Limited company contractors who subcontract work out to other contractors and freelancers are facing a red tape reporting nightmare, as they will be forced to report detailed personal information on their subcontractors to HMRC.
Both umbrella and limited company contractors will also be forced to hand over sensitive personal data to any agency or freelancer that they secure work from. Failure to comply with planned new onshore intermediaries reporting requirements drafted by HMRC could lead to a £3000 fine.
Freelancer and Contractor Services Association’s CEO Julia Kermode fears that the measures could have far-reaching consequences for both contractors and service providers: “Activity in the vibrant contracting and freelance sector could potentially slow down, as contractors will stop hiring other contractors and freelancers will start making choices about who they work for to avoid the reporting requirements. It could have a broader business impact.
“There is also a huge duplication of effort. Much of the data is already supplied by service providers such as umbrella employers to HMRC by mechanisms such as RTI every time they process a payroll. These additional compliance costs may filter into the contracting supply chain, potentially resulting in higher fees to contractors and their end-user clients.”
Onshore intermediaries draft new reporting requirements
The new statutory instrument on reporting drafted by HMRC follows on from the onshore intermediaries legislation that was introduced by the Finance Act in 2014. The draft is interpreted to confirm that contractors’ personal service companies (PSCs) are ‘specified employment intermediaries’. This means that they are treated like recruitment agencies and have to report directly to HMRC every time they sub contract out work.
Contractors will be required to obtain and report on each subcontractor’s detailed personal data that includes full name, date of birth, address, postcode, gender, National Insurance number, Unique Taxpayer Reference (UTR), passport number, the dates when the subcontractor started and stopped work on the project, and the number of hours worked.
This data must be reported to HMRC electronically every quarter, and contractors will have to continue reporting on a specific subcontractor for three years, even if that subcontractor never works for the contractor again.
A contractor will also have to explain why they did not deduct income tax and National Insurance Contributions (NICs) from the subcontractor’s gross fees. As the proposals stand, if a contractor fails to report to HMRC, they face a £3,000 fine with a further £600 penalty for each day that the data is unreported.
What is a specified employment intermediary?
The draft statutory instrument defines ‘specified employment intermediaries’, by which it means any agency or contractor that is required to report under the onshore intermediaries legislation.
The draft says that “An employment intermediary is a specified employment intermediary if at any time during a tax quarter…the employment intermediary is an agency” and “more than one individual provides services to a client under or in consequence of a contract between the employment intermediary and one or more clients”.
HMRC’s explanatory note goes on to say that: “Employment agencies that place multiple workers with clients other than on United Kingdom continental shelf and are not required to operate PAYE for some or all of those workers are specified employment intermediaries.”
In its response to the original HMRC consultation, the Chartered Institute of Taxation highlighted that:
- A classic contractor limited company with two spouses/civil partners both delivering services could be unnecessarily classified as a specified employment intermediaries
- It is not clear who exactly is responsible for reporting if there are multiple intermediaries, which in most contracting supply chain there are.
Limited company contractors should have been excluded
“From the outset, HMRC made it clear that limited company contractors would not be required to operate the onshore intermediaries legislation,” highlights ContractorCalculator CEO Dave Chaplin. “This was confirmed by HMRC representatives at a Lawpeed seminar I attended over the summer.”
Simon McVicker, director of policy and external relations at IPSE, agrees, adding: “Throughout the consultation process, we have been repeatedly assured that legitimate independent professionals would not be affected by these new rules.
“It is therefore all the more ridiculous to find that thousands of freelancers will be forced to conform to the onerous reporting requirements now outlined in the draft statutory instrument. The regulations will strongly discourage independent professionals from subcontracting and collaborating with others.”
Contractors and agencies will face increased costs
Kermode believes the cost implications of the proposals have not been fully considered: “These regulations will impose a significant cost burden on businesses. Installing systems that can securely collect and store data is not cheap, one of our members has set aside a six figure sum to achieve this.
“For some small businesses it will be prohibitively expensive.”
Will the onshore intermediaries reporting requirements become law?
The original consultation ran from 1 October 2014 and closed on 25 November 2014. ContractorCalculator has been told that HMRC chose to inform very few stakeholders about the consultation’s existence, so most of the leading contracting sector organisations and service providers were denied the opportunity to comment.
In response, IPSE has mounted a joint campaign with the Freelancer and Contractor Services Association , the Recruitment and Employment Confederation (REC) and the Association of Professional Staffing Agencies (APSCo).
IPSE has also written to Secretary of State for Business, Innovation and Skills Vince Cable highlighting the implications of the new reporting legislation and calling on him to exclude PSCs from the regulations. The final decision on the form that the reporting regulations will take and whether contractors will be affected won’t be known until the New Year.