The law relating to the taxation of agency workers has recently changed.
Prior to 6 April 2014, the effect of section 44 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) was, in summary, that recruitment agencies were obligated to deduct tax and NI from the remuneration receivable by those agency workers they contracted with who were individuals in the following circumstances: (i) the worker personally provided or were under an obligation to personally provide services to an end user and (ii) the worker was subject to or to the right of supervision, direction or control as to the manner in which the services were provided. Consequently agencies invariably deducted tax and NICs from the worker’s remuneration where the agency worker was an individual.
Where the agency worker which the agency contracted with was a limited company, the agency was not generally obliged to involve itself in the taxation of the remuneration paid to the individual representative supplied to actually perform the services by the limited company contractor. IR35 may have been applicable but that was a matter primarily between the individual worker and the limited company which supplied the individual to the agency/end user. A tax risk to the agency where the individual worker was engaged via an intermediary limited company would only usually arise if the limited company was a managed service company (“MSC”) as defined in section 61B of ITEPA. If the agency had recommended the use of the MSC to the individual, it was possible for the agency to face tax liabilities as a result, if the MSC failed to pay the appropriate tax and NICs in respect of the individual, to the HMRC.
Since 6 April 2014 and as a result of the passing of the Finance Bill 2014, the rules on taxation of agency workers, whether they be individual or supplied by an intermediary company have changed. Full guidance can be found in the HMRC’s employment status manual
In broad summary, where:
1. an individual worker personally provides services (which are not “excluded services”) to another person (“the client”); and
2. there is a contract between the client and a person who is not the worker (“the agency”); and
3. pursuant to that contract, (i) the services of the worker are provided or (ii) the client pays for the services of the worker; and
4. the worker is not already an employee of another company which is operating PAYE and NICs, and the worker is not already being treated as employment income by another party before the new rules are applied;
1. For income tax purposes, the worker is treated as holding an employment with the agency. If there is more than one intermediary company sitting between the client and the worker, then all of these can be classified as agencies and liable under the new tax provisions, but the agency that contracts directly with the client is primarily liable. PAYE must be operated in respect of the worker’s employment income, by the agency directly contracting with the client in the first instance, even if there are other intermediary companies sitting between the agency and the worker in contractual terms. Income tax payments must be remitted to the HMRC via RTI (Real Time Information).
2. For NIC purposes, the worker is treated as an employed earner for Class 1 NICs purposes. Usually, the agency that has the direct contract with the client will be liable to deduct employee’s NICs and make payment to HMRC under RTI. The agency will also be laible for employer’s NICs.
“Excluded services” situations, i.e. where the new tax regime will not apply are:
1. Services provided where the worker is not subject to or subject to a right of supervision, direction or control by anyone (not just the client) as to the manner in which they provide the services/how the work is done. Whether or not such supervision, direction or control is exercised is assessed on the basis of the actual way the worker provides the services. There will be a presumption that such level of control exists in general. For this exclusion to apply the agency must also have obtained satisfactory evidence to demonstrate the worker is not subject to supervision, direction or control by any person. A signed declaration from the worker will not be sufficient. Evidence will need to be provided by the client.
2. For NICs purposes, the worker provides their services wholly in their own home or on premises which are not controlled or managed by the client, unless the worker is required to work at those premises because of the nature of the services and work being provided by the client.
3. For NICs purposes, if the worker provides services as an actor, singer, musician or other entertainer or as a fashion, photographic or artist’s model.
The new provisions contain tax avoidance measures. Where a worker personally provides services (which are not excluded services) to a client and a third party enters into any arrangement the main purpose of which is to defeat the new tax rules, then the third party will become responsible for operating PAYE and NICs on all remuneration received by the worker in consequence of providing their services via that arrangement.
The obligations for agencies to account for PAYE and NICs via RTI began on 6 April 2014. From that date agencies must also keep and preserve records for individual workers for whom they are not deducting income tax and NICs at source. Agencies will be obliged to make quarterly returns to HMRC in respect of such workers, the first return being due by 5 August 2015. The return will include information about the worker as follows:
1. identity details;
2. information about how they are paid and engaged;
3. reasons why income tax and NICs have not been deducted by the agency; and
4. information about the business supplying the worker to the agency.
There will be penalties for late and incorrect returns. The initial fixed penalty will be £3000 plus daily penalties of up to £600 per day for continued non-compliance. The penalties will come into force on 6 April 2015.
If an agency is provided with a document by a client which purports to prove the worker is not subject their supervision, direction or control; and that document is untrue; and the agency was unaware the document was fraudulent, then the client will become liable for tax and NICs on the worker’s income. If an agency is provided with a document by a third party purporting to show that the income the worker earns is already being properly taxed before the application of the new agency tax rules; that document is untrue; and the agency was unaware that the document was fraudulent then the third party supplying the document will be liable for tax and NICs on the worker’s income. Directors of the fraudulent entity can be held personally liable for the tax and NICs if the relevant company does not pay it.
The new agency tax laws are complicated and this is a broad overview only. Advice on this issue should be taken from a specialist tax accountant.
For further information on the issues raised in this article, please contact Helen Wyatt on 020 7925 8083 or by email at firstname.lastname@example.org