“Engagers” beware: Major increased tax risk for users of contractors and umbrella workers

The consultation on the withdrawal of tax and NIC relief on travel and subsistence expenses for workers and contractors engaged via employment intermediaries ends on 30 September 2015.

The consultation proposals affect not only the intermediaries who pay the workers but also the organisations who use their services, referred to in the consultation document as “engagers” – who, under the current proposals, will be held liable for any unpaid tax in the contractual chain. HMRC confirmed to us recently that it is concerned about the lack of awareness amongst engagers about these proposals, especially given that they:

• require engagers to provide information about supervision, direction and control; and
• put engagers in the frame for tax debt transfer liability for lack of compliance.

For many agency workers and contractors this may mean a reduction in take home pay.

This will be of importance to your organisation if you (or any staffing company you contract with for the provision of staff) engage contractors and temps via:

• umbrella companies;
• personal service companies (“PSCs”); or
• any other intermediary which pays travel & subsistence expenses tax free

It will also be relevant to you if you are a labour-intensive outsourcing business or user of outsourcing arrangements, because it is not yet clear how the term “employment intermediary” will be defined. HMRC seems uncertain at this stage, as to whether labour-intensive outsourcing arrangements will fall within the proposed exemption.

Responses to the consultation will be used to finalise proposals with a further announcement planned in the Autumn Statement 2015 (scheduled for 25 November). These proposals will be followed by publication of draft legislation, with changes to be implemented with effect from 6 April 2016. This leaves a relatively short window for engagers and labour-intensive outsourcing companies to carry out risk assessments and risk mitigation.

We are currently offering fixed price meetings to our clients to help them understand the risks and develop practical risk mitigation and compliance processes.

For more information, please read on.

The government issued a consultation document on 8 July 2015 setting out its proposals to implement the withdrawal of tax and NIC relief on travel and subsistence expenses for individuals engaged via employment intermediaries. This is part of a wider strategic review of the differences between employment and self-employment and the use of employment intermediaries. The government’s objective is to ensure that those who are in an employment relationship are taxed as employees and to create fairness on the tax system.

What is proposed and what does this mean in practice?

From April 2016, tax relief on travel and subsistence expenses will be withdrawn for individuals engaged via employment intermediaries such as umbrella companies and PSCs. Individuals will be caught unless the engager can show that the individual will not be under the right of supervision, direction or control by anyone as to the manner in which they provides their services. The so-called “SDC” test is intentionally wide and difficult to get round. In practice relatively few agency workers or contractors will (unless the way they work drastically changes) pass this test.

There are a number of options under consultation, but it is clear that HMRC wants to push the responsibility for assessing supervision, direction or control on to the engager and that liability for any tax debt arising from travel and subsistence tax relief misuse due to misleading information provided by the engager will be transferred to the engager.

This is a huge departure from previous policy in this area. Until now liability has largely remained with the employment intermediary but now, it seems, the government wants to increase effectiveness of the legislation by driving compliance from the engager end (which is how similar “worker misclassification” legislation works in the USA). In practice, engagers will need to examine their supply chains, check their contracts and implement tests to ensure that they are confident that the correct tax is being paid.

Will outsourcing businesses fall outside the scope of the new legislation?

The consultation document clarifies that an “employment intermediary”, will be an entity whose business is substantially in the supply of labour services. Outsourcing companies who generally supply an outsourced service on a fixed price project basis rather than on a time spent labour services basis appear to be outside this definition. However there may be grey areas, particularly where the service is labour-intensive and resembles a supply of staff rather than an outsourced service, such as where labour-intensive services are charged for on a “cost plus” or “time spent” basis. HMRC will look at the reality of the supply rather than rely on the contractual position.

IR35

The government is also reviewing IR35. Although currently only at a discussion stage, HMRC have indicated that they are considering making engagers liable for unpaid tax if PSC contractors fail the reviewed IR35 test.

What should you do and how we can help

Engagers are going to need to ensure that the correct indemnities are negotiated with any company that they contract with to provide agency workers and contractors (such as staffing companies). Given the potentially large sums involved and the uninsurable nature of those indemnities, we believe that most sophisticated and reputable staffing companies will refuse to provide such indemnities on a blanket basis, especially when tax exposure may be based on information from the engager. The indemnities need to be sensible. It is clear that staffing companies that promise the earth are probably promising something they cannot deliver.