The intention of the proposed 'false self-employment' legislation is to tackle the issue were workers, many in the construction sector, are put into mass-marketed schemes where they are treated as 'self-employed'. Many are unaware of the detail or the consequences of this and have been included primarily as their employers seek to avoid employer National Insurance and reduce the costs associated with workers’ employment rights.
Although the proposals are aimed at these mass-marketed schemes for lower-paid workers, there has been so much concern that the impact could be wider, that HM Revenue and Customs has stepped in a number of times to reaffirm that they are not targeting genuine freelancer or contractor businesses.
Agency body, the Recruitment and Employment Confederation (REC) has responded to the Government’s consultation by voicing concerns over whether the proposed legislation will succeed in tackling false self-employment.
REC senior Policy advisor Ben Farber said: “Eliminating false self-employment is a commendable goal and one that compliant recruitment businesses are keen to help achieve. However, the REC is concerned that flaws in the proposed legislation will actually increase the extent of false self-employment, jeopardise UK employment and growth, and put compliant recruitment businesses at risk.
“False self-employment is a whole supply chain issue and any legislation to address the problem must reflect that fact. The lack of any end-user liability leaves significant scope for avoidance and sets this piece of legislation up to fail.”
During the consultation process, REC members from a range of sectors identified a number of key concerns including:
- Impact on jobs – as supply chains try to absorb labour cost increases of up to 25 per cent, employment will inevitable suffer. An immediate response from clients will simply be to use fewer staff - do the job of four with three. The cost increases could also threaten the viability of many large scale infrastructure projects where budgets have been set years in advance.
- Mass avoidance – with no end-user liability or reporting requirement there is nothing to stop clients from engaging with rogue traders at the expense of compliant agencies. Those rogue traders are unlikely to submit to the new reporting requirements and HMRC have admitted there is little they will be able to do in the way of enforcement in such circumstances.
- Risk to workers – there is a real risk that such avoidance tactics will force lower skilled workers away from decent agencies and into the informal 'cash-in-hand' economy, where they could fall victim to exploitation.
- Missing the revenue target – the Government has set an ambitious revenue target of £500 million per year. Aside from headcount reduction and mass avoidance, the other likely outcome of the proposed measures will be an increase in workers operating as PSCs and through PAYE umbrellas. Both of these scenarios would severely impact on any financial return for the Treasury.
REC Head of Legal and Professional Services, Lewina Farrell said: "The rush to enact these changes and the lack of proper consultation with business shows the Government understands neither the complexity of the problem it is seeking to address, nor the impact of the legislation it has drafted. A delay in the implementation timetable is crucial if compliant agencies are to renegotiate contracts to ensure an equitable distribution of costs, hopefully avoiding pay cuts for workers and other unintended consequences.”
The Association of Recruitment Consultations (ARC) also added their concerns and predicted that it would have a much wider impact than intended.
Adrian Marlowe, chairman of ARC, said: “We can see why the Government wants to address this area, but we believe the legislation as currently drafted will have a much wider impact than the intended result. For example, the idea is that the organisation which has the contract with an end user (I refer to these as head operators, or HOs) is to be liable for payment of the tax going forwards, as well as reporting to HMRC wherever payments are made gross. Where there are several agencies in the chain the due diligence required will be excessive in our view. Every company in the chain will have to be checked to ensure that it is not paying the worker gross, and it may be that more than one organisation has a contract with the end user. In addition it is not clear who the end user would be, especially in the construction industry – is the end user the landowner, or the main construction company?
“Risk averse HOs that are head contractors or RPOs may be tempted to take overall control, which could lead to 2nd tier agencies being used purely as find and introduce vehicles rather than supply businesses as now. Workers could be forced to operate through the HOs’ preferred umbrella company, which may be controlled or even owned by the contractor/RPO. In our view this would lead to an unacceptable interference with the way the industry currently works, as obvious commercial advantage would be handed to specific HOs. We think that this outcome may not have been anticipated."
The idea of making the HO liable is included in recent draft legislation related to general offshore employment intermediaries. Mr Marlowe said: “The idea is sound so far as offshoring is concerned, because it is relatively easy for the HO to check whether any party in a chain has an offshore arrangement which triggers payment of PAYE tax. This is not the case under the new proposed onshore legislation where the HO will find it very difficult to check how payments to the worker are made. Where gross payments are identified the HO must either pay up on a PAYE basis and account for employer’s NICs or produce evidence that the worker is not under the control, or right of control, of any person, a complex legal test.”
Personal Service Companies
There has been much speculation as to whether the so-called personal service companies (PSCs) are outside of scope of the new proposals. HMRC has stated its intention is not to include these businesses, but there have still be concerns about how this will work in practice.
Mr Marlowe said: “Our analysis of the draft legislation is that every individual working through a company is within scope of the legislation as it is currently drafted as they are unavoidably ‘personally involved in the provision of the services’, this being a new proposed test that triggers the tax. The only way to avoid this would be if payments are made by the company by way of dividend or employment income. However if dividend payments are in consequence to the services, for example where the dividends are made regularly based on payments received, as is often the case with PSCs, HMRC would be entitled to look for payments from the HO on the PAYE basis (making the HO liable for 13.8 per cent employer NICs). Again we are not sure whether this is an intended outcome and HMRC is providing mixed messages on that front.
“Finally the timing in our view is far too short. Existing projects and labour cost will have been priced on the current tax basis. Where workers are self-employed at the moment but caught under the new rules, the labour cost will increase by 13.8 per cent, the current amount of employer NICs. In the construction industry in particular, where work is typically based on fixed price project amounts, this increase could result in the collapse of projects and businesses where the projects run beyond April 2014. We therefore think that in fairness there ought to be a much longer implementation period.”
AS2013 (5): Government consults on 'false self employment' - Shout99, Dec 13
AS2013 (2): 'False self-employment' and the fear of unintended consequences - Shout99, Dec 2013
Consultation on 'false self-employment' comes to an end - Shout99, Feb 2014
Onshore Employment Intermediaries: False Self-Employment - HMRC Consultation document
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Susie Hughes © Shout99 2014