CIS - CHANGES TO SELF-EMPLOYED
STATUS FROM 06 APR 14
Over the last decade or more there has been a significant increase in the
numbers of self-employed individuals driven in large measure by the
increase in temporary employment agencies and payroll intermediaries.
FALSE SELF-EMPLOYMENT
ONSHORE
INTERMEDIARIES:
FALSE SELFEMPLOYMENT
REGULATIONS
The government has been determined to stamp out what it sees as false selfemployment, whereby temporary staffing agencies & payroll intermediaries have allowed
employers, particularly in the construction industry, to avoid employing personnel directly.
The obvious motivation has been the avoidance of on-costs including Employers NIC,
holiday pay, higher pay rates and other direct employee benefits. The Construction
Industry Scheme (CIS) has inadvertently facilitated this growth, as individuals in the
construction sector have been able to register easily as self-employed individuals by
simply making a phone call & obtaining a UTR No. (Unique Tax Reference) subject to a
short lead time. Individuals have then been able to work on a self-employed basis subject
to deduction of tax at 20% under CIS.
A large proportion of CIS workers have been contracted through either temporary
employment agencies or payroll intermediaries so that there is no direct contractual
relationship between the contractor and the individual worker.
HMRC Onshore Intermediaries - False Self Employment
Over the last few months the
SUPERVISION, DIRECTION & CONTROL
of false self-employment
The government’s focus has been that these individuals have been subject to the same
level of supervision, direction and control as if they were employed by the contractor and
consequently are in effect employed. As a result the government concludes that it is
missing on very significant revenues and that individuals are being deprived of their
employment rights. The government estimates that there are some 200,000 who are
falsely self-employed, the new regulations aim to stamp out this practice and direction
and control are at the heart of the legislation.
Under the new regulations, if you are subject supervision, direction or control during the
execution of your work (or if someone has these ‘rights’ even if they do not exercise
them) you will be ‘employed’ for tax purposes regardless of what your view is, whether
you are paid through an intermediary or under CIS. If you currently work through an
existing ‘Personal Services Company’ (PSC) then technically you are exempt from the
regulations, however you stand to be captured under IR35 regulations as being
effectively employed. HMRC are fully aware of this possible loophole, so any PSC
formed after 06 April 2014 will come under heavy scrutiny.
Agencies and payroll intermediaries must comply with these new laws and should they
continue to pay anyone on a self-employed basis, through CIS or through a PSC, the
they will have to submit a report to HMRC explaining (a) who those workers are, (b) how
much they are being paid, (c) who they are being supplied to and (d) why they are being
paid as self-employed. For further information please see:Definition of Supervision, Direction & Control
In the rest of this article we look at what the response has been from the agencies
and payroll intermediaries and what it means for the previously self-employed
person.
government has been in
consultation with HMRC,
Construction Industry
representatives & the
Accounting Profession. The
government has been
determined to tackle the rise
particularly in, but not
restricted to, the construction
sector. New regulations came
into force rapidly on 06/04/14
with very little publicity and
the minimum of notice.
Accountants &
Business Advisors
www.sumassistance.co.uk
0113 418 2085
21/04/14
THE RESPONSE
Contrary to what you might be told the Construction
Industry Scheme has not been abolished. Legitimate subcontractors can still operate under the CIS scheme
provided they meet the supervision, direction and control
provisions and will continue to have 20% tax deducted at
source and will be required to submit the usual annual selfassessment tax return to claim their tax refund.
Some press release comment that agencies and payroll
intermediaries will have to pick up the extra costs involved
in respect of those previously operating under CIS; as they
will now have to process them as employed individuals
under the PAYE scheme. This is unlikely to be the case,
instead individuals are likely to be pushed down the
‘Umbrella’ route .Umbrella schemes are essentially PAYE
schemes with a dispensation under which temporary
employees can claim a weekly offset against gross pay for
certain expenses, thus reducing taxable pay for tax and NIC
purposes.
UMBRELLA SCHEMES
Standard umbrella schemes have been operating for some
time and vary in the extent of dispensation however they all
essentially allow the individual to claim an offset, often
referred to as “expenses”, against gross pay. These
“expenses” are not paid on top of gross pay, they operate
effectively as extra notional personal allowance and include
such elements as mileage allowance, daily meal allowance,
tools and PPE, business mobile costs (itemised bills) and
laundry allowance.
What you may not be aware of is that as well as paying
both PAYE tax and employees NIC, individuals will also be
required to pay employers NIC. This is a prerequisite of the
umbrella model but payroll intermediaries are not always
open about this fact. Another provision they do not always
disclose is that the amount of expenses that can be offset is
restricted, in that they cannot reduce the effective hourly
rate below national minimum wage. Any unused expenses
can be carried forward for future use but there is a
likelihood they may never be available for offset. Individuals
will not be paid holiday pay in addition to their gross
earnings but may have a deduction made from their gross
wages to build up a ‘holiday pay pot’.
A new umbrella model is now emerging called the Elective
Deduction Model (EDM) or ‘Low Pay Model’. The intention
of these models is to maintain notional ‘self-employed
status whilst “electing” to pay PAYE tax and national
insurance contributions. Full details are only just emerging
but trade associations view this new model as an attempt to
work round national minimum wage, AWR and pension
regulations and are calling on HMRC to take action to
stamp out this development.
Trade associations respond to EDM developments
We recommend that if you are required to be paid under an
umbrella model that you obtain full facts about the regime
and ask for a written statement of any net pay comparisons.
If you can persuade the contractor to take you on directly as
an employee this may be the best option as you will have
employment rights, holiday pay and pension entitlements.
Sum Assistance
Accountants &
Business Advisors
www.sumassistance.co.uk
0113 418 2085 21/04/14
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If a payroll intermediary performs a comparison against CIS
for you, be aware of the above and that they will possibly
just compare against a gross less 20% scenario and not
factor in your tax refund and the expenses you could
previously claim against your CIS income.
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