Understanding the UK’s ‘employment intermediary’ rules

Are you an ‘employment intermediary’, otherwise known as an agency supplying workers to UK end-user organisations? Or alternatively do you use consultants and so need to file quarterly returns to Her Majesty’s Revenue & Customs (HMRC)?

The answers to these questions have taken on a much greater significance in recent times than was previously the case due to HMRC’s surprise on failing to receive as many returns as expected, following a legislative change in April 2015 when The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015 were introduced. But even though there has undoubtedly been a significant rise in the number of intermediaries and ‘false’ self-employment situations, the new rules also do not appear to have been particularly widely publicised either inside or outside of HMRC.

Another important consideration is that a recently-closed consultation on whether to introduce ‘off-payroll’ rules into the private sector has generated a lot of press coverage. But if the rules are introduced and the public sector situation is anything to go by, one of the first places that HMRC will likely focus on is intermediaries’ reports.

The definition of an ‘employment intermediary’

Any person or company that provides services to an end-user company from workers who are not on the payroll but are instead part of a wider supply chain, will need to consider whether they have a reporting obligation in light of the new rules. Specified intermediaries can range from large organisations to small enterprises and even individuals as long as workers are supplied to an end-client. This definition applies across all industry sectors.

Intermediaries are required to submit quarterly returns to HMRC if payments have not been taxed under Pay As You Earn (PAYE) or been subject to National Insurance Contributions (NICs).

HMRC has the power to obtain the necessary information under The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015 rules, which affect:

• Self-employed contractors who are engaged via ‘intermediaries’ and currently pay tax as a self-employed person;
• The ‘intermediary’ businesses themselves.

There are statutory penalties of up to £1,000 for late reports, with possible tax-based penalties for incomplete or incorrect returns.  

You must send a quarterly return to HMRC if at any time during a reporting period you:

• Have acted as an agency;
• Have a contract with a client;
• Provide more than one worker’s services to a client as a result of your contract with that client;
• Supply the worker’s services in the UK, or from an individual resident in the UK if services are provided overseas;
• Make one or more payments for services, which includes payments to third parties.

When a number of parties provide workers in a contractual chain, the HMRC reporting obligation rests with the last intermediary/agency before the end user, otherwise known as ‘Intermediary One’. If there are several intermediaries in the chain, each will need to contact the next one down in order to request the above information and enable ‘Intermediary One’ to submit their return.

This situation applies even if you withhold tax under the ‘Construction Industry Scheme’. On the other hand, if the workers you supply provide their services to oil and gas industry companies operating wholly on the UK continental shelf at sea, it will not be necessary to send reports to HMRC.

The new reporting requirement likewise does not apply if there are special exemptions for certain types of workers, such as actors, entertainers, photographic or artists’ models, or if services are provided wholly at a worker’s own home among other things.

Could agency rules apply?

If you supply workers to an end-company, you could find that the rules introduced in April 2014 apply. You will be required to operate PAYE/NICs if:

• An individual personally provides services to another business, even though they are not an employee of either the agency or the business;
• An individual is subject to (or has a right to) supervision, direction or control relating to how they provide those services.

That a worker can exercise a profession that is subject to trading income and some of the engagements they undertake are liable for Class 2/4 NICs, is not in itself enough to remove the individual from the scope of these requirements.

The fact that workers are professionally qualified, skilled or experienced may mean they are not, in practice, subject to detailed supervision, direction or control. In this case, there will usually still be a right of supervision, direction or control that can be exercised on the rare occasion that the need arises.

If you do not have a PAYE/NICs obligation under these rules, it is important to take the intermediaries’ reporting activities into consideration. More information about these situations can be found on HMRC’s website. 

Who should be included on an intermediary’s return?

Any self-employed workers, including people who are members of a partnership or directors of limited companies, who personally provided their services to a client through an intermediary, should be included in the intermediary’s return.

What data must be included in the return?

As of 6 April 2015, it has been necessary to report quarterly - and intermediaries must also specify why they are not required to apply PAYE and NICs on payments. They must also include data on the workers concerned and what payments were made. The return must be submitted in the specified format and uploaded to the HMRC website. More information can be found at the Gov.uk website. 

When is the return due?

It is possible to amend or replace information returns until the end of the next tax quarter.

Examples of when a return might be required

• As an intermediary, you are asked to help a client by seconding someone to them to prepare a draft document for a property transaction. You send a self-employed person. In this instance, a report would be required. But if the contract involves the firm drafting of a sale agreement that takes into account the time spent by the individual in preparing it, no report would be needed.
• A limited liability partnership (LLP) has a service company connected to it. All self-employed and employed workers are engaged via a service company before being provided to the LLP. In this case, it would be necessary to take the agency rules from April 2014 into consideration and, if they do not apply, think about writing an intermediaries’ report.
• XY Ltd enters into a contract with Z Ltd. Under the contract, XY Ltd will supply two installation workers to Z Ltd. But:
  • XY Ltd does not have an employee with the requisite skills and so, in order to fill its obligations to Z Ltd, enters into a contract with ABC Ltd;
  • ABC Ltd is a personal services company;
  • ABC Ltd invoices XY Ltd on a day-rate basis and then XY Ltd invoices Z Ltd, also on a day-rate basis, making a profit by applying a mark-up to the day rate;
  • XY Ltd must make a report and include each worker's specified personal details and working dates for each client. They also need to incorporate the total payments made for each worker during that quarter, reason code D (Ltd company), and provide an indication of whether VAT was charged. 

Conclusion

Organisations using off-payroll workers should regularly review their procedures to determine if they have a reporting requirement, either when supplying workers to others, or providing them to connected organisations. Key questions should also be considered such as:

• Do you have workers that you pay for without deducting PAYE/NICs?
• Do you use these off-payroll workers to fulfill customer contracts?
• Does the worker provide their services in the UK or are they resident in the UK if the service is provided overseas?

If the answer to all of the above questions is ‘yes’, it may be necessary to write a report. You should also review all of the applicable rules and, if needs be, set up a process for capturing the required information on a regular basis in order to determine if a quarterly return is required on each occasion.

HMRC has also set up a special unit to review these new returns - and focus on intermediaries generally. The returns give the tax authority more insight into the payments made to workers outside of payroll.

This situation could lead to status enquires being conducted on intermediary companies if workers are taken on on a self-employed basis or via a Personal Service Company via IR35. Any organisation that is unsure of their reporting obligations here should seek specialist advice.

Susan Ball is a partner at Crowe UK and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

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Are you an ‘employment intermediary’, otherwise known as an agency supplying workers to UK end-user organisations? Or alternatively do you use consultants and so need to file quarterly returns to Her Majesty’s Revenue & Customs (HMRC)?

The answers to these questions have taken on a much greater significance in recent times than was previously the case due to HMRC’s surprise on failing to receive as many returns as expected, following a legislative change in April 2015 when The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015 were introduced. But even though there has undoubtedly been a significant rise in the number of intermediaries and ‘false’ self-employment situations, the new rules also do not appear to have been particularly widely publicised either inside or outside of HMRC.

Another important consideration is that a recently-closed consultation on whether to introduce ‘off-payroll’ rules into the private sector has generated a lot of press coverage. But if the rules are introduced and the public sector situation is anything to go by, one of the first places that HMRC will likely focus on is intermediaries’ reports.

The definition of an ‘employment intermediary’

Any person or company that provides services to an end-user company from workers who are not on the payroll but are instead part of a wider supply chain, will need to consider whether they have a reporting obligation in light of the new rules. Specified intermediaries can range from large organisations to small enterprises and even individuals as long as workers are supplied to an end-client. This definition applies across all industry sectors.

Intermediaries are required to submit quarterly returns to HMRC if payments have not been taxed under Pay As You Earn (PAYE) or been subject to National Insurance Contributions (NICs).

HMRC has the power to obtain the necessary information under The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015 rules, which affect:

• Self-employed contractors who are engaged via ‘intermediaries’ and currently pay tax as a self-employed person;
• The ‘intermediary’ businesses themselves.

There are statutory penalties of up to £1,000 for late reports, with possible tax-based penalties for incomplete or incorrect returns.  

You must send a quarterly return to HMRC if at any time during a reporting period you:

• Have acted as an agency;
• Have a contract with a client;
• Provide more than one worker’s services to a client as a result of your contract with that client;
• Supply the worker’s services in the UK, or from an individual resident in the UK if services are provided overseas;
• Make one or more payments for services, which includes payments to third parties.

When a number of parties provide workers in a contractual chain, the HMRC reporting obligation rests with the last intermediary/agency before the end user, otherwise known as ‘Intermediary One’. If there are several intermediaries in the chain, each will need to contact the next one down in order to request the above information and enable ‘Intermediary One’ to submit their return.

This situation applies even if you withhold tax under the ‘Construction Industry Scheme’. On the other hand, if the workers you supply provide their services to oil and gas industry companies operating wholly on the UK continental shelf at sea, it will not be necessary to send reports to HMRC.

The new reporting requirement likewise does not apply if there are special exemptions for certain types of workers, such as actors, entertainers, photographic or artists’ models, or if services are provided wholly at a worker’s own home among other things.

Could agency rules apply?

If you supply workers to an end-company, you could find that the rules introduced in April 2014 apply. You will be required to operate PAYE/NICs if:

• An individual personally provides services to another business, even though they are not an employee of either the agency or the business;
• An individual is subject to (or has a right to) supervision, direction or control relating to how they provide those services.

That a worker can exercise a profession that is subject to trading income and some of the engagements they undertake are liable for Class 2/4 NICs, is not in itself enough to remove the individual from the scope of these requirements.

The fact that workers are professionally qualified, skilled or experienced may mean they are not, in practice, subject to detailed supervision, direction or control. In this case, there will usually still be a right of supervision, direction or control that can be exercised on the rare occasion that the need arises.

If you do not have a PAYE/NICs obligation under these rules, it is important to take the intermediaries’ reporting activities into consideration. More information about these situations can be found on HMRC’s website. 

Who should be included on an intermediary’s return?

Any self-employed workers, including people who are members of a partnership or directors of limited companies, who personally provided their services to a client through an intermediary, should be included in the intermediary’s return.

What data must be included in the return?

As of 6 April 2015, it has been necessary to report quarterly - and intermediaries must also specify why they are not required to apply PAYE and NICs on payments. They must also include data on the workers concerned and what payments were made. The return must be submitted in the specified format and uploaded to the HMRC website. More information can be found at the Gov.uk website. 

When is the return due?

It is possible to amend or replace information returns until the end of the next tax quarter.

Examples of when a return might be required

• As an intermediary, you are asked to help a client by seconding someone to them to prepare a draft document for a property transaction. You send a self-employed person. In this instance, a report would be required. But if the contract involves the firm drafting of a sale agreement that takes into account the time spent by the individual in preparing it, no report would be needed.
• A limited liability partnership (LLP) has a service company connected to it. All self-employed and employed workers are engaged via a service company before being provided to the LLP. In this case, it would be necessary to take the agency rules from April 2014 into consideration and, if they do not apply, think about writing an intermediaries’ report.
• XY Ltd enters into a contract with Z Ltd. Under the contract, XY Ltd will supply two installation workers to Z Ltd. But:
  • XY Ltd does not have an employee with the requisite skills and so, in order to fill its obligations to Z Ltd, enters into a contract with ABC Ltd;
  • ABC Ltd is a personal services company;
  • ABC Ltd invoices XY Ltd on a day-rate basis and then XY Ltd invoices Z Ltd, also on a day-rate basis, making a profit by applying a mark-up to the day rate;
  • XY Ltd must make a report and include each worker's specified personal details and working dates for each client. They also need to incorporate the total payments made for each worker during that quarter, reason code D (Ltd company), and provide an indication of whether VAT was charged. 

Conclusion

Organisations using off-payroll workers should regularly review their procedures to determine if they have a reporting requirement, either when supplying workers to others, or providing them to connected organisations. Key questions should also be considered such as:

• Do you have workers that you pay for without deducting PAYE/NICs?
• Do you use these off-payroll workers to fulfill customer contracts?
• Does the worker provide their services in the UK or are they resident in the UK if the service is provided overseas?

If the answer to all of the above questions is ‘yes’, it may be necessary to write a report. You should also review all of the applicable rules and, if needs be, set up a process for capturing the required information on a regular basis in order to determine if a quarterly return is required on each occasion.

HMRC has also set up a special unit to review these new returns - and focus on intermediaries generally. The returns give the tax authority more insight into the payments made to workers outside of payroll.

This situation could lead to status enquires being conducted on intermediary companies if workers are taken on on a self-employed basis or via a Personal Service Company via IR35. Any organisation that is unsure of their reporting obligations here should seek specialist advice.

Susan Ball is a partner at Crowe UK and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

OTHER ARTICLES THAT MAY INTEREST YOU

 Beware the pitfalls of the UK's National Minimum Wage

What will extending off-payroll tax rules to the UK private sector mean?

How to get UK PAYE right for short-term business visitors?