter being the target for IR35...and
  • those who are not the target, ie 'legitimately self-employed contractors and freelancer' is a bit similar to 'genuine businesses', the exemption for many other pieces of legislation who have, nevertheless, been caught up in the cross-fire.

Further information is expected on December 10, so in the meantime, it is a case of ...Watch this space.

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