Contractors' Questions: Am I caught by the false self-employment rule?

Contractor’s Question: Is it true that if I opted to become a sole trader and got assignments via a recruiter that I would have to pay employment taxes, unless I could prove I am not supervised, directed and/or controlled in my work at the client(s) site(s)?

If so, what proof or evidence that I’m not falsely self-employed would be accepted by HM Revenue & Customs? Overall, I’m confused. I read this latest guidance from HMRC but am still none the wiser. I thought that, because recruiters don’t tend to deal with sole traders (as this ContractorUK piece states), there wouldn’t be legislation between the two parties, but obviously I’m wrong. Am I missing something here?

Expert’s Answer: In short, the answer to your initial question is ‘yes.’ If you are a sole trader supplied to work for a hirer by a recruitment agency, that agency is obliged by legislation (effective from April 6th 2014) to deduct employment taxes (PAYE income tax and NICs), and pay employer’s NICs on payments to you as an individual, for the performance of services for the hirer -- unless it can demonstrate that the manner of the sole trader’s provision of services is not subject to (or to the right of) supervision, direction or control (SDC), of any person.

This is a very difficult test to meet, given that there is little or no case law on what is meant by SDC as to the manner the services are performed. Agencies are not therefore willing generally to pay gross because of the risk of having to pay employment taxes.

The side effect of this is that there is no longer an incentive for an individual to operate as a sole trader where they are being supplied to a hirer by an employment business. Incidentally, legislation that prevented employment businesses paying individuals gross has been in place for many years; it is simply that the tests have been tightened and ‘loopholes’ in the previous legislation removed.

The Expert was Adrian Marlowe, managing director of Lawspeed, a recruitment law firm.

Editor’s Note: Further Reading –

Contractors’ Questions: Who’d be liable for false self-employment?
Contractors’ Questions: Will false self-employment rules hit PSCs?
Contractors’ Questions: Do the onshore intermediary rules exempt composites?