HMRC have now confirmed that both of the changes to the tax and NI legislation effective from 6 April 2014 which will impact contractors who are currently working as sole traders, often via an intermediary who pays them without the deduction of tax and NI, and offshore employment intermediaries.
The changes are being driven by HMRC’s concern that these two ways in which contractors can be paid result in tax and national insurance being avoided.
Sole traders – False self-employment intermediaries
These models have been prominent in the construction sector and allow contractors to be paid gross (as sole traders) or with deduction of a 20% withholding tax. More recently these models have started to be used in other sectors outside of construction, predominantly in catering, security and transport. Providers of these models interpose themselves between the recruitment agency and the contractor and use the contractual terms to classify the contractor as a sole trader and therefore not subject them to PAYE resulting in lower rates of national insurance being paid. HMRC have addressed this by changing the law from 6 April 2014 to shift the self-employment test to focus on whether the contractor is under the supervision, direction and control of the end client (this will not impact the self-employment tests for IR35).
HMRC have amended existing legislation to make the recruitment agency who has placed the contractor responsible for reviewing the self-employment status and deducting PAYE from the contractor if they are working via a self-employment intermediary and they believe that the control test is failed.
Brookson have held several meetings with HMRC on this topic and it has been confirmed to us that a compliant umbrella company which employs its contractors and deducts PAYE from their earnings are outside the scope of this change. In addition HMRC have confirmed to us that if a contractor works through their own limited company and pays themselves by way or dividend and / or directors fee then they will also be outside the scope of the legislation. As a result Brookson customers will not be impacted by these changes.
The legislation now confirmed as coming into force on 6 April will result in many recruitment agencies reviewing the payment models used by their contractors and if they identify that payments are being made via a self-employment intermediary they are likely to request that the contractor switches to either an umbrella company or set up their own limited company. We are already aware of several recruitment agencies starting this process and are also aware of several self-employment providers ceasing to operate this model.
Offshore employment intermediaries
HMRC have been attempting to combat this form of tax avoidance for several years and we are aware of many contractors who have recently been issued with hefty tax demands as a result of them working via an offshore umbrella company (which typically pays its workers by a small salary and the balance via a loan – which is never repaid!). HMRC are clamping down further on this form of tax avoidance by changing the tax legislation in April 2014 to help them to police this abuse by shifting the compliance burden and tax and NI risk to the recruitment sector. This is a similar change to that proposed to tackle tax false self-employment and will again result in many recruitment businesses refusing to pay contractors who are working in the UK but using an offshore umbrella company.
How Brookson can help
Brookson have never operated either a self-employment model or an offshore umbrella company and therefore any existing Brookson customers will not be impacted by these changes.
Brookson are currently engaging with many recruitment agencies to help them to understand these changes and would be happy to assist any impacted contractors by working with them and their recruitment agency to ensure that they are working in a compliant way.
If you would like further information, please contact us.