Employment Agency: Facilitated ‘False Self Employment’

From time to time there are legal cases which serve to remind everyone of the importance of compliance when employing contingent labour.

A recent example is that of healthcare employment agency K5K Limited which has recently been ordered to pay a £260,991.21 tax bill after their appeal regarding ‘Section 44’ legislation was dismissed at a First Tier Tribunal hearing.

Sitting within sections 44 to 47, Chapter 7 of Part 2 of Income Tax (Earnings and Pensions) Act 2003 and the Social Security (Categorisation of Earners) Regulations 1978, the so-called Agency Legislation targets employment intermediaries facilitating false self-employment to avoid employment taxes.

As a result of widespread abuse, the Agency Legislation was significantly amended in April 2014. These updates introduced new anti-avoidance provisions and a new record-keeping and quarterly returns routine. They also introduced changes to how HMRC determine which party would be responsible for deducting and remitting income tax under PAYE, and who must deduct, pay, and remit Class 1 National Insurance contributions.

The verdict for K5K highlights HMRC’s increasing focus on recruitment agencies where they believe there is a possibility those businesses have facilitated what is known as ‘false self-employment’.
Section 44 – what you need to know

‘Section 44’, commonly referred to as the ‘agency legislation’ and ‘onshore intermediaries’ legislation, was introduced in 2014 to prevent employment agencies from supplying sole traders where a status determination would consider those workers to be employees.

If the onshore intermediaries’ legislation is not adhered to and ‘false self-employment is determined to exist, the employment agency, as “intermediary 1”, is liable for unpaid tax and national insurance contributions that ought to have been paid under an employment relationship.

This is in addition to potential interest and any penalties issued by HMRC.

According to the First Tier Tribunal, K5K Limited provided workers as sole traders to a client despite the engagement reflecting employment, and consequently, K5K Limited was deemed liable for unpaid employment taxes amounting to £260,991.21.

What should recruitment agencies learn from this?

This case shows that facilitating workers into the wrong employment status can have significant tax implications for employment agencies. As a result, a thorough assessment of both the contract and the working practices of contractors is now even more essential than ever before.

The onshore intermediaries’ legislation 2014 is a lesser-known piece of tax legislation in many sectors but the sums involved in getting this wrong can result in business failure.

As this risk sits firmly with the recruitment business and not the umbrella or CIS provider, it is critical to ensure such risks are thoroughly assessed by the recruitment business, with the help of genuine expert providers in this area.

This case is evidence that HMRC is now actively scrutinising agencies’ compliance in this area – and this victory will have given them the confidence to increase this activity.

The K5K case highlights the importance of ensuring contracts are properly drafted and that any self-employed sole trader’s working practices are consistent with the contract and are documented and thoroughly and regularly assessed.

Need help?

If you have any concerns or questions, please speak to a member of our team.

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