Intermediaries Reporting Requirements: an overview for contractors

Following significant changes to the Agency Legislation in 2014 designed to tackle false self-employment, the intermediaries reporting requirements came into force from April 2015, with further implications for contractors, writes Chris Mattingly, lead compliance specialist at WTT Consulting.

The Intermediaries Reporting Requirements, what’s the point?

The framework requires employment intermediaries placing workers with clients to submit a return to HMRC at least once every tax quarter, for any qualifying payments that have been made to their workers which have not been subject to income tax and NI deductions under Paye As You Earn (PAYE).

The purpose of the intermediaries reporting requirements, therefore, is to help HMRC identify false self-employment and armed with this information, HMRC can better target both workers and intermediaries who are not paying the correct amount of tax, as well as providing a level playing field for those intermediaries who are operating compliantly.

The Intermediaries Reporting Requirements: what the legislation says

The central ‘reporting requirement’ was introduced by The Income Tax (Pay As You Earn) (Amendment No. 2) Regulations 2015, and is triggered when an agency or intermediary directly places one or more of its UK tax resident workers with one or more clients to provide qualifying services under a contract for services.

Where there are multiple intermediaries in the supply chain, it will normally be the intermediary closest to the client who is responsible for submitting the report to HMRC.

Under the legislation, the reporting intermediary is required to retain and preserve records on all non-PAYE transactions for a period of at least three years after the end of the tax year to which they relate. 

Qualifying payments

The report must provide details of each payment where PAYE has not been operated -- and should include payments to overseas workers, who are required to pay tax in the UK; payments where the worker is working in the UK or working temporarily abroad overseas; and Construction Industry Scheme (CIS) workers who are receiving payments on a gross basis.

If there are no qualifying payments made during the reporting period, the intermediary must submit a ‘nil’ report and can only withdraw itself from the reporting requirement by either notifying HMRC they are no longer an employment intermediary or after four nil returns have been submitted.

Oil and gas exemption

If the intermediary only provides workers that work exclusively on the UK Continental Shelf, regardless of whether they are UK tax resident or not, the intermediary will not be required to submit an intermediary report.

Excluded services

While most services qualify for reporting, there are two exclusions.

The first for services provided entirely from the worker’s own home or at other premises which are neither controlled or managed by the client nor prescribed by the nature of the services and work they provide to the client.

The second exemption applies to services provided by actors, singers, musicians, other entertainers, or as a fashion, photographic or artist’s model.

What’s in the HMRC report?

The report is submitted electronically in a prescribed format and should contain details of each qualifying payment; the worker and their address; the reason why PAYE has not been operated; and the details of the third party who provides the worker’s services’, such as the workers Personal Services Company (PSC).

Failure by the reporting intermediary to submit a correct report on time could trigger penalties up to a £1,000 per report.

Intermediaries Reporting Requirements: implications for contractors

Contractors will not be surprised to learn that HMRC will use the information contained within the intermediaries’ report -- blended with many other elements of data at the Revenue’s disposal -- to best determine if the payments that were not subject to PAYE should have been subject to PAYE.

Where payments have been incorrectly treated for tax purposes, there will be consequences for the intermediary who is deemed to be the employer for tax purposes.

While the deemed employer should be responsible for any unpaid tax, in cases where fraudulent information has been provided, liability could shift to another party in the supply chain.

In a worst-case scenario, the contractor could find themselves subject to an enquiry and or liability.

Beware of contractual indemnities

Contractors should also be mindful of any contractual indemnities they have provided to their clients.

These indemnities may explicitly indemnify the intermediary and those above them in the supply chain against any and all tax losses they incur as a result of the engagement, meaning those losses could be transferred to the contractor’s PSC, or the contractor personally.

Contractors should always seek to have these indemnities removed from their contracts at the outset and where they remain uncertain, they should always seek professional advice before acceptance.