Should the proposed False Self-Employment legislation become law in its current form, then the resulting implementation by agencies, clients and HMRC could end up being even more of a disastrous mess than IR35 has been.
Limited company contractors have enough to contend with, with IR35. But at least IR35 doesn’t require contractor agencies to investigate every worker they place to check whether they are under the supervision, direction and control of their client. That’s the eventuality facing agencies under the False Self-Employment legislation.
Or is it? Businesses have a remarkable ability to mitigate the impact of onerous regulations and individuals can demonstrate huge creativity when it comes to protecting their wallet from the taxman.
HMRC’s objective is to identify and shut down mass marketed schemes mainly operating in the UK construction sector, but spreading increasingly to other sectors. These schemes turn employed workforces into self-employed sole trader workforces, thereby avoiding employers’ National Insurance Contributions (NICs), and also saving the workers a significant amount of income tax and NICs.
Right now, it is not clear precisely what reporting requirements will be when the new laws come into force. However, you can be sure that recruiters will choose the path of least resistance and keep their workload – and overheads – to a minimum. This is just good business practice, keeping compliance costs down and doing just enough due diligence to cover their backsides if the taxman comes calling.
A logical next step for the self-employed sole trader targets of the proposed legislation is to incorporate. This runs the risk of IR35 applying and higher costs of business, such as accountancy fees and so on.
But the alternative is to stay self-employed and undergo a false self-employment test to determine the absence of supervision, direction and control. This they would almost certainly fail and so have to pay income tax and NICs via Pay As You Earn (PAYE).
The Managed Service Company (MSC) legislation will prevent mass-marketed schemes from mopping up workers, but HMRC will still have potentially hundreds of thousands of new personal services companies (PSCs) to police for IR35.
This supervision, direction and control test is far more onerous than the tests of employment required for IR35. HMRC adopts the default position that supervision, direction and control is present, and it is up to the agency to prove its absence.
The M1 connects London and Leeds, passing by many towns and cities along its route. The False Self-Employment test is like saying someone who lives along the M1 but not in London must therefore by default live in Leeds. They could of course live anywhere in between.
The False Self-Employment test is like saying someone who lives along the M1 but not in London must therefore by default live in Leeds.
Dave Chaplin - ContractorCalculator
Assuming by default that a worker with any level of supervision, direction and control must therefore be employed is similarly illogical, and also does not align with existing legislation and case law on employment status.
IR35 looks positively benign in comparison. And a substantial number of sole traders deciding to incorporate will result in the loss of income tax and NICs.
So, HMRC is potentially setting itself up for a spectacular own goal and an even worse enforcement nightmare than IR35. Thank heavens that contractors won’t be directly affected.