New Legislation Causing Nervousness


Contractors being subjected to unnecessary checks by agencies

Probably not unexpectedly, the new Agency Legislation is already wreaking havoc amongst some agencies and causing knee jerk reactions.

The legislation, enshrined in Chapter 7, Part 2, Income Tax (Earnings and Pensions) Act 2003, was amended from 6th April of this year to tighten up on 'false self-employment' by forcing agencies to deduct PAYE tax and NIC from self-employed individuals who are subject to control or a right of control by any parties in the contractual chain. The effect is therefore to re-classify such workers as being employed by the agency.

During the eight week consultation period, 'Onshore Employment Intermediaries: False Self-Employment', concerns were voiced that the legislation did not make it clear that a typical PSC was not the intended target and because of this it would cause confusion with the existing IR35 rules.

In response, HMRC issued a technical note setting out their view of the interaction between the Agency Legislation and IR35, basically stating it's 'as you were' for IR35 and that the PSCs are not affected by the new legislation. I am however only paraphrasing as, in true Revenue style, of course, the note did not expressly say this!

As a result of there being no absolute confirmation that PSCs are not the subject of the Agency Legislation (which they aren't), this has caused some agencies to start twitching and putting into place unnecessary measures in their dealings with bona fide contractors. Only last week I saw a document that an agency is issuing to freelancers in reaction to the legislation. In its covering letter, the agency stated, “Please note it is our current understanding that workers engaged via a PSC which pays salary under PAYE and NIC's and/or pays dividends are not normally regarded as being paid as a result of services provided.”, i.e. contractors aren't affected. However, the letter then contradicts itself and proceeds to ask the freelancer to complete and sign a document containing 5 questions:

  1. Confirm that the PSC only employs workers under a contract of employment and pays them under PAYE.

  2. Confirm that the contractor operates via a PSC.

  3. If a PSC, identify the controlling director and:
    - confirm that, apart from expenses and dividends, they will not be paid gross; and
    - the PSC’s payroll is operated in the UK.

  4. Confirm the nature of the engagement between the PSC and the named worker, ie, self-employed, director's agreement or something else.

  5. If the named worker is engaged on some basis other than self-employed or director's agreement, then further details are to be given.

This type of document serves only to pacify and satisfy an agency's paranoia, caused and fuelled, in part, by HMRC's failure to provide categorical confirmation that PSCs are not affected by the new Agency Legislation. The legislation itself however is not new, it has only been amended and narrowed and has always applied to self-employed individuals. So why then were agencies not imposing these excessive checks before 6th April 2014? It is because they knew the legislation did not apply and that PSCs came under the IR35 regime. Well that hasn't changed and it would be unjust and unfair to expose a group of taxpayers to double taxation on the same source of income.

Forcing contractors to enter into such gratuitous confirmations could have an impact on their IR35 status, as they may give the impression that the personal service of the freelancer is a condition of the engagement. My advice to any contractor presented with such a request would be to politely decline, pointing out that it should be sufficient that the agency know they are operating through their own limited company and to attach a copy of HMRC's technical note, which can be found on pages 24-25 of Onshore Employment Intermediaries: False Self-Employment highlighting the paragraph, “As is currently the case, the proposed Agency legislation will not generally apply where a worker is engaged via a PSC.....”.

Author: Andy Vessey

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