CIS scheme reforms will tackle false self-employment

Tuesday 10 December 2013

The government has launched a consultation to tighten agency legislation designed to combat the discrete issue of intermediaries being used to facilitate false self-employment across all sectors of the economy.

This includes the Construction Industry Scheme (CIS), which has previously been criticised for leading to the bad practice of avoiding contractor tax.

Originally set up in 1972 and relaunched in 2007, CIS is a compliance scheme for self-employed construction workers and monitors payments to and from subcontractors. However, over the years it has been subject to abuse.

"Registration within the scheme is not HMRC agreeing that a worker should be engaged on a self-employed basis," HM Revenue and Customs explained in the 'Onshore Employment Intermediaries: False Self-Employment' consultation document.

"HMRC accepts that the majority of those working within the scheme are genuinely self-employed but has evidence to suggest a large minority are falsely self-employed."

When the new CIS was launched in 2007, a statutory declaration was included, requiring contractors to confirm the subcontractors on the monthly return are genuinely self-employed.

HMRC claims this has led to the use of intermediaries within the construction industry to insulate contractors from the effects of incorrect status declarations.

To combat the issue, the government is proposing making agency legislation work in the way it was initially intended by putting someone who is engaged by or through an intermediary in the same position as someone who is engaged directly.

A loophole will be closed by removing the obligation of a worker to provide their services personally. Instead, agency legislation will apply when an employee is subject to control, supervision or direction as to the manner in which duties are carried out.

If a worker is remunerated as a consequence of providing their service or received remuneration not already taxed as an employment income, they will also be subject to the legislation.

If a worker is engaged by or through an intermediary and meets the above conditions, they will be considered employed for tax purposes.

For workers being placed by an employment business, which are not being deducted income tax and NICs, and making returns through RTI, employment intermediaries must hold the following documents relating to the individual:

1) Their full name

2) National Insurance number

3) Address

4) Date of birth

5) Gender

6) Passport number or ID card number in stances where the worker is not a UK citizen

7) Reason why income tax and NICs has not been deducted by an employment intermediary

8) Name and address of the business that is supplying the worker to the employment business and the number of hours the payment relates to.

These documents are the same as those proposed by HMRC for offshore employment intermediaries but are yet to be finalised.

Employment intermediaries with the contract with the end-user will have to complete a quarterly electronic return also. This enables them to report workers they have placed with end clients who are not accounted for via RTI.

The government first tried to tackle the problems caused by employment intermediaries in 2009, publishing 'False Self-Employment in Construction:Taxation of Workers'. This outlined plans to introduce legislation that moved away from a case law approach to prevent abuse, including a proposal to deem construction workers as 'in receipt of employment income' in instances excluding those where they provide plant and equipment, all materials or other workers.

If one criteria was not met under the proposals, the person paying the worker would be responsible for employer's National Insurance Contributions (NICs), deducting Income Tax and NICS from the employee and paying it to HMRC.

However, it was deemed this would lead to an additional administrative burden, which would impact the labour market.

In the most recent consultation, the government claims: "Where absolute tests provide no flexibility and run the risk of capturing large numbers of genuinely self-employed workers … a more targeted proposal will be less likely to negatively affect the genuinely self-employed."

"The strengthened agency legislation will mean that those intermediaries (including Employment Businesses) who are placing workers who are deemed to be employed for tax and NICs purposes with end clients will have to pay employer’ NICs at 13.8 per cent, unless the workers are already employees of another organisation," the consultation added.

By Victoria McDonnell

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