What is false self-employment?
Many skilled British workers choose the flexibility and freedom of being self-employed, where they take responsibility and control for their own working affairs, including ensuring that the correct tax is paid on their earnings.
This way of working also suits the needs of many organisations which rely on the flexible workforce as and when they need them, without having to make a financial commitment to employ workers on a full time basis.
However, the government believe that a significant number of workers are currently being treated as self-employed when their working practices suggest that they should be treated as employees. The supply chain using the services of the self-employed worker is able to avoid not only the 13.8% in employer national insurance contributions, but also other costs associated with engaging employees and affording them full employment rights.
Changes in legislation
It was widely understood that self-employment can be determined by using employment tests that had been formulated by case law over the years. However, HM Revenue and Customs (HMRC) have had trouble proving false self-employment in cases where the right to substitution was present.
An example of this is the case of HMRC v Talentcore (2011) where even when the workers were determined to be supervised, directed and controlled by the organisation, no employment taxes were due because the level of control was low enough for a substitute to be used.
In order to take action against this type of arrangement HMRC have consulted on their proposed changes and are currently preparing the final version for the upcoming Finance Bill which will come into effect on 6th April 2014.
How it affects recruitment agencies
Whilst it remains to be seen what the final legislation will look like, the proposed changes could have a major impact on recruitment agencies who currently engage with self-employed workers either directly or through an intermediary.
Importantly, the recruitment agency will be liable for the Tax and NI of the workers unless they can show the worker is genuinely self-employed.
In addition, all recruitment agencies involved in supplying workers through intermediaries (e.g. an Employment Umbrella Company), as they will be responsible for additional record keeping and reporting requirements via HMRC’s Real Time Information (RTI) processes.
How it affects workers
There is a strong likelihood that many workers who are engaged via a self-employed arrangement, do not understand the benefits of being an employee. Although they may enjoy additional income for a short while, this is at the detriment of other employment protections such as statutory sick pay and redundancy pay which could prove much more useful in the long term.
How it affects Personal Service Companies (PSC’s)
During the consultation process, many commentators felt that the proposed new legislation would deter Agencies from engaging with contractors operating through PSC’s, since the Agencies would be asked to deliver what were considered onerous reporting requirements whilst exposing themselves to risk.
Agency Legislation has always applied to PSC’s and the revised rules are no different. However, HMRC have issued guidance assuring PSC’s users and Agencies alike that the Legislation is not intended to affect those genuinely working through their own businesses. In the majority of cases the PSC’s fall outside of the rules since not all of the worker’s remuneration is received as a consequence of providing services – as dividends are paid as a consequence of their shareholding in the PSC.
How it affects Orange Genie Group
It will be business as usual – the new regulations will NOT affect our services to our agency partners or end clients. As members of both the Freelancer and Contractor Services Association (FCSA) and Professional Passport, Orange Genie Group already meets the high standards of compliance set by these organisations. Our operations follow HMRC employment tax rules which mean our solutions are risk-free for both recruitment agencies and contractors.
All Genie Umbrella and Genie Education workers are employed on an overarching employment contract and all employment income is subject to the correct deductions of PAYE and NI. Employer’s NI is reported in RTI and paid in full to HMRC by Genie Umbrella and Genie Education.
For a more detailed explanation please contact Orange Genie on 0845 603 8088. We have a knowledgeable team who can provide clear advice, and support.