With effect from 6 April 2014 any self-employed subcontractor who is subject to supervision, direction or control by another person or organisation will have to be paid subject to deduction of tax and national insurance contributions.
If these deductions are not made at source, and HMRC determines the relationship between the parties is one of employment, it is the intermediary (e.g. staffing agency, contractor) who contracts directly with the end user, who will be liable for the additional tax and national insurance contributions and (from April 2015) financial penalties and interest. This is potentially a huge financial burden for intermediaries and so they need to be aware of this recent legislation and its potentially far-reaching consequences.
The new tax rules have been brought in in an effort to combat false self-employment encouraged by some staffing agencies and payroll companies. Being classified as self-employed brings with it a number of commercial and financial benefits to both the worker and the employer who engages them. For instance, if a worker is self-employed no employer national insurance contributions are payable (currently paid at the rate of 13.8% on amounts paid in excess of £149 per week) and PAYE does not apply, meaning that the worker pays employee national insurance contributions at the lower rate of 9% (as opposed to 12%). Furthermore, the tax deductible expenses for a self-employed individual are more generous than those applying to an employee.
It is anticipated that the new tax rules are likely to have a significant impact upon both the construction and recruitment industries. Construction businesses rely on sub-contracted labour and this sector has particularly high levels of false self-employment. Therefore, the new tax rules will have major repercussions on the costs of construction labour, limiting the ability of sub-contractors to supply labour at current rates. Recruitment agencies must also ensure that they are well versed as to the new tax rules because of their obligations under the same. These include their obligations, from August 2015, to report to HMRC where they place workers for whom they are not deducting tax and national insurance. They will be required to hold detailed information about those workers, including the name and address of the intermediary and why tax and national insurance was not deducted.
As a consequence of these new rules is of paramount importance for any business that contracts work to sub-contractors or is involved in the facilitation of the same, to seek expert advice as to the potential financial and administrative obligations resulting from the same.
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