Last reviewed 14 November 2017

There has been press speculation that Chancellor Philip Hammond is considering, for the November Budget, a raid on freelance workers in “disguised employment” in the private sector. In the haulage sector, this could be relevant to hired-in freelance external transport managers as well as to drivers who are not on the payroll. Whether there is action here or not, the high profile attaching to “disguised employment” continues. In this article, Croner-i tax writer Mark Cawthron, runs through some aspects of this complex subject.

The current playing field

Office for National Statistics figures suggest, apparently, that around 450,000 people earn most of their income through personal service companies (PSCs). From April 2017, reforms were introduced for public sector workers operating in this way, shifting the onus to employers to ensure tax is accounted for correctly under the applicable “IR35” regime. According to HM Treasury, public bodies added 90,000 people to their payrolls in the three months to June 2017, most of whom had been working as contractors.

HM Revenue & Customs (HMRC) expects to reap an extra £265 million in the current tax year, as a result. Any further action the Chancellor did choose to announce here, in relation to the private sector, might presumably also raise significant amounts (one estimate is an annual figure of £1 billion). In terms of raising revenue, maybe an approach targeted by reference specifically to “disguised employment” is the best the Chancellor can look to achieve by way of tax-raising in this area, after the rather ignominious post-Spring 2017 Budget climb-down — when the proposed “across the board” increase in National Insurance contributions (NICs) for the self-employed caused such a furore, at least among Parliamentary colleagues, and had to be abandoned.

A second ongoing “hot topic” is the debate about the employment rights of those working in the gig economy. This is the focus of the recent Uber employment tribunal case (where the Employment Appeal Tribunal has just ruled), though the case does not decide whether the workers concerned are employed or self-employed for tax purposes. But the Office of Tax Simplification, which has been reviewing the gig economy, makes the point that tax issues are raised by gig working in a number of ways, especially as an individual’s status for tax and for employment rights are not always the same. Thus:

  • The individual worker who contracts for a gig: are they employed or self-employed for tax purposes?

  • The platform operator: could they become more involved beyond simply sorting out their own tax position?

  • The company (or individual) who is offering the gig: does or should the hirer have any role in ensuring tax compliance by the worker?

Income tax legislation

The income tax legislation targeting “disguised employment” has for some years had three main planks:

  1. Workers supplied by agencies.

  2. Workers operating through intermediaries, most commonly PSCs (“IR35” legislation).

  3. Workers supplied by Managed Service Companies (MSCs).

These provisions are comprised in Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Where the provisions apply, the agency, the intermediary (or public sector body), or the MSC, as the case may be, has to operate Pay As You Earn (PAYE) on relevant payments.

Workers supplied by agencies

A central question, in determining whether a worker (and the agency) are caught by the agency provisions, is whether “the manner in which the worker provides the services is subject to (or to the right of) supervision, direction or control by any person”.

The legislative provisions generally were tightened up from April 2014, including seeking to ensure that an offshore agency, or any UK intermediary involved in the supply chain for workers, would be liable for any PAYE and NIC that remained due on the payments made to workers. In addition, tax obligations were visited upon the client, rather than the agency, in any case where a “fraudulent document” is created designed to deceive on the subject of the “supervision, direction or control” test, above.

Workers operating through intermediaries

Here, the central question under the IR35 regime has always been whether, if the services in fact provided under the contract with the intermediary PSC “were provided under a contract directly between the client and the worker”, the worker would in law be regarded as an employee of the client.

If yes, then the PSC is subject to the “IR35” rules, and has had to account for tax under PAYE.

This regime has, as noted above, been tightened from April 2017, through the new rules for “off payroll working in the public sector”. Such rules shift the responsibility for applying the IR35 regime (and so for accounting for tax and NICs under PAYE) from the PSC to the public sector “employer” and potentially accelerate the date when PAYE is applied. In addition, in such cases, the 5% deduction in computing the deemed taxable earnings (given in order to allow for the extra administrative costs of dealing with these rules) is abolished.

Workers supplied by MSCs

This regime was inserted from April 2007, partly to catch “umbrella companies”. In determining whether a worker (and the MSC) are caught by the MSC rules, there has to be an “MSC provider” involved — that is, a person “who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Regulations quickly followed to enable PAYE and NICs debts of MSCs to be transferred to relevant third parties, including the MSC provider. This was, HMRC said, because such debts often could not be collected from an MSC because MSCs generally had no tangible assets making it easy for them to be wound up or simply to cease trading and for workers to move to a new MSC.


Finally, another important change generally, from April 2016, has been the tightening of the expenses rules across all sectors and industries. This affects, or potentially affects, workers in all these categories above. In particular, in appropriate cases, it prevents tax relief being obtained for travel costs which are “home to work” or between different engagements.

This is achieved by treating engagement of a worker as a separate employment for the purposes of the travel and subsistence rules, unless broadly:

  • it is one where the services concerned are not subject to (or to the right of) supervision, direction or control by any person

  • in the case of IR35 intermediaries, the worker would anyway be “self-employed” if the relevant contract was directly with the client.

National insurance legislation

There are similar, though not identical, rules setting out liability to NICs. These provisions are, arguably, somewhat confusing. On the one hand, the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000 No. 727), which treat a worker as an employed earner for NIC purposes, apply in circumstances where “were the services to be performed by the worker under a contract between [the worker] and the client, [the worker] would be regarded … as employed in employed earner’s employment”. This language essentially corresponds to the IR35 language for income tax.

On the other hand, there are the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978 No. 1689), tightened up from April 2014 to prescribe certain types of employment through a third party as employed earner’s employment. Here, workers whose services are provided through third parties are, generally, treated as falling within the category of “employed earner” for NIC purposes notwithstanding the contractual arrangements unless the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person. This different language corresponds to the agencies language for income tax.

The recent case of Big Bad Wolff Limited [2017] TC 06143 dealt with the interaction of the Intermediaries Regulations and the Categorisation Regulations. The case in fact involved the pre-April 2014 version of the Categorisation Regulations, and related to a worker (“G”) who was an actor and provided his services through a PSC: the Categorisation Regulations contain specific provisions dealing with “entertainers”. But it remains of wider interest.

The company appealed against a decision that it was liable to pay Class 1 employer and employee NICs. It was agreed that had G engaged directly with clients, he would have been self-employed as a matter of general law. But the First-tier Tribunal rejected the company’s argument that in consequence, the Intermediaries Regulations could not apply. This was because the Categorisation Regulations treated G as an employed earner, and that deemed treatment should feed through in construing the Intermediaries Regulations.

This case — albeit a First-tier Tribunal decision only – gets one thinking whether, for NIC purposes, it may not necessarily be a defence in PSC cases to show that the IR35 test (“would it be an employment?”) is not met; it may be necessary to consider whether the “supervision, direction and control” test is met. Any such analysis is founded not so much on interaction of the Intermediaries and Categorisation Regulations (as with Big Bad Wolff), but on the separate application of the Categorisation Regulations, post-April 2014 amendment.

The two tests of course share much in common, but are by no means exactly the same.

Umbrella companies

While umbrella companies are used very much to serve commercial purposes (saving an agency the time and expense of dealing with payroll, and enabling them to get on with the job of matching workers with available work), they have historically been perceived as also carrying tax advantages: the deduction of certain expenses, to increase the contractor’s net income — and also acting as a structure to stay outside the IR35 legislation.

There appears to be some current debate about the future of umbrella companies. Some argue that demand for umbrella companies has reduced as the tax rules have tightened. Others suggest the IR35 reforms in the public sector have increased the demand for umbrellas, but for commercial reasons: thus hirers, rather than putting contractors on their own payroll or on agency PAYE, might prefer an umbrella who will actually employ the contractor.


We wait to see if further tax changes emerge in this area on Budget day, 22 November. Whether they do or not, the tax issues in this area remain. There is always a broad process to follow in assessing the position of “off-payroll staff” in relation to these several taxing provisions: the key steps seem invariably to be a review of the relevant contract (between client and intermediary), and a review of how the parties concerned (including the worker) actually operate in practice. This might in some cases lead on to other questions, such as what further payment obligations should be provided for as between the parties, or if insurance cover could be considered for possible liability to employer’s NICs.

This is not to forget either the ongoing employment law — as distinct from tax law — angle, concerning the status of “workers”, drawn out by the very topical Uber case above.

Mark Cawthron, LLB, CTA is a tax writer with Croneri Limited.