In order to obtain the preferential tax treatment of being self employed, an agency worker will often set up their own limited company (often referred to as a ‘personal service company’). They are commonly the only employee of the company. By providing a service through a limited company an individual can avoid paying national insurance contributions by taking earnings as ‘dividends’ rather than salary. The Company then pays corporation tax on the dividends. Personal service companies may then provide their services through an employment business or intermediary (often referred to as ‘umbrella company’) which will, for a fee, carry out all the administrative tasks of running the personal service company such as producing invoices and deducting corporation tax. Agency workers employed by a personal service company and hired out through an umbrella company are now firmly in the sights of HM Revenue and Customs (‘HMRC’). HMRC want to ensure national insurance contributions are paid by the individuals in circumstances where the individual is providing a ‘personal service’ i.e. controlled by a manager employed by the organisation. HMRC has issued a consultation on proposed changes to the tax system in order to tackle what they describe as ‘false self-employment’ – i.e. the use of umbrella companies to present employment situations as self-employment. The consultation follows the announcement made in the Autumn Statement. The proposed changes are intended to come into force in April 2014. The main proposal is to water down the requirement for ‘personal service’ in the sections of the Income Tax (Earnings and Pensions) Act 2003 that define when payments made to agency workers are to be taxable as employment income. Under the new test, if the worker personally provides ‘or is personally involved in the provision of’ services to another, and if he or she is subject to supervision, direction or control as to the manner in which he or she carries out his or her duties, then the payment for his or her services will be taxed as employment income. The umbrella company will therefore need to deduct income tax and National Insurance contributions. The intention is that the amended legislation will catch intermediary relationships involving employment businesses, agencies and/or ‘personal service companies’.
The consultation points out that the change will mean that such workers become entitled to statutory sick pay and maternity pay, by virtue of NI contributions being made on their behalf. It also states that ‘in the majority of cases the worker will also gain the benefits of being an employee for employment rights purposes, although this will depend on them being within the case law tests set out by the courts’. The consultation does not propose any changes to employment legislation and so it does not necessarily follow that cases on employment status will be decided any differently as a result. However, insofar as the courts take the tax position into account when deciding employment status questions, the change may have some effect in marginal cases.
The consultation runs until 4 February 2014. The changes will be made by secondary legislation, a draft of which is included in the consultation document.