FALSE SELF-EMPLOYMENT & THE CONSTRUCTION INDUSTRY An analysis of the new legislation and its impact Matt Boddington, Chartergate Legal Services National Association of Shopfitters Autumn General Meeting 15 October 2014

Background The consultation document Announced at Autumn Statement: 5 December 2013 Consultation document published: 10 December 2013 Consultation closed: 4 February 2014 Legislation announced 27 March 2014 for implementation 6 April Analysis Background to the issue Widely criticised, including by ICAEW, REC, construction bodies HMRC-driven, and HMRC are enthusiastic about introduction Part of general “attack” on intermediaries: other proposals on LLPs and offshore intermediaries enacted from 6 April 2014 Targeted at construction and emerging self-employed sectors

Effect of proposals Self-employed engagement through an intermediary to be subjected to a new single test Traditional employment status tests do not apply Proposal for tax and NIC purposes only – not about employment rights (despite what consultation document implies) Where engagement is through an intermediary and there is self-employment, new test will apply

Who is affected Agencies Umbrella companies Clients using agencies Any client who involved in labour supply (notably construction) Effects may be direct or indirect (e.g. cost implications, changes of engagement)

Effect of new rules Wide definition of “intermediary” – this is not just an agency or an umbrella, but could include any party in the supply chain Consideration needs to be given to whether construction clients act as an intermediary in some circumstances Criticism of this aspect of the proposal Little definitive guidance from HMRC Note: all existing risks of different types of engagement still apply (IR35, employment status, MSC). This is additional legislation widening the scope of PAYE

Effect of new rules Personal service (factual test) Via any form of intermediary supplying a worker Key control test: it is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person If this cannot be proved, the worker is treated for tax and NIC purposes as an employee

The test Intermediary engagements are automatically within PAYE unless (key phases underlined): “…it is shown that the manner in which the worker provides the services…is not subject to (or to the right of) supervision, direction or control by any person.” Therefore, where there is an intermediary either PAYE must be accounted for, or it must be shown that there is no right of control by any person

Who is liable? By default, the person who supplies the worker to the end-user (known as Intermediary 1) is liable If a party further down the supply chain operates PAYE, this will satisfy the obligation of Intermediary 1 to account for PAYE New proposed RTI reporting requirements from 6 April 2015 – details just announced There are proposals for debt transfer in certain circumstances

The Control Test No supervision, direction or control as to the manner Tough to prove in reality Will potentially require amendment of all the contracts in the chain Will require agencies to remove the onus of control that they place on their clients Will require serious consideration of the facts and whether any party has the right to control, supervise or direct as to the manner Will require end users to potentially relinquish the right of control Where the above things do not happen then it will be difficult to show there is no control However, there may be cases where it can genuinely be shown that there is no control, supervision or direction as to the manner. In these circumstances the new rules will not apply.

The Control Test Deliberately vague Little existing case law Potential purposive interpretation “Right of control” is key element (whether or not exercised) HMRC has provided useless ‘comprehensive’ guidance Elements of control ‘as to the manner’ Health & safety provisions Job/project specifications Additional elements of control

Direct CIS workers Arguable where service to Main Contractor is labour supply Control exercisable by Main Contractor? In this scenario the Shopfitters would be Intermediary 1 and liable for PAYE, unless the Main Contractor itself was supplying labour Main Contractor Shopfitters Self- Employed worker

CIS Engager Model Control test CIS Engager Company would be Intermediary 1 and liable If Shopfitters are supplying labour on, the Shopfitters could become Intermediary 1 Shopfitters CIS Engager Self- Employed worker

Agency Model (CIS) Exactly the same scenario, but Agency would be Intermediary 1 and liable for PAYE Main intended effect of proposed rules Again, liability could be shifted if it could be argued another party was Intermediary 1 ShopfittersAgency CIS Engager Self- Employed worker

Other provisions Debt transfer If a client provides a fraudulent document to Intermediary 1 intended to constitute evidence that there is no control or right of control The client is liable for the PAYE/NIC HMRC can serve a personal liability notice on the directors if the PAYE does not get deducted or paid If an unconnected party provides a fraudulent document to Intermediary 1 intended to constitute evidence that PAYE is being operated The party providing the document is liable for the PAYE/NIC HMRC can serve a personal liability notice on the directors if the PAYE does not get deducted or paid Targeted Anti-Avoidance Rule (“TAAR”)

Likely outcomes & risk Workers being engaged directly rather than through an intermediary (old status tests still apply) Direct engagements place PAYE risk on clients Employment law protection provided by intermediary is lost Additional administrative burdens Move to PSCs and other forms of corporate engagement MSC risks Move to PAYE Umbrella Model Inflationary effect on labour supply costs Requests for contractual amendments by intermediaries to demonstrate lack of control and satisfy new test Resultant vicarious liability, insurance and debt transfer risks

Likely outcomes & risk Danger of intermediaries facing financially ruinous liabilities Commercial risk / VAT risk Indemnity documents These are not always what they are made out to be

Due diligence Where there is an argument that you are Intermediary 1, you need to ensure that the intermediary in the supply chain responsible for paying the worker is operating PAYE unless it can be shown that there is no control Where you are involved in labour supply, Labour supply VAT Due Diligence more important

Any questions?

Property Investors There can be a fine line between “investment” and “development” HMRC guidance seeks to clarify the divide at CISR12080 Property investment: acquisition/disposal, accepting “minor refurbishment to bring properties up to a suitable standard” Property development: substantial development to change to a new use Typically this is guidance at the extremes More important than HMRC guidance is the Courts’ opinion Statutory test: “…any person carrying on a business which includes construction operations”

Property Investors Note – this is the ‘mainstream contractor’ rule NOT the ‘deemed contractor’ rule Mundial Invest SA v Moore [2005] EWHC 1735 (Ch) Owners of Hastings Pier, development works HMRC made estimated assessments £500k p.a. 5 years Mundial argued construction must be “core business” or “substantial” Argument rejected by High Court If your business is 99% outside construction, you are a mainstream contractor