Contractors will be subject to new False Self-Employment legislation from 6 April 2014, despite efforts to delay its implementation, although efforts by ContractorCalculator to delay and modify reporting were partially successful.
Limited company contractors continue to be outside the scope of the legislation. Worryingly, though, HMRC has retained the right to reclassify dividend income as employment income if it believes a contractor’s incorporation was purely for tax reasons.
HMRC has published its report titled Onshore Employment Intermediaries: False Self-Employment - Summary of Responses in which concerns over the test for proving the absence of control have been ignored. A new Targeted Anti Avoidance scheme will be introduced to prevent mass incorporation from self-employment to avoid the legislation; however, no details of the form that it will take and any tests have yet been published by HMRC.
The legislation is going ahead this year – regardless
Despite over half of respondents, including some sympathetic to the proposed legislation, calling for a delay, the government has decided to press on regardless, and the legislation will take effect from 6 April 2014.
HMRC’s excuse for rushing it through is that “delays in bringing it in would provide a window for those trying to circumvent the legislative intention, in which for them to devise new avoidance arrangements”.
According to the consultation response, from 6 April intermediaries, such as agencies:
“Will be required to operate the new agency legislation and deduct income tax and National Insurance Contributions (NICs) through Pay As You Earn (PAYE) where the manner in which the worker provides their services is subject to (or subject to the right of) supervision, direction or control of anyone in the contractual chain.”
Delays in bringing it in would provide a window for those trying to circumvent the legislative intention, in which for them to devise new avoidance arrangements
Two of the few concessions are that agencies and other intermediaries will have until August 2015 to make their first submission to HMRC, and the definition of ‘intermediary’ will be tightened up to exclude genuine service providers.
The former was partially in response to ContractorCalculator CEO Dave Chaplin submitting a response to HMRC that highlighted the impracticality of setting up a reporting scheme using Excel spreadsheets, which was HMRC’s initial proposal.
Defining control, direction and supervision
HMRC and the government have effectively ignored the concerns about proving an absence of control, and have decided only to provide more guidance. This is supposed to provide examples both of where control, direction and supervision is present, and where it is not.
Those in doubt can also ask the taxman, as the response says: “HMRC’s compliance officers will also help customers to make considered decisions in relation to the new legislation.”
There is no conflict with IR35
The response has clarified the position over IR35. HMRC believes that contractors already caught by IR35 won’t be in-scope of the false self-employment rules because they are already paying income tax and NICs on their earnings.
HMRC also confirms that limited company contractors paying dividends will not be affected: “It will also not apply in most cases where profits are withdrawn as dividends as this is a return on capital distribution, not remuneration in consequence of the worker providing their services.”
A new Targeted Anti Avoidance Rule (TAAR)
A Targeted Anti Avoidance Rule (TAAR) will be included in the legislation to prevent avoidance by sole traders as a result of mass incorporation to escape the legislation.
The TAAR will be designed to “enable HMRC to consider both:
- The motive for setting up the arrangements - whether it is set up with the motive of avoiding income tax; and
- What it achieves – whether it results in tax being paid.”
HMRC’s document goes on to say:
“This means that people who set up PSCs for a reason other than reducing tax – such as the limited liability protections incorporation provides – would not be within the TAAR. However, HMRC would be able to use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up PSCs to avoid the new legislation.”
No further details have been published, but it is possible the TAAR could be applied incorrectly to genuine contractors. ContractorCalculator will report on the progression of the TAAR as more becomes known.