Non Payroll Labour: What Employers Need to Know

HMRC is clamping down on those who seek to avoid liability for income tax and National Insurance Contributions (NICs) by supplying their labour through intermediaries, such as employment agencies, on a self-employed basis. Employers need to be aware of the changes as they could be liable for deducting income tax and NICs in certain circumstances. 

Under changes in the agencies legislation introduced from 6 April, where a worker provides their services to an employer via one or more intermediaries, the intermediary is required to operate PAYE and make deductions for income tax and NICs unless it can demonstrate that no party in the chain has exercised, or has the right to exercise supervision, direction or control over the worker – the new test for self-employment. Where there are a number of intermediaries involved, the obligation to operate PAYE rests on the intermediary which contracts with the employer to provide the individual’s services.

Previously it was possible to escape the obligation to deduct tax and NICs by demonstrating that the worker was not obliged to perform the service personally. This led to provisions being included in contracts allowing the worker to provide a substitute to get round any suggestion that he was obliged to perform the service personally. However, in reality there was no intention that the clause would be operated in practice.

The removal of the need for an obligation of personal service from the test means that it is now much harder for intermediaries to escape the requirement to deduct income tax and NICs before making payments to workers. 

From April 2015, intermediaries will also have to keep records for each individual, including details of why they have not deducted income tax and NICs and report these to HMRC quarterly. There will be draconian penalties for non-compliance – a penalty of up to £3,000 and an additional £600 for each day the breach continues after a penalty has been imposed. 

In addition to the impact on intermediaries, the change in the law also has significant implications for employers. Any person who provides an intermediary with a “fraudulent document” intended to show that the worker is not subject to the supervision, direction or control of the employer will become liable to deduct tax and NICs and account to HMRC. This is likely to include any agreement which includes a provision to that effect when the employer knows that this is not or might not be the case, but not a situation where inaccurate information is provide by mistake, as the necessary intent will not be present. Employers should therefore be reviewing their agreements with agencies as a matter of urgency to ensure that they are not exposing themselves to these liabilities. 

The changes could result in individuals getting the worst of both worlds. They could be considered to be employees for tax purposes and have income tax and NICS deducted from their pay but not an employee for employment law purposes, so not benefiting from employment law protections, such as the right to claim unfair dismissal or a redundancy payment. Although there have always been differences in the tests of employment for tax and employment law purposes, the difference has now become more marked.