False self-employment legislation
Background
Limited company and umbrella contractors are outside of the False Self-Employment legislation scope, which mainly targets the self-employed who use their sole trader status to avoid employment taxes. The Onshore employment intermediaries: false self-employment legislation was introduced in the 2014 Budget and came into effect on 6 April 2014. Its intention ensures that recruitment agencies hiring self-employed sole traders who are really employees on behalf of clients deduct income tax and National Insurance Contributions (NICs) from gross pay at source.
The test of false self-employment requires the agency to prove an absence of supervision, direction and control of the worker by the client. If any supervision, direction, and control element is present, then the legislation applies, and the agency must deduct income tax and NICs.
The agency must prove the absence of supervision, direction and control
It is the agency’s responsibility to assess whether there is any supervision, direction and control by the client over the worker. HMRC assumes that these are present, and it is the agency’s responsibility to prove otherwise.
Under the rules, the agency must automatically deduct income tax and NICs from the worker’s gross pay as if they were an employee. The rules also apply if the “individual personally provides or is personally involved in the provision of services”.
That means that even if there is a substitution clause and a worker uses someone else to do some or part of the work, because they elected and paid the substitute, it qualifies as being “personally involved” in providing the services.
No conflict with IR35
The false self-employment rules operate independently of and in parallel with IR35, so the classic tests of employment and principles of substitution, control and mutuality of obligation still apply to limited company contractors.
Contractors already inside IR35 and either paying themselves a full salary or a deemed payment are already paying income tax and NICs, and so the legislation would not apply.
