The issue of employment relationships being falsely presented as self-employment is now very much on HMRC’s radar. In an attempt to combat this problem, measures contained within ‘Onshore Employment Intermediaries: False Self-Employment’ were introduced in April 2014. Not only does false classification impact HMRC due to a reduction in national insurance contributions and income tax, but it also impacts on the individual who suffers a loss of legal employment rights.
Classification by HMRC as an ’employment intermediary’ can now have serious implications following legislative changes in The Income Tax (Pay As You Earn) (Amendment No.2) Regulations 2015. These changes bestow powers on HMRC to obtain information from certain intermediaries relating to the workers they supply where PAYE has not been operated.
Not only do the powers effect self-employed contractors who are engaged via ‘intermediaries’ and who currently pay taxes as a self-employed person but also the intermediary business themselves.
In essence, the legislation defines an intermediary as:
- A person or business who makes arrangements for someone to work for a third person; or
- A person or business who supplies workers to work for an end client or another employment intermediary, and the client then pays the person or business or someone connected to the person or business for the worker’s services. The end client is who the worker does the work for.
Those effected by the legislation but who omit to file the necessary reports can be subject to penalties for late and/or incorrect reports in a rolling 12 month period.
- £250 1st offence
- £500 2nd offence
- £1000 3rd & later offences
The fundamental questions that should therefore be posed in order to determine whether HMRC may deem your business as an intermediary and therefore liable to submit the necessary reports are:
- Do you use off-payroll workers to fulfill customer contracts?
- Is the workers service in the UK (or is the worker resident in the UK if the service is provided overseas)?
- Do you pay these workers without deducting PAYE/NIC?
Such ‘onshore employment intermediaries’ are required by HMRC to supply information in the form of quarterly reports, although more frequent filing is accepted if this suits the intermediary’s operation.
It is vital to note that any business falling within the definition must still file a quarterly report even where no workers have been supplied during a particular period. This will simply be a ‘nil report’.
As 2016/17 is the first year that HMRC will charge such penalties, common sense dictates that this is an area in which HMRC will increase their focus and compliance activity. It is vital, therefore, that businesses are fully aware of their obligations. The difficulty may well lay in the fact that the legislation not only applies to obvious intermediaries – such as umbrella companies and agencies – but also to many more, perhaps unsuspecting, businesses.
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