Limited company contractor using personal service companies are caught by the Employment Intermediaries legislation reporting rules.
That means contractors using agencies must hand over sensitive personal information and those that subcontract must start reporting their subcontractors to the taxman, when there is no agency in the chain. In both cases, HMRC is being handed a target rich list of contractors for IR35 investigations.
This is according to the latest guidance updated on 12 February and draft legislation updated on 10 February published by HMRC, which also now omits any mention of supervision, direction and control (SDC) and working from home.
However, contractors using personal service companies (PSCs) continue to be excluded from the actual False Self-Employment legislation itself, and can be paid gross
Limited company contractors were never intended to be targets
“HMRC had led us to believe that the legislation would not affect those working through their own limited companies,” Andy Chamberlain, deputy director of policy and external affairs at the Association of Independent Professionals and the Self-Employed (IPSE), told ContractorCalculator.
“Agencies will now be expected to report back to HMRC with a level of personal information about the contractor that is wholly inappropriate for a business to business relationship.
“Our argument for excluding limited company contractors is that there is already anti-avoidance legislation available for that arena in the form of IR35. Why is HMRC dragging these businesses into this?”
Chamberlain makes the point that it could have been worse: “At least the reporting period has been reduced to three years and contractors can continue to be paid gross by their agencies.”
Umbrella company contractors need take no action
From an umbrella contractor’s perspective, the updated legislation and legislation is to be welcomed. Recruiters will only need to report identity details – and not payment information – for contractors employed by an umbrella company when submitting quarterly returns to the taxman.
That’s because payment details will have already been included in the umbrella firm’s Pay As You Earn (PAYE)Real Time Information (RTI) submission.
“This is a common-sense decision from HMRC, which will ensure considerable amounts of unnecessary duplication are avoided,” notes Parasol managing director Derek Kelly.
“At a time of heightened scrutiny of our sector by policymakers and the mainstream media, this serves as a timely reminder of the importance of compliant, legitimate umbrella employers.
“By reducing the administrative burden on recruitment firms and effectively acting as a tax and data-collection service for HMRC, contractor employment providers play a vital in the flexible workforce supply chain. Indeed, we expect agency demand for our services to increase post-April.”
Contractors who subcontract become employment intermediaries
The guidance is very clear about who is in scope. Only limited company contractors with a single person PSC contracting direct with a client are exempt. Limited company contractors contracting via an agency will be required to provide detailed personal information, including date of birth and National Insurance (NI) number.
According to HMRC, a limited company that has more than one contractor operating through the business, or who uses subcontractors, “will be acting as an intermediary and will have to send reports for each reporting period”.
That means they will have to send full details of each worker in the business and of each subcontractor to HMRC every quarter for a year, even if the subcontractor only even work for a single day. Records must be kept for three years and there are stiff penalties for failing to report.
Chamberlain concludes: “Our solicitors continue to engage with HMRC to find out why, when they are out of scope of the Employment Intermediaries legislation, and while IR35 provides an existing anti-avoidance tool, PSCs have been included.”