The recent Uber employment tribunal decision has once again brought into focus the subject HMRC classify as “false self-employment”. This particular case only involved two individuals, but the potential repercussions could have significant direct tax and VAT implications for Uber and others operating in the ‘gig economy’. Since the Uber decision was announced there have been a number of similar rulings with further cases to be heard. On a wider scale, the case also once more brought into focus the employment status of those operating via their own companies and the impact of rule changes on these individuals and also the companies who engage them.
Uber has always treated their individual drivers as self-employed rather than employed which means that Uber have no subsequent employer national insurance liabilities. In addition the VAT liability falls on the self-employed individuals, the vast majority of whom earn below the £83,000 registration threshold, so VAT receipts are minimal.
Conservative estimates total the number of Uber drivers in the UK at around 42,000, however this number is quickly increasing. Following the decision, it is HMRC’s intention to classify all drivers as having the same employment status. When we consider that employers national insurance is charged at a rate of 13.8% on all weekly earnings in excess of £165 and the fact that for VAT purposes the income will be deemed to be Uber’s, the potential tax amount at stake is enormous.
On a wider scale, research by Citizens Advice indicates as many as 460,000 people could potentially be deemed by HMRC to engage in “false self-employment”.
A historic check
HMRC first took action against the perceived “false self-employment” when they introduced the IR35 legislation back in April 2000. As a result, if an individual operating via a personal service company (‘PSC’) is deemed to have an employment relation with the contracting company then the income received by the PSC from that engagement is subject to PAYE and NIC. The liability falls on the PSC not the contracting company. A number of factors are considered when determining the employment status including control, financial risk, integration and mutuality of obligation – with no one factor necessarily decisive.
As always various solutions were devised to get round the IR35 rules. Managed Service Companies came and went as legislation was introduced to counteract them. However, HMRC has always held the view that the system wasn’t operating as planned and that the IR35 legislation in practice had failed to act as a deterrent to “false self-employment”.
Therefore, over the past few years there has been a number of legislative changes aimed at reforming the system. We take a look below at the major changes and who they impact:
1. Onshore Intermediaries legislation – April 2014
There was initially a good deal of confusion with regards to how widely this legislation applied. Any temporary worker operating through an employment intermediary is deemed to be employed for tax and NI purposes unless they can demonstrate they are not subject to Supervision, Direction or Control (‘SDC’). The SDC definition is very widely drafted and hence very difficult not to be caught by.
However, importantly PSC’s were not caught by the legislation, as they do not meet all the conditions. The main target was agency staff. Agencies also now need to submit quarterly electronic returns detailing payments made to those not on agency payroll, which flags up to HMRC those operating via PSC’s or Umbrella companies.
2. Travel expenses of workers providing services through intermediaries – April 2016
Umbrella Companies are another form of intermediary company. They treat the IR35 legislation as applying and pay individuals salary only, with the relevant PAYE and NI deductions. The Umbrella Company carries out all the administration with the individual paying them a small fee for their services.
However, individuals employed via an Umbrella company, rather than via an Agency, had a major advantage – the ability to deduct travel expenses on the basis they operated at a temporary workplace. As a result the take home pay for the individual employed via the Umbrella Company was greater than their Agency counterpart.
HMRC felt this to be unfair so introduced legislation removing the ability to claim travel expenses. A temporary worker employed by an intermediary is no longer deemed to be providing their services at a temporary office if under the SDC of the end client. This in effect caught all but a very small number of individuals.
What of those operating via a PSC and not under IR35? Most operating in this manner will argue they are not caught by SDC and whether this is the case or not in practice this specific piece of legislation is unlikely to intervene.
With the tax benefits removed from Umbrella Companies their future role remains unclear. Already we are aware of a number of agencies who will no longer take on an individual operating via an Umbrella Company and the Umbrella Company operators themselves are now marketing alternative payroll solutions.
3. Taxation of Dividends – April 2016
Whilst the legislation above may not apply to PSC’s the dividend tax changes specifically targeted them. From April 2016, the classic PSC remuneration strategy of paying an individual a salary up to the personal allowance level and then dividends up to the higher rate threshold will result in an additional tax liability of around £2,000 per annum.
4. Off–payroll appointments in the public sector – April 2017
The application of this legislation seems certain to cause much dispute in the years to come. Once again PSC’s are targeted and importantly there is a responsibility shift from the PSC to the contracting company. The public body will need to determine whether tax and NI should be deducted and are also responsible for the collection; they then pay the PSC the net amount.
HMRC have announced they are developing a ‘simple and straightforward digital tool’ to determine whether the rules apply, which is certain to be controversial. If we consider that the current employed/self-employed test is based on years of case law, the idea that a simple HMRC tool can suitably deal with this matter seems implausible. More cynical commentators have already suggested that the details will be entered into the digital tool and the answer will always be that the individual in question is employed. HMRC may of course point out that in practice those operating PSC’s under the current rules always appear to come up with a self-employed conclusion!
It is widely anticipated that if HMRC deem the public sector changes to be a success they will seek to apply these rules to the private sector as well. As noted above it seems unlikely that the implementation will be smooth, particularly in relation to the digital tool; therefore any changes would appear unlikely to be imminent.
Where in the past the risk has always been perceived to be with the PSC, the public sector rules have started to shift this safeguard. Therefore moving forward employers will need to take care and be aware of how the ever changing rules apply to them and the underlying risks.
As things stand PSC’s are still governed by the IR35 legislation, providing they engage with the private sector. However, the change to the dividend regime has already began to remove certain benefits associated with the structure.
With Uber set to appeal the tribunal decision this particular case will likely run in the courts for the foreseeable future as neither party will back down due to the amounts at stake. Of more immediate concern to employers and those operating via PSC’s are the public sector changes and whether they are expanded to cover the private sector.
Campbell Dallas has a specialist team dealing with the issues mentioned above. If you are an employer or operate via a personal service company and would like more information on how the rules may impact your business, please get in touch.
0141 886 6644
The information in this blog should not be regarded as financial advice. This is based on our understanding in January 2017.