How will locum social workers operating through their own Personal Service Company (PSC) be affected by new intermediary reporting requirements under the amended agency legislation?
From August 2015, under Income Tax (Pay As You Earn) (Amendment No.2) Regulations 2015, the first reports from intermediaries (most commonly recruitment/employment agencies) will now fall due and must now advise HM Revenue & Customs (HMRC) of any workers who have been paid gross, which will usually be via their own PSC or an umbrella company (the individual is an employee of the umbrella company, but the agency is engaging with the umbrella not the individual).
If we focus on those individuals who have their own PSC, then agencies will be reporting details about the PSC and the individual because the agency will not have deducted PAYE. This applies to every sector – not just the social care sector – and no PSC engaged via an agency should escape these reporting requirements.
What this means is that HMRC will have a huge list of PSCs engaged in that typical chain of:
End client – Agency – PSC – Individual
Logic suggests that HMRC will have a list of PSCs where IR35 might apply to their engagement – and might is the key word.
HMRC’s state of the art analytical Connect system will, no doubt, be able to cross reference and narrow down the list into something more definable e.g. trades/sectors, turnover, dividend to salary ratios etc.
So, the premise that all PSCs are at greater risk is correct, but the issue for social workers, I believe, is whether many of them are operating outside of IR35.
The three fundamental factors which must all be present before a contract can be said to exist were laid down by Justice MacKenna in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968:
- Personal service must be provided by the worker
- Mutuality of obligation must exist
- The engager must have a significant right of control, in particular over the manner in which the work is done.
The judgement did determine that other components present must be consistent with a contract of service. Elements such as ownership of significant assets, financial risk and the opportunity to profit are not consistent with a contract of service and should also be taken into account where the three key factors do not provide a conclusive result.
The key questions which follow the key factors are:
- Can the individual social worker send a substitute? I suspect that in most cases the answer is ‘No’ i.e. the social worker’s personal service is a requirement of the role.
- Does the social worker have to accept work offered by the Department engaging them? The answer could be ‘No’, which would be a positive, but evidence of rejected work would probably be required to appease HMRC. Even if the social worker can decline work, there is still the issue of ‘mutuality within the engagement’ i.e. is there an obligation to complete any assignment once accepted? Please see the reference below to the Court of Appeal case of Prater v Cornwall County Council 2006.
- Is the social worker being controlled? Unfortunately, with the introduction of the reporting requirements, control is now considered more widely as direction, supervision or control. Based on the wider application of the control test, it is possible that HMRC may conclude the social worker is controlled.
These comments are made without seeing any specific contracts or knowing the individual working practices of any particular social worker. However, if they resonate with you or any of your social worker clients, a contract review may be prudent because of IR35 as opposed to the new agency reporting requirements.
Prater v Cornwall County Council 2006
From the conclusion:
(1) During that period 1988 to 1998 Mrs Prater had a number of work contracts with the Council. The issue was whether or not they were contracts of service. If they were, she enjoyed continuity of employment, notwithstanding the breaks between the contracts.
(2) Under the contracts Mrs Prater was engaged and was paid to teach individual pupils unable to attend school.
(3) There can be no doubt that, if she was engaged to teach the pupils in a class, collectively or individually, at school under a single continuous contract to teach, Mrs Prater would have been employed under a contract of service.
(4) It makes no difference to the legal position, in my view, that she was engaged to teach the pupils out of school on an individual basis under a number of separate contracts running concurrently or successively.
(5) Nor does it make any difference to the legal position that, after the end of each engagement, the Council was under no obligation to offer her another teaching engagement or that she was under no obligation to accept one. The important point is that, once a contract was entered into and while that contract continued, she was under an obligation to teach the pupil and the Council was under an obligation to pay her for teaching the pupil made available to her by the Council under that contract. That was all that was legally necessary to support the finding that each individual teaching engagement was a contract of service. Section 212 took care of the gaps between the individual contracts and secured continuity of employment for the purposes of the 1996 Act.’
If you would like to discuss any of the points raised in this article, then please ring 0845 223 2727 and ask to speak to Paul Mason.
Author: Paul Mason, National Contractor Manager
E mail: firstname.lastname@example.org