Guide to Onshore Intermediaries 2014 & SDC Test

Information on one of the biggest changes to legislation in recent years. The sign of things to come?

Dec 8, 2020
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This was the first of the ‘holy-trinity’ of major legislation changes that would target all of the main payroll models used by temporary contractors working within the recruitment/payroll intermediary arena.

The aim of the game for this legislation was to tackle ‘false self-employment’ by requiring that PAYE and NIC’s were deducted where the worker is caught by ‘Supervision, Direction and Control (or the right of) in the manner of the duties’ – a phrase that has now become synonymous with the contingent workforce.

Chapter 7, Part 2, Income Tax (Earnings and Pensions) Act 2003, section 44 (thus often referred to as S44).

Despite confusion about this legislation, agencies have always been able to provide workers to end users on a self-employed basis provided that:

  • The worker is not under an obligation to personally provide their services; AND
  • The worker is not subject to (or to the right of), supervision, direction or control as to the manner in which the services are to be provided.

The Impact

What changed was the removal of the requirement for personal service and the focus solely on the ‘right of control’ as the determining factor as to whether a worker is self-employed or not.

Where a worker is engaged by or through an agency then it will be presumed that there is ‘control’ over the worker and it will be up to the employment intermediary who sits closest to the end-client in the chain to prove otherwise. Very clever wording from HMRC and the fear of getting it wrong would mean the policies suddenly started to ‘self-police’ themselves.

This saw the birth of the ‘SDC test’ which had people running for the hills due to it’s unclear and unbalanced HMRC views on how it should be applied. It was easier for workers to go into models where supervision, direction or control wasn’t an issue.

The Result

Naturally, agencies became a lot more risk-averse as the legislation meant that recruiters could be liable for paying the employment taxes for contractors unless this is carried out by a third party (e.g. Umbrella PAYE provider). In this case, a new ‘intermediary report’ was created to show earnings details to HMRC on a quarterly basis, for those engaged by third parties.

The details include:

  • Full name
  • Address & postcode
  • National Insurance number (if they have one and their date of birth & gender are unknown)
  • Date of birth and gender (if they don’t have a National Insurance number)
  • Start date of work with the client
  • End date of work with the client (if applicable)

Payment details would not be required because they would be supplied by the Umbrella companies Real Time Information (RTI) report.

The Solution

A big shift from sole trader engagement to a massive rise in Umbrella PAYE and Limited Company/PSC as agencies looked to keep workers happy in an outsourced service that carried the least risk form HMRC penalties.

CIS/Non-CIS Sole Trader – was only now an option if a process was in place to properly assess if supervision, direction or control (or the right of) applied to how the workers performed in the manner of their duties. This caused panic and confusion and it was a few years before the contract chain got to grips with handling SDC.

Supervision, Direction or Control (or the right of)… as to the manner

SDC is a wide-ranging set of tests and checks that is not easy to navigate because HMRC are essentially asking for people to prove that it does not exist if they want to engage workers a certain way.

It took a while for people to a) first of all want to work with it and then b) look at how it could be put into practice to be a useful tool in helping to categorise which model was best for certain workers in certain industries. Deliberate short cuts to get around it rather than working with it are not advisable.

The definition of SDC can be described as:

Supervision applies where someone overseeing another person doing the work to ensure that they are actually doing it and that the work is being done correctly to the required standard. Supervision can also involve aiding or assisting someone to develop their skills and knowledge.

Direction involves someone making another person do their work in a certain way, generally by providing instructions, guidance and advice as to how the work is to be done. Someone providing direction will often coordinate how the work is done as it is being undertaken.

Control is where you have someone dictating what work a person does and how they should go about doing that. This also includes the power to move the worker from task to task as priorities change.

At Orbital we were mindful that in our core market, construction, it wasn’t a ‘gimme’ that all workers were automatically ‘caught’ by SDC and so we took the challenge on to come up with a process that was rigorous but compliant and respectful of the legislation. We feel we have struck the right balance and that we can assist agencies and their end clients in helping to understand how ‘SDC’ can work throughout the contract chain.

For advice please contact us: compliance@orbitalservices.co.uk

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