Prior to April 2014, the government identified an increase in the number of offshore employers with workers in the UK, undertaking assignments for UK companies and using their offshore status to avoid paying income tax and national insurance contributions (NICs) in respect of those workers’ incomes.
Although the obligation to pay the tax and NICs fell on the hirer of those workers (i.e. the business that the assignment was undertaken for) they were often unaware the worker was engaged via an offshore company, unaware of their responsibilities and therefore did not pay.
As the UK government’s powers do not extend to offshore employers, existing legislation was amended in 2014 to deal with the issue. These changes are widely referred to as the Onshore Intermediaries Legislation and the Offshore Intermediaries Legislation.
At the same time, the government also introduced Offshore Intermediaries Legislation. Read about it here.
In short, the Onshore Intermediaries Legislation was introduced to tackle the sums of revenue the government was losing due to non payment of tax and national insurance contributions because individuals were falsely claiming to be self-employed when working through an intermediary.
Self employed status was attractive to businesses engaging these workers as it removed the requirement for them to pay employer NICs, and also the businesses did not need to provide employment related benefits and protections in relation to those workers. However, in many cases, this status was forced upon workers if they wanted to continue working, left them unprotected and often with lower pay in the long run.
The Onshore Intermediaries Legislation was introduced to address this and requires the intermediary (often a recruitment agency) to be certain that any workers that are not paid via PAYE are genuinely self-employed. If these workers are not genuinely self-employed then the agency is liable for the tax and NICs due on the income for those workers.
What does the Onshore Intermediaries Legislation do?
Before the Onshore Intermediaries Legislation was introduced, some workers were deemed to be self-employed on the basis that they were not required to provide the services personally. These workers often also had a contractual right to provide a substitute.
HMRC noted that although many workers were classed as self-employed as a result of the absence of a requirement on them to personally provide services, in fact, that right was in many cases, never exercised. In addition, because there was no employer there was no payment of employer’s national insurance contributions or PAYE tax to HMRC which resulted in lost revenue for HMRC.
As a result, this type of working was termed as ‘false self-employment’ and the Onshore Intermediaries Legislation was introduced.
The change mean that ‘personal service’ required the individual to personally provide or be personally involved in the provision of services to another person. This had the effect of classing many self-employed individuals as workers employed by the recruitment agency through which they received assignments. This created employment rights for the workers and employment obligations for the agency.
As a result, if you are self-employed and working through a recruitment agency (or other intermediary) then you will need to prove that you are self-employed by proving an absence of supervision, direction and control (“SDC”) by the end client (business that you undertake work for) or any third party acting on their behalf.
Only when it can be proved that there is no supervision, direction or control (SDC) over how you work can the agency (or other intermediary) safely treat you as self-employed.
The evidence is required by the recruitment agency engaging you who will in turn need to prove your status to HMRC, as required. HMRC assume that there is ‘control’ present.
HMRC Guidance on Supervision, Direction and Control
The government has issued guidance which sets out what, for the purposes of the agency legislation HMRC consider supervision, direction and control to be. You can access it here.
The guidance states:
Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.
Direction is someone making a person do is/her work in a certain way by providing them with instructions, guidance or advice as to how the work must be done. Someone providing direction will often coordinate the how the work is done, as it is being undertaken.
Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.
If an absence of SDC cannot be proved, then PAYE and NICS will be due on your income received through the intermediary and theses must be deducted and paid to HMRC by the intermediary, i.e. your recruitment agency.
The intermediary is responsible for:
- Ensuring that the correct employment status is used for the workers they engage.
- If SDC exists, PAYE and NICs must be deducted and paid to HMRC.
- Any workers engaged on assignments and in respect of whom PAYE and NICs are not paid, must be reported to HMRC on a quarterly return.
Many recruitment agencies do not want to employ workers nor be liable for providing employment rights so they will often only work with workers who join an umbrella company. The umbrella company becomes the workers employer and takes on the responsibilities that come with that role, removing them from the agency.
You can learn more about “What is an Umbrella Company?” here.
To enable HMRC to police this system, agencies are required to submit quarterly Intermediaries Reports, which set out details of the workers, their status and assignments. As required, the status of any worker deemed to be self employed must be evidenced to HMRC. In the event that the status is found to be incorrect, HMRC will seek recovery of unpaid tax and NIC’s from the agency. If fraudulent information has been provided to the agency to demonstrate a workers status, HMRC will seek recovery of unpaid tax and NICs from the party providing that information. HMRC also issues penalties for late, incorrect and/or incomplete returns made.
It’s important to be aware that there is a possibility of a worker personally being pursued by HMRC for unpaid tax and NICs under the Onshore Intermediaries Legislation in the event the party that would be liable, no longer exists.
One way in which this could occur is if the worker submit an annual self-assessment to HMRC which includes a period of what HMRC consider to be disguised self-employment and they decide to investigate accordingly.
If HMRC considers that a worker has been complicit, intentionally or otherwise, in attempting to hide the false self-employment, HMRC may decide to pursue that worker for the monies owed.
Workers should also check that any terms and conditions between them and any intermediary do not seek to pass liability for any breach of the Onshore Intermediaries Legislation by the intermediary, onto the worker.
The absolute best way for workers to avoid falling foul of the legislation is to work with an intermediary closely and in a transparent way, to always make sure that they are genuinely self-employed and/or that the correct deductions are always made from their income.
Why a PSL is important when it comes to Onshore Intermediaries Legislation
We’ve previously covered Preferred Supplier Lists (PSLs) and how they can help independent workers and recruitment agencies to always adhere to legislation and make sure all financial obligations to HMRC are fulfilled.
You can read more about PSLs by clicking here.
A PSL, in short, is a list that agencies and contractors can create that includes trusted and compliant partners and suppliers throughout the contractor supply chain.
A strong, regularly-updated PSL reduces the chances of legislation like Onshore Intermediaries Legislation not being adhered to.