Is time up for Limited company agency workers?
HMRC issued a consultation last month proposing to extend the rules for ‘off payroll working’ in the public sector to the private sector.
While not unexpected, for practical purposes anyway, this will probably bring to an end the use of the limited company for contract work where the worker is providing personal services. HMRC have devised a test that they say they will abide by, as long as the correct information is inputted. This test (the check employment status for tax) can be found HERE.
Most agency contractors will be caught and it will be the client or agency who decide the nature of the engagement, not the worker.
HMRC’s view is that rules set out in April 2000 (known as IR35) make it clear that when the above test, or at least it ancestors, determined that the engagement was employment, then the limited company should treat 95% of the income derived from that engagement as taxable under PAYE. HMRC complain that there is only 10% compliance and short of examining every single case, they have no means to check and raise an assessment. However, they say, collecting the correct level of tax in future is a justifiable objective, so the rules require modification.
The new rules, already implemented from April 2017 in the public sector, make the end user or the person making the payments liable for unpaid tax if the above test determines that the worker falls inside the rules and should be designated as employed.
The same thing happened thirty years ago with self employed workers and the upshot was that that method of payment stopped within a couple of years. It’s one thing for a worker using a limited company to make a judgement about his own employment status, but quite another for the client or agency to interpret things favourably for the worker when there is the risk that they may be liable for that worker’s unpaid tax. Clients and agencies will probably just refuse to payroll via limited companies if these rules are implemented.
HMRC have proposed a complex process where a limited company can still be used, but the ‘employer’ must operate PAYE across 100% of the company’s income. Its difficult to understand why anyone would do that rather than just be PAYE.
What options does this leave for workers currently using a limited company?
Either engage with their current employer/agency as PAYE or go to an umbrella company. Umbrella companies themselves have been subject to legislative control and there is no umbrella company, who are operating legitimately, who can do anything other than operate PAYE in precisely the same way as a normal employer. They will however charge the contractor a fee, something in the region of £25 to £30 per timesheet. All reputable employers and agencies should be able to offer PAYE employment without resorting to umbrella companies or demanding fees to process a payroll.
Unfortunately, it gets worse for current limited company contractors, as whatever option they take (PAYE direct, PAYE via an agency or PAYE via an umbrella) their net income will reduce. This is because, the gross rate paid to the limited company, includes all class 1 primary and secondary national Insurance contributions and other deductions for holiday pay and the workplace pension, and this will become payable by the employer.
£1000 paid to the limited company would equate to £770.00 and £93.00 in holiday pay (a taxable gross pay of £863.00) out of which, workplace pension, income tax and national insurance would be deducted. The tax benefit of using a limited company is not that large and gets smaller the closer to full compliance the individual comes. Nevertheless, it’s hard to argue in defence of widespread non-compliance, or though there is still an argument about the inherent fairness of IR35 in the first place.
While IR35 is now eighteen years old, it is only now when its full force is likely to be felt, that the question of how fair it is comes into focus. Is it right that everyone should be on the same tax rates when some people’s employment is tenuous and lacks benefits when compared with others?
HMRC regard this wider question to be ‘out of scope’ but it is our view that it is important particularly as that in some cases workers may be forced into the hands of organisations who will charge them simply to be paid.
The consultation continues until August 10th 2018 and it is unlikely any decision would be implemented until April 2019. Nevertheless, this should be a concern to all limited company contractors and agencies using them.
Tim Loftus- Director of Prisma Recruitment Limited
©Prisma Recruitment Limited 2018. This is an opinion only and does not constitute legal or financial advice.