Proposed New Rules on the Provision of Personal Services



Summary of a Possible Approach

This summary for use as a basis for discussion but is not a consultation document.

This summary should not be taken as indicative of the form new rules might eventually take and is not to be relied upon in individual circumstances where the underlying facts may differ.

The purpose of the proposed new rules is to remove opportunities for the avoidance of tax and Class 1 national insurance contributions (NICs) which can arise where an engagement is routed through an intermediary (or intermediaries). The changes are not designed to prevent a worker providing his or her services through a third party but, where the arrangements amount to disguised employment, they should remove any tax/NICs advantages of doing so.

This note sets out proposed new rules. The proposals can be split into three parts:

  • Part 1 identifies the engagements caught by the new rules;
  • Part 2 sets out how tax and NICs will be charged where the new rules apply;
  • Part 3 deals with cases where the new rules are not properly applied.

1) Identifying engagements where the new rules will apply

It is proposed that the new rules will:

apply where:

- a worker holds an office with or performs services for another person ('the client') where the client has a right of supervision, direction or control as to the tasks undertaken or the manner in which they are performed and

- the worker or services are provided under a contract between the client and an intermediary (e.g. a service company or a partnership of which the worker is a member);

not apply where:

- a worker's services are supplied incidentally to the supply of materials and/or equipment (e.g. where a lorry and driver are supplied together),

- where the client is an individual not in business (i.e. services for a householder should not be affected) or

- an engagement is 'exempt' (see below).

The aim is to minimise any impact on those not involved in avoidance. It is proposed, in general terms, that payments by a client to an intermediary with respect to a particular engagement should be exempt from the new rules - provided that

  • any remuneration by the intermediary with respect to that engagement will be in a form subject to tax and NICs and
  • the intermediary will itself account fully for PAYE and national insurance.

It would be inappropriate and burdensome to require a client to check that the intermediary had in practice done this. What is required is a system to allow clients, or potential clients, to check (quickly, easily and at minimum cost) whether or not they can make payments gross.

The favoured approach is a certification scheme. In broad terms, an intermediary undertaking to pay workers only in a form chargeable under Schedule E and subject to national insurance should be able to apply to be what we will describe as ‘certified agency’. The use here of the term ‘agency’ is perhaps a little misleading. While we would expect all existing agencies to apply for certification, there would be no need to restrict certification to bodies which are employment agencies in the traditional sense. At this stage, there seems no reason not to allow any intermediary who accounts for PAYE and NICs to apply for certification.

The idea is that the Inland Revenue would maintain a constantly updated public register of certified agencies incorporating instant access and a helpline facility. The certification process itself should obviously be as quick and simple as possible - ideally something very much akin to self-certification. To allow such an approach to operate effectively, ease of certification would need to be accompanied by appropriate penalties for wrongly obtaining, or using, certification.

2) Tax and NICs treatment where the new rules apply

Again in very broad terms, the idea is that where a particular engagement comes within the terms of the legislation and payment made is not covered by the exemption, the worker will (for the purposes of tax and NICs only) be deemed to be an employee of the client. The tax and NICs liabilities of the client, intermediary and worker would be dealt with as follows:

The client

  • The client will account for PAYE/NIC on relevant payments made to the intermediary or to the worker - broadly following existing PAYE/NICs rules.

The intermediary

a) Intermediaries who are companies

Gross receipts from the client will be treated as taxable receipts of the company in the normal way. Income tax deducted by the client under PAYE and primary Class 1 NICs will be allowed as deduction in computing the company’s profits.

In this way, the intermediary need pay no Corporation Tax on the receipts provided the net amount received is paid out to workers as ‘salary’ - because the salary and the tax/NICs deducted will all qualify as deductions in computing profits for Corporation Tax purposes.

b) Intermediaries who are partnerships where the worker is a partner

The partnership will exclude amounts received net of tax/NICs when calculating profits. This will mean that the partners pay no Schedule D tax or Class 1 national insurance on the income.

c) Other intermediaries

We expect most intermediaries to become certified agencies. Where they do not, gross receipts from the client will be treated as taxable receipts of the business in the normal way. Income tax deducted by the client under PAYE and Class 1 primary NICs will be allowed as deduction in computing the profits of the business.

The worker

  • will be subject to tax (Schedule E) and national insurance (primary Class 1) on remuneration from the deemed employment (both accounted for by the client);
  • will be able to deduct expenses allowable under the general Schedule E rules;
  • will be able to receive salary tax/NIC free from an intermediary (within a fixed time limit) - up to the amount of net of PAYE/NIC payments received by the intermediary.

3) Failure cases

There will clearly be a need for measures to deal with those cases where a client fails to deduct PAYE/NIC in a case where no certification exemption is claimed. However, it does not seem appropriate for this to necessitate the unwinding of what has subsequently happened within the intermediary nor for the worker to be chargeable on these sums as income from the ‘deemed employment’. The intention is that the client (rather than the intermediary or worker) would be held to account in such cases. As described previously, the intermediary (rather than the client) would be held to account where certification is wrongly obtained and/or used.


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