Agencies and the Link to IR35
Where an agency or person is involved in the supply of a worker to an end client, contracts are likely to be offered work on a PAYE basis next year, basically because agencies enter into engagements with clients which state that workers will work under the control of the client.
Agencies are therefore required to pay workers as employed workers, i.e. under PAYE, due to what’s known as agency legislation. This following is an extract taken from Chapter 7, Part 2 of Income Tax (Earnings and Pensions) Act 2003, the ‘Application of Provisions to Agency Workers.’
44 (2) If this section applies—
(a) the services which the worker provides, or is obliged to provide, to the client under the agency contract are to be treated for income tax purposes as duties of an employment held by the worker with the agency, and
(b) all remuneration receivable under or in consequence of the agency contract (including remuneration which the client pays or provides in relation to the services) is to be treated for income tax purposes as earnings from that employment.
However, partly to protect the rights of genuinely self-employed business owners who may use agencies to source contracts, there are three clauses which are provided under the above legislation, and these allow agencies to pay workers under invoice without the deduction of employment taxes and these are;
- The agency is paying a company, not a person
- The worker isn’t working under supervision, direction or control
- Another company operates PAYE on the worker’s income
The majority of mainstream agencies tended to plump for the first option, although the third option of paying workers via 2nd tier agencies or umbrella companies is on the increase.
What’s this got to do with the new IR35 rules?
The problem is, HMRC saw a huge rise in limited companies over the last ten years, many of which were involved in working via agencies, but there was no corresponding rise in tax and NI receipts. So, HMRC figured that many, many agency workers, who were working under the control of a hirer, were not operating IR35 properly and this is exactly the reason given when challenged about the new rules.
Those new rules have transferred the responsibility for operating IR35 to large hirers, covering the majority of agencies, so obviously paying workers via their own limited companies will no longer be viable which means that agencies are left with offering work under PAYE direct or with employment via a third party employer, e.g. an umbrella company.
For people who were self-employed before they took on agency work, it could be that agency contracts may no longer be worthwhile, while for other agency workers it does seem that it’s more or less a fait accompli, and going back into employment and paying employment taxes is the future.