The new umbrella tax legislation: a word of warning

The long-awaited draft legislation on the PAYE debt liabilities of umbrella companies arrived on Monday. The derails are largely uncontroversial, and the Government is to be commended on taking a pragmatic approach to the issue, simply making agencies (or end-clients where there are no agencies) jointly and severally liable with the umbrellas. Considering what they might have done this is welcome news.

However there is a sting in the tail, directed especially at those intermediaries who do not operate PAYE because the people that the are paying are genuinely self-employed. There are quite a few of these intermediaries in the construction industry, who do in fact deduct tax under the Construction Industry Scheme but in a rather lesser quantity than they would do if forced to operate PAYE. They now might have to operate PAYE, and for reasons largely outside their control and left rather vague in explanation. Some of them call themselves ‘CIS Umbrellas’, a moniker that they would be well advised to drop because of the expectations that it raises.

Here’s how. Most of the new law assumes that the umbrella worker has a contract of employment with the umbrella company, and only applies if he does (this is in the definition of the term ‘umbrella company’). However the proposed section 61Z1 – the last clause in the new draft law – introduces the concept of a ‘purported umbrella company’ – one where the individual is not employed by the umbrella but ‘it is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the individual, would assume that a substantial proportion of amounts provided to the purported umbrella company in respect of the services will be paid to the individual as earnings’.

Let’s unpack this a little. There have to be a reasonable supposition (‘reasonable to suppose’) and an assumption (‘would assume’). The assumption has to be on the part of a party to the ‘arrangements’, which might include the agency (or agencies) and the client in the chain, which seems fair enough. (Be very careful whenever you see the word ‘arrangements’ in a tax statute – it can mean almost anything, and is certainly not confined to things that are legally enforceable.) But the supposition does not. So who can make one? The client? The man on the Clapham Omnibus? The average HMRC inspector? All that the draft law says is that ‘it is reasonable to suppose’ – which can mean anyone. Maybe a tax tribunal judge will restrict this a bit some time in the future, but until that happens we are in the dark.

What this allows ‘anyone’ to do is to claim to read the mind of a participant in the arrangements, to suppose what that participant might assume about the worker’s employment status. Let us take the client as an example – the client is the participant least likely to be actually asked. This client might be a large construction company that has asked a large agency to source a lot of skilled labour for a big project – electricians, joiners, plumbers, bricklayers, forklift drivers: you name them, there they are – and is not all that bothered about their employment status as long as they are compliant: they think that that is the agency’s business. All that they have specified is that there are to be no personal service companies in the chain, as that would give them obligations to issue status determination statements and such-like – they don’t understand things properly and don’t want to be bothered with that. That client’s project manager is just the sort of person who might ‘assume’ something without giving it any real thought.

He might assume that everybody was ‘on the books’; he might equally assume that nobody was as to his knowledge skilled construction workers are generally self-employed; he might also assume that proper tests have been conducted by the agency to determine whether or not the agency rules

apply. Which of these assumptions could an outsider to ‘reasonably suppose’, bearing in mind that an ‘assumption’ is something that by its very nature something that is not the result of any detailed enquiry? Is the answer perhaps ‘all three’?

If it is, then the one that matters for this purpose is the assumption that the individuals are employed, as that one, as long as the supposition behind it is reasonable, triggers the law and the other two do not, even if they are better suppositions.

Now look at this from the point of view of the agency and the paying intermediary. The contract between the paying intermediary and the individual is patently not a contract of employment, and the agency has done due diligence work to satisfy itself that the agency rules do not apply. But this isn’t good enough. If some hypothetical outsider whom they don’t even know reasonably supposes that the client – who doesn’t want to get involved and so they have not actually asked – assumes that the individual is working under a contract of employment, that is enough to trigger the PAYE obligations on both the paying intermediary and the agency. It not only alters the party responsible for paying the individual’s tax; it creates an employer’s National Insurance out of nothing.

The only remedy for this that I can see is for the paying intermediary and the agency to make it abundantly clear to all concerned – particularly the client – that they are paying under a self-employed arrangement with no deduction of tax (or CIS only if that is the case), every time that they take on someone new. Even that does not strike me as foolproof but it ought to go a long way.