Temporary workers and employment agencies to pay more

Draft Finance Bill 2014

Workers supplied through intermediaries, and specifically employment agencies, are being targeted to raise significant amounts in extra pay as you earn tax and national insurance contributions.

Temporary workers make up around 5 per cent of the workforce and are a popular choice for employers with fluctuating staffing needs. The businesses who supply them sometimes employ them directly, or sometimes use agency contracts or sub-contractors. The tax, national insurance contributions (NICs) and employment law position is different in each case, so end-users have been going for the cheapest options, which often involve reduced tax costs (and less employment red tape).

Where the law stands…

Those temporary workers who are employed under an ‘umbrella’ employment contract which covers every separate assignment that they undertake are always subject to PAYE and NICs deductions.

Workers on agency contracts are not generally employed by anyone, but the agency is obliged to operate PAYE and make NI deductions from their wages as if they were employees.

Cracking down

Following a consultation period ending in February 2014, with effect from April 2014 the Government is taking action against those temporary workers who are sub-contractors and supplied by an employment agency.The PAYE and NI rules for temporary workers currently don’t apply if the worker is not obliged to provide personal services, accepting that a self-employed worker finding work through an agency is still self-employed and should be taxed as such. But that is set to end from 6 April 2014.

From that date, if the worker personally carries out the work, or is involved in the provision of the services, the payment will have to be payrolled, so the worker will have tax and employee NICs (at 12 per cent) deducted at source, and the agency will become liable for employer NICs (at 13.8 per cent). The worker’s own NI cost is therefore 3 per cent higher than the 9 per cent paid as a self-employed person, and the employing agency has a completely new liability. With some agencies, workers are free to send somebody else to do the contracted work, which has the effect of taking the payments out of the scope of the PAYE and NICs rules. This freedom will, in future, not prevent the operation of PAYE and NICs as if they are an employee.

The Government estimates that 200,000 construction workers and 50,000 other self-employed people will now be subject to PAYE, raising the tax and NICs take by around £520m next year. It will be interesting to see how hard-pressed construction businesses react to the extra costs.

Not the end of the story

Imposing PAYE on subcontractors who are self-employed is not the end of the story. Some employment intermediaries have also been operating from outside the UK to avoid UK employer NICs, and they are to pay an extra £85m per annum. 

In the oil and gas sector, employment of North Sea rig workers by a non-UK entity has (legitimately) been the normal way of doing things for many years, and those employers with no UK place of business have not been subject to employer NI liabilities. That too is to change, with a new liability imposed on the intermediary which ultimately provides the worker to a UK entity.

In other business sectors, there have been some offshore employers and UK end users who consider that the existing rules don’t apply. The new rules will ensure that PAYE and NICs are deducted either by an intermediary or end user in the UK.