Changes to the law to combat false self-employment

In April 2014, HMRC introduced new measures to combat false self-employment, particularly in the construction sector, following years of union campaigning. In extreme cases, CIS payroll companies were actively marketing conversion of directly employed construction staff to “self-employed” status via a payroll company, as a mechanism for avoiding employer’s national insurance (see UCATT’s 2012 report: The great payroll scandal).

As a result of the legal changes introduced in April 2014, whenever workers are supplied to a hirer through an intermediary such as a CIS payroll intermediary or an employment business, PAYE and NICs must now be deducted at source, unless the intermediary can prove that the worker is genuinely in business on their own account, with no supervision, direction or control by any organisation. In other words, wages can only be paid gross and without deducting NICs if the employment business or agency can prove that the individual is genuinely self-employed. Under the new regime, HMRC treats the intermediary as the employer.

Quarterly reports must be provided to HMRC of any workers who are not subject to PAYE or NICs and the reason why deductions are not being made.

Initially unions cautiously welcomed this rule change. However, as always, new devices for reducing employers’ employment and tax liabilities have emerged. In particular, there has been a significant growth in the use of umbrella companies (see below).