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UK – Osborne Clarke assess impact of new offshore and onshore intermediary legislation

10 February 2014

At a seminar in London last week, law firm Osborne Clarke outlined the potential impact of upcoming legal changes to the staffing industry.

On 6 April, new legislation and changes to existing legislation with regard to offshore intermediaries will come into force. The revised proposal will place liability for employment tax and national insurance contributions (‘NICs’) and associated reporting requirements, in respect of workers employed via offshore employment intermediaries, with the intermediary at the head of the staffing supply chain (defined as ‘intermediary 1’). In many cases this will be a managed service provider (MSP) or preferred supply business. End users will have an obligation in respect of tax and NIC only if they contract direct with the offshore employment intermediary.

While the current practices of most offshore intermediaries and their associated cost savings are not illegal, HMRC feels that businesses take unfair advantage of current legislation. HMRC estimates that the new legislation will cost the UK staffing industry an extra £80 million in terms of PAYE and NIC.

Tracey Wright, Senior Associate at Osborne Clarke, stressed that the legislative changes will place a large burden on ‘intermediary 1’ in terms of reporting and paying tax, whilst in many cases it will have to be determined who is liable for these payments within the supply chain. The key questions that arise from the amendments are firstly whether offshore intermediaries will now move onshore and secondly, how/where the supply chain will look for NIC savings elsewhere.

The seminar also focused on HRMC's consultation on 'Onshore Employment Intermediaries: False Self-Employment', which ended last week. The consultation sought to assess the government's plans to tackle false self-employment of workers supplied via third parties. The proposals would make the recruitment agency liable for a worker’s tax and National Insurance (NI) unless the agency can show that the worker is genuinely self-employed.

HMRC is seeking to close a loophole in the current Agency legislation in order to end an increasing instance of arrangements wherein workers are classed as self-employed in order to save money on employers' National Insurance Contributions (NIC) and statutory employment benefits.

As supply chains attempt to absorb significant labour cost increases, however, it is feared that employment levels will fall. There is also an expectation that end-users will engage with rogue traders rather than with complaint agencies. Frances Lewis, Head of the Recruitment Sector Group at Osborne Clarke, believes that “in the short term the less reputable agencies and intermediaries are going to gain out of this, and particularly those operating in construction. They will set up overnight, take the money while they can and then disappear into thin air”.

According to Kevin Barrow, Partner at Osborne Clarke, suggests these new supply chain risks, in addition to upcoming decision on the Reed appeal, feed in to the wider debate regarding future contract models and staffing solutions. In light of these legal changes, staffing firms should assess the key risks for their business and ascertain whether their current supply models and those of their suppliers stand up to scrutiny. 

Barrow advises international staffing firms to adopt two to three broad supply models (with adjustments for specific country law) in order to minimise potential dangers. This tactic will also serve to make business more attractive to outside investors, who are naturally risk averse. Barrow predicted that the upcoming changes will increase market share for more sophisticated suppliers and intermediaries (i.e. those who are in the best position to negotiate the changes) whilst ensuring a higher barrier to entry in the industry.

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