FROM MARCH 2014's RECRUITER MAGAZINE

Proposed legislation to either combat offshore tax avoidance or recover lost onshore tax revenue won’t please all of the people, all of the time. Scott Beagrie investigates how to stay on top of the changes

High levels of transparency and accountability are widely considered as a cornerstone of delivering best business practice. But it’s reasonable to say that transparency hasn’t always been a defining quality of recruitment supply chains. 

The introduction of the Offshore Employment Intermediaries legislation on 6 April, however, and whatever form the Onshore Employment Intermediaries legislation ultimately takes, will change all that. The former seeks to stamp out tax and National Insurance Contributions (NICs) avoidance where UK workers are employed by offshore companies or engaged through offshore employment intermediaries. Meanwhile, the proposed onshore legislation aims to recover tax revenue lost due to false employment, when the employed are disguised as self-employed through use of intermediaries.

When plans to strengthen existing offshore legislation were announced last year there were serious concerns about the limited time recruiters would have to put the necessary procedures in place. So little wonder that with the consultation period for the onshore draft legislation only having ended last month, and with an identical proposed implementation date of 6 April, there has been industry uproar; particularly given that the legislation has far wider ramifications than its offshore counterpart.

While eliminating false-employment is as the Recruitment & Employment Confederation (REC) points out a ‘commendable goal’, it doesn’t believe the government fully understands the complexity of the problem nor the potential impact of what it has so far drafted. “The proposed legislative changes as they stand will instead jeopardise the viability of compliant recruitment businesses, increase the extent of ‘false’ self-employment and employment tax avoidance, and result in a dramatic failure to meet the government’s revenue target,” it warns, adding: “A delay in the implementation timetable is crucial.”

Steve Wortley, business development director of Outsauce, provider of financial and business support to the recruitment industry, says: “The legislation as currently drafted is confusing and recruiters will need to be extra careful to ensure that they only use fully compliant operators who should provide a level of protection to the agency in the case of any challenge.”

The draft legislation (see sidebar) states that recruitment agencies or managed service providers (MSP) which supply the workers will be liable for tax and National Insurance Contributions (NICs) unless they can prove to HM Revenue & Customs (HMRC) that the workers aren’t under the “control, supervision or direction of anyone”. 

This is one of the main areas of contention since as Kevin Barrow, partner at the international law firm Osborne Clarke, warns it will be extremely hard to determine. “Because the concepts of control, supervision and direction are potentially quite broad and because, frankly, it is the hirer not the staffing company who knows what goes on on a day-to-day basis,” he says. “HMRC has promised additional guidance on what will constitute control, supervision or direction and many major suppliers are now doing detailed legal analyses of their options.”

Julian Ball, legal director at PayStream, agrees and says that contractual rearrangements will have to be revisited. “Recruitment agencies will need to liaise with their client, the service provider and the worker to satisfy themselves that there is no element of control over the worker,” he explains. “Contracts will need to reflect this, which will be difficult because agency contracts traditionally do the opposite, in that for good commercial reasons, they put various responsibilities on the client. To reduce risk many agencies will probably only deal with PAYE umbrellas or PSCs – which HMRC has confirmed will not be caught – going forward,” he adds.

Barrow predicts the main ‘battlegrounds’ will be in the construction industry and, perhaps, logistics/haulage. He reckons the major problem will not be staffing companies or workers who are trying to ‘get round’ tax, but hirers who don’t want to increase what they pay to allow for the relevant tax and NICs, especially employers’ NICs. 

Derek Kelly, managing director of umbrella company Parasol, concurs that the consequences will be felt ‘most keenly’ among agencies operating in construction and other blue-collar sectors, as opposed to professional/technical recruiters but stresses there is no silver bullet or one-size-fits-all approach. “Every agency should be looking to conduct a thorough compliance audit,” he says. “The most straightforward way to ensure compliance with the onshore intermediaries’ legislation is to engage a reputable third-party provider that will employ and pay workers. This will remove all of the risk and uncertainty posed to agencies by the new legislation.”

John Chaplin, director, human capital at EY (Ernst & Young), shares the concern over onshore legislation, believing that it will more likely create a “problem of false employment”, forcing individuals who are currently legitimately self-employed on to PAYE and NICs models as a result. What’s more, he reckons there is still a great deal of uncertainty around what the impact of the proposals will be both in isolation as well as their combined impact on the sector. “I don’t think your average recruitment agency is geared up to deal with these two pieces of legislation by quite a long way and it will require a lot of work to be done in a short space of time,” he says.

Both sets of legislation will undoubtedly require recruitment agencies to scrutinise their supply chains far more closely, and Chaplin stresses that they shouldn’t be as accepting of what the supply chain tells them as might have been the case in the past. “Agencies not only have to ask the right questions but have to test the answers given to them,” he cautions.

As far as the offshore legislation is concerned, Barrow suggests anecdotal evidence points to arrangements involving offshore payments having already “started declining in advance of April”. Although he adds: “We do not believe MSPs and staffing companies have yet started putting in place spot checks on payment destinations.”

Plainly, one way for recruitment businesses to minimise their exposure to risk is to draw up a preferred supplier list (PSL) of firms whose practices have been scrutinised and can be safe in the knowledge are UK-based and fully compliant with all legal requirements. Kelly says a robustly prepared and ‘fully embedded’ PSL will give agencies peace of mind that they will not be pursued for unpaid employment taxes as they will only be dealing with a select few providers they can trust.

Kelly adds that while communication has come on leaps and bounds in the ‘post-AWR world’, there is always room for improvement. One of his concerns is that at the time of writing there has been no attempt to set out a single, approved means by which legitimate providers can demonstrate to agency partners that they are based onshore and pay all relevant employment taxes.“The danger is that agencies will develop myriad bespoke methods for compliance checks,” he says. “Parasol has called for the introduction of standardised reporting criteria, and it is to be hoped that this will happen prior to the legislation being enacted.”

Alex Baines, operations director of umbrella firm Liquid Friday, reports that in light of the offshore rules the majority of its agency clients, especially the larger ones, have already started reviewing their PSLs and are gaining much better understanding of who’s involved further down the chain. “Especially where master vendor arrangements exist and there may be second and third-tier suppliers, each with their own PSLs,” he explains. “As long as the agency has total confidence that PAYE is being operated properly for all agency workers on assignment under the direction, supervision or control of the end client, there should be very little risk.”

Baines also reckons that the likelihood of the onshore employment intermediaries’ legislation targeting false self-employment being implemented at the time should address the ‘migration’ of workers from offshore employment to UK based self-employed models. Although he does anticipate a financial impact for clients or agencies dealing with lower paid assignments, “where charge rates may need to include employers NICs, holiday pay, pension contributions or any other statutory obligations the worker may become entitled to”, he says.

Ultimately, no one can predict quite how either piece of legislation will play out on the ground for the contractor market and recruitment industry. But Chaplin attests the best hopes for a positive outcome is through effective communication, and greater collaboration. Too often in the past, he reckons, each element of the contractual supply chain has fought its narrow corner sometimes to the cost of another part of it. 

“So the end user has blamed the agency, the agency has put the responsibility on the service provider and the service provider has either done the right or wrong thing depending on what their culture is,” he says. “The only way the legislation is going to work is if the whole supply chain comes together and gets involved in a dialogue with HMRC and the Treasury and gets something in place that closes down tax avoidance loop holes and introduces best practice without creating a lot of hassle that frankly isn’t necessary.”

The legal perspective

Kevin Barrow, partner at international law firm Osborne Clarke, outlines what the legislation means to recruitment businesses.

Onshore

“The staffing company or MSP which holds the contract with the end client will be liable for tax and NICs in relation to workers who are supplied via them and who are paid whether by the staffing company or an intermediary below them in the supply chain (on a sole trader/self-employed basis free of tax and NICs) unless the staffing company or MSP can prove to HMRC that the relevant workers are not under the control, supervision or direction of anyone.”

Offshore

“The staffing company or MSP, which holds the contract with the end client, will be liable for tax and NICs in relation to workers who are supplied via them and who work in the UK but who are paid on a tax-free basis (perhaps via an umbrella) offshore.

“If a large group of contract workers supplied via them are in fact (perhaps unbeknown to the MSP or staffing company) paid offshore, it could involve a material loss, far exceeding the margin they will have made on the supply of those workers. They will need to check where the workers are paid. They will be liable even if they can show they tried to root out the offshore payments — there is no statutory defence of ‘having tried to check’.”

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