The Government has been clear in its commitment to reduce tax avoidance. In recent years there has been a growth in the use of offshore employers to employ UK workers, working in the UK, for UK based companies. Whilst many of these arrangements are in place for legitimate commercial reasons, such as international secondment, a significant number of businesses use these structures to avoid paying employment taxes for their UK-based workers.
The HMRC states that the tax treatment of services provided through a third party is governed by a piece of legislation called “IR35″. This looks at the nature of the relationship between the worker and the end client, and constructs a “notional contract” between them, of which there can be two types:
A contract for services: Where the contract has the characteristics of self- employment (subcontractor). In this case the normal tax rules apply.
A contract of service: If the contract is one of employment, then the legislation requires that the third party company pays employed levels of tax and NICs on payments to the worker.
These guidelines have made many agencies feel uneasy and pressured into employing all workers direct. In this case the workers lose their freedom of choice to choose a third party company to handle payment processes throughout the course of their employment, such as an Umbrella Company.
Furthermore, if an agency does use the services of a CIS limited company, who-in-turn uses and pays subcontractors, then the agency could be held responsible for any outstanding monies on behalf of any subcontractor, who should have originally been paid as an employee.
The HMRC is attempting to regulate an industry that is, and has been, largely unregulated. With original legislation brought in to tackle Composite Companies, whose workers were paid in dividends as shareholders, it now appears it has been reworked to force legitimate self-employed people into employment.
Treating an ‘employed’ person as a ‘self-employed’ subcontractor is illegal; as is paying workers less than minimum wage, not paying full holiday allowance, allowing claims for non-existent expenses, etc.
Even if the agency isn’t the direct employer, responsibility for unpaid PAYE / NI contributions may be passed on to the directors of agencies, who use payment service companies that do break the law.
Liability of other intermediaries in the supply chain
It is increasingly common for recruitment businesses to supply agency workers to clients via intermediaries, including master or neutral vendors or umbrella companies, which, for the purpose of the Regulations are also “temporary work agencies.
Some agencies have been known to turn a blind eye to the questionable practices of their payment companies, and many agencies supplying workers into the lowest paid roles in the temporary labour market allowed avoidance schemes to proliferate, with the “umbrella company” market causing problems for compliant agencies that struggle to identify what is and isn’t compliant and find they may be less able to compete without the commercial assistance of such schemes driven by the push for ever cheaper labour by end users in certain sectors.
If agencies refuse to use the most commercially advantageous pay and bill models, they risk losing their clients to to non-compliant competitors.
Where more than one “temporary work agency” is involved in the supply of the agency worker who alleges that there has been a failure to provide equal treatment, an employment tribunal shall consider the extent to which each is responsible for the alleged breaches.
The various intermediaries which may share the obligation to provide equal treatment include:
• Second tier suppliers – in order to rely on the agency defence an agency needs to take reasonable steps to obtain information about equal treatment from the client. Agencies will need to put mechanisms in place to manage ensure this information is received if they do not ordinarily have a direct relationship with the end user client;
• Master or neutral vendor – they will also need to take reasonable steps to obtain information from clients about equal treatment in order to rely on the defence. Additionally master and neutral vendors will need to consider whether their terms may need to be revised, particularly whether they currently obstruct second tier suppliers from having any contact or obtaining any information from end user
• Umbrella companies – they usually have the direct contract with the agency worker and will also be responsible for ensuring that the agency worker receives equal treatment. An umbrella company wishing to limit its liability may also seek to obtain information regarding equal treatment from the client or via the agency.
The most recent example of this is the Onshore Employment Intermediaries changes, implemented on April 6th 2014 which is causing a stir to agencies that fully comply with the legislation. The revised proposals from HMRC states that responsibility for compliant Tax and National Insurance payments for workers employed offshore will fall to the recruitment agency, rather than the end user -ensuring that workers receive UK statutory employment benefits such as maternity pay and sick pay. As a result, an extra cost and administration burden has been sidelined to recruitment agencies. The full report can be found here.
To assist with HMRC’s enforcement, relevant intermediaries would be required to have in their power or possession information about how the workers they placed with end users were ultimately paid and engaged. In addition, the consultation proposed that the relevant intermediary would be required to make a quarterly return to HMRC detailing information about all the workers, that are employed offshore, who they place or engage. In the case of no relevant intermediary, this responsibility would fall to the end user of the labour.
This will also put added pressure on agencies’ due diligence processes and result in compiling a ‘preferred supplier list’ where only compliant Umbrella companies/intermediaries are used. The end result is that regardless of the length of the supply chain, the proposed legislation allows for any unpaid Income Tax and National Insurance, which should be paid.
However, the REC is concerned that flaws in the recent onshore intermediaries legislation will actually increase the extent of false self-employment, jeopardise UK employment and growth, and drive workers away from compliant agencies and into more informal, “cash-in-hand” arrangements.
False self-employment is a whole supply chain issue and any legislation to address the problem should reflect that fact. However, the changes as drafted lack any end-user liability. Mass avoidance is a continuing risk: with no end-user liability or reporting requirement, there is nothing to stop clients from engaging with non-compliant supply chain entities at the expense of compliant agencies. Those non-compliant supply chain entities are unlikely to submit to the new reporting requirements and HMRC have admitted there is little they will be able to do in the way of enforcement in such circumstances. Such informal arrangements will impact negatively on lower skilled workers in the construction sector. The only way to mitigate this sort of informality is to ensure that clients are incentivised to source their temporary labour from compliant agencies and where appropriate, or to engage people permanently or on a fixed term basis. Imposing ultimate liability for tax and NICs onto clients is the simplest way of achieving this goal.
In any event, with the onset of the Finance Act 2013 there are certain rules created – the general anti-abuse rule (‘GAAR’) that allows HMRC to challenge all agreements made with a view to obtaining a tax advantage, if it considers them to be abusive if…
• the arrangements entered into “cannot reasonably be regarded as a reasonable course of action”
• the arrangements need “contrived or abnormal steps” to achieve any results
• any shortcomings in the provisions are exploited by the arrangements.
There are a few basic rules for any Umbrella or Subcontractor, which if followed, should help agency directors protect not just them but the interests of the workers too:
- A supplier should be chosen carefully, ensuring that any HMRC compliant and responsible supplier should be able to provide proof of adhering to current legislation.
- It is vitally important that a full service contract is in place between all parties. This should be for a limited period, and a new contract agreed for each project. If this is not done automatically, it can be very cumbersome and time consuming.
- Every applicant to your subcontracting company should undergo a thorough self-employment/IR35 test, before being accepted as a self employed worker by your subcontractor. This has to be periodically reviewed, as a worker may be working ‘in his own right’ on one site, but his circumstances may be different on another.
- Finally, legislation cannot be side stepped. An employee has to be paid at least the minimum wage, receive holidays, be eligible for sick pay and incur expenses. There has been widespread abuse of dispensations, as dispensations can reduce a company’s reporting, however expenses must still be incurred and not assumed or invented, and proof, such as receipts, should always be requested.
According to REC, the failure to publicise and learn lessons from enforcement action is typified most by the successful HMRC action against Legitas Group and its associated Employ-E. Both were high profile umbrella companies that operated aggressive travel and subsistence models. Following an HMRC investigation, the former went bust owing HMRC £22 million, the latter £58 million. That is the extent of public knowledge: no detail was released on the nature of the model used, the mechanics of the model or the particular laws breached. No further detail was provided on how HMRC intended to recover the debts owed. As no detail was provided and because the industry remains in the dark as to the model used and its inherent failing, organisations like the REC were unable to come out forcefully against whatever model was being used by those failed companies, were unable to point to this enforcement action as firm proof that the model used was non-compliant and that member organisations and their clients should therefore avoid it.