The budget, HMRC legislation and the broadcast freelancer

George Osborne’s on a mission.

As you know, he’s been looking everywhere for money he can scrape together through cuts and new legislation, while reclaiming cash that’s been, in his view at least, wasted, squandered or simply lost.

The back of Britain’s sofa has never seen such attention.

As much as £400m in income tax receipts and National Insurance contributions is reportedly lost each year as a result of tax avoidance by umbrella companies placing temporary workers.

And Mr Osborne wants to reclaim it.

Described in December 2014 as a “potential way forward” and announced in his March 2015 budget, the chancellor revealed changes to the rules that affect freelancers and umbrella companies, as we reported in our post here::

“…we will stop employment intermediaries exploiting the tax system to reduce their own costs by clamping down on the agencies and umbrella companies who abuse tax reliefs on travel and subsistence – while we protect those genuinely self-employed.”

The result was the removal of their tax relief claims on home-to-work travel costs and sustenance expenses.

“The aim of this change,” the government states, “is to remove an unfair tax outcome, and level the playing field by putting all temporary workers on an equal footing in tax terms regardless of how they are engaged.”

This is where it might affect you…

But the chancellor hasn’t stopped there: in his summer budget, on July 8^th 2015, he said:

“We’re consulting today on how to deal with the increasing abuse of the rules around disguised employment when working through a personal service company.”

A ‘personal service company’ can be loosely defined as a limited company whose shares are largely or wholly owned by the sole director who delivers some kind of service for an end client.

He later added that he intends to “simplify the taxation of dividends” and told us that “the dividend tax credit will be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers” – a move described by Rowena Mason, political correspondent for The Guardian, as “a major shake-up to stop tax avoidance through use of personal service companies”.

You asked us about HMRC legislation, so we’re answering

Since the more recent budget speech, we’ve been asked numerous questions about how this HMRC legislation affects broadcast industry freelancers since so many parties – including sole-traders, owners of one-person limited companies, employment agencies and umbrella companies are involved – so we wrote this article to address your queries.

What does HMRC want – and why

HMRC have, they say, recently seen increasing evidence of some ‘intermediaries’/recruitment agencies using methods to reduce employment taxes and avoid having to fulfil their legal employment rights and obligations.

So now they want certain intermediaries to provide details – at least once every three months or face a financial penalty.

HMRC want to know about…

• the workers they supply and treat as employees
• those workers’ assignments
• the payments made to those contractors
  • when Pay As You Earn (PAYE) wasn’t operated
  • or the individuals receive PAYE earnings from elsewhere (for example, through an umbrella company or their own limited company)
  • or because they are not under the agency’s control or supervision

As one contractors’ community puts it:

“Agencies are going to drown in data.”

Are you the owner of a one-person limited company?

HMRC says:

“One-person limited companies, or personal service companies, that only supply a client with one worker don’t have to send reports to HMRC.”

…meaning if you’re given work via an agency, you’ll be included in the report that that agency (which has the contract with the end client) sends to HMRC – whether you like it or not.

It also means that as one of Frame 25’s pool of talented freelancers, it seems we might have to ask you to play a part as we continue to work to meet our legal obligations.

Does your limited company supply more than one worker?

If your company supplies more than one individual, including any subcontracted workers, it’ll be acting as an intermediary and will have to send reports, too.

Here’s a supporting document from the government to help intermediaries.

The deadline for the first quarterly report to be sent to HMRC was August 5^th 2015 and covered the three months from April 6^th 2015 to July 5^th 2015.

It could’ve been worse…

While agencies will have to shoulder the burden and costs of the extra work, things could actually have been a whole lot worse.

Following a very brief consultation last year, HMRC did back down on their demand for personal information such as workers’ job titles, hours worked and passport numbers – all of which agencies won’t now have to ask workers for.

Here’s what is required in reports:

• the full name of the agency representative, as well as the company’s address, postcode and PAYE reference
• the start and end dates of the reporting period
• workers’ personal details
• engagement and payment details

And the following information must be disclosed for each worker:

• title
• full name
• date of birth
• gender
• address and postcode
• National Insurance number (if they have one)
• passport number (if they don’t have a National Insurance number)
• national identity card number (if they don’t have a National Insurance number or a passport number)
• unique taxpayer reference (if they’re self-employed or a member of a partnership)

Something else to consider – IR35

Along with clearly being able to trace payments made to people via agencies, this move by the government is likely to reveal those who fall within IR35, the legislation that’s designed to eliminate tax avoidance through workers’ use of intermediaries, or agents – knowledge of which can determine how much tax you pay. We explain it fully here.

In summary

Contractors working via an umbrella company must be wondering what’s hit them recently and questioning the worth of their monthly fee now that the once-attractive tax relief has been removed – which was the main reason they used umbrella companies in the first place.

And intermediaries of all descriptions must be thinking that they’re increasingly being asked to do the taxman’s work.

So what options remain for contractors? Offshore umbrella companies? Limited partnerships?

Time – and possibly another Frame 25 blog post – will tell.