SI Review: Autumn 2014 European Issue

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Benefit of Counsel: Paying Dues

How UK tax law changes are affecting the staffing industry

By Fiona Coombe

As concerns grow over the collection of tax revenue derived from flexible employment, the U.K. government has turned its attention firmly on the staffing industry. Among its initiatives is a change to existing legislation that would require ‘agencies’ — staffing firms or managed service providers that are contracted directly with the end client — to deduct tax and National Insurance Contributions (NICs) from income earned by certain workers.

Offshore Connection

The legislation pertains specifically to employees of offshore intermediaries supplied to work in the U.K., and workers engaged in the U.K. on ‘self-employed’ contracts for services where they are subject to, or to the right of, supervision, direction or control by any person. Other legislative efforts are under way to make staffing agencies that contract directly with the client liable for secondary employers’ Class 1 NICs.

The effects of these legislative efforts are already apparent as some employment businesses are rejecting workers engaged by offshore companies and terminating contracts with such suppliers. For the oil and gas sector, there is the effect of a new system of certification to exempt the licensee of the oil field, provided the offshore employer is meeting all tax and NIC obligations.

Most affected are sole traders involved in the construction industry, who are used to having a fixed deduction of 20 percent withheld from their pay under the Construction Industry tax scheme.

Difficult Options

Employment intermediaries supplying sole traders or individual workers claiming to be self-employed will have three choices, though none of the options is straightforward.

One is to insist that all such workers go onto their payroll or that of an umbrella company. But running payroll for an agency that has few or no PAYE workers carries an administrative burden, not to mention the burden of auto-enrolment and the non-recoverable elements of statutory payments such as sick pay. On long-term contracts with fixed charges, there may be no opportunity to pass on these costs or the cost of employers’ NIC.

Umbrella companies, meanwhile, are also subject to greater scrutiny as to the use of creative accounting models and restrictions on travel and subsistence schemes in the wake of the decision of the Upper Tribunal in Reed v. Her Majesty’s Revenue and Customs (HMRC). The Tribunal upheld an earlier decision that Reed’s scheme was flawed and that HMRC had the right to revoke an earlier dispensation granted for the scheme.

The final option is to require workers to operate through personal service companies. However, if such companies are managed and controlled by a third-party provider, the transfer of debt provisions from other legislation may put the agency at risk of liability if the third-party company has unpaid taxes. Such a strategy may also run afoul of the Targeted Anti-Avoidance Rule (TAAR) built into the agency legislation.

Whichever choice an intermediary makes in managing the impact of the changes to legislation they should take certain precautions to minimise the risks arising from this and other tax legislation:

Sub-suppliers. Amend or draft contract clauses seeking warranties from suppliers below them in the supply chain that workers are not self-employed or employees of offshore companies, or that a personal service company is not controlled by a third-party provider, and indemnities against any liability for tax and associated costs.

Due diligence. Tighten up due diligence on umbrella company providers to ensure they are employing the workers they supply, correctly paying tax and NIC and operating compliant travel and subsistence schemes.

PSCs. Carry out checks on personal service companies to ensure they are current and not dissolved and ensure the contract is with the company and not the individual supplied by the company.

Educate clients. Finally, inform clients of the changes and the impact of the changes and re-negotiate your rates where possible.

From August 2015, regulations will require employment intermediaries to record and submit quarterly returns of workers they have arranged to work for, or provide or be involved in the provision of services to, a third person. There will be penalties for non-reporting and HMRC will use the data to check compliance with the tax legislation.

Fiona Coombe is director, legal & regulatory research, at Staffing Industry Analysts. She can be reached at fcoombe@staffingindustry.com