Will National Insurance increases spur the use of unlawful self-employment models?

The employers' National Insurance contributions (NICs) aspect of the temporary NICs rise and the Health and Social Care Levy may drive parts of the workforce into lawful – and in some cases unlawful – use of self-employment. But if a lawful self-arrangement is set up, the employer's NICs element of NICs is avoided.

The temporary increase in NICs is due to come in on 6 April 2022, with the new Health and Social Care Levy introduced the following year. HMRC is asking employers – including umbrellas and staffing companies engaging on a PAYE basis – to include a message for their employees on all payslips between 6 April 2022 and 5 April 2023 explaining what the funds from the increase in NICs will be used for. For political reasons it is possible this increase will be delayed but we believe it will come into force at some stage in the foreseeable future.

The new levy

The government announced last September the new Health and Social Care Levy to fund investment in the NHS and social care. The levy will be introduced from this April, when NICs for employees and the self-employed will increase by 1.25 percentage points and be added to the existing NHS allocation.

There will also be a 1.25 percentage point rise in employers NICs so, even if workers have to swallow the increase in employees NICs rate (at a time of skills shortages and increased bargaining power for workers), this will be a real cost to all who operate an employed payroll or otherwise fund payments to payrolled workers. For umbrella companies the increased cost is likely fall to the umbrella workers in the form of reduction to their pay. For so-called PEOs (professional employer organisations), or other employers of record, the cost will likely be borne by the client organisations who underwrite the employment costs.

The threshold at which NICs will be payable has been increased to £12,570.

From April 2023, the levy will be formally separated out from NICs, and NICs rates will return to 2021-2022 levels.

To ensure taxpayers understand that their increased contribution is helping to fund public services, HMRC is asking employers to include a message for their employees on all payslips between 6 April 2022 and 5 April 2023 explaining what these funds will be used for. The message should read "1.25% uplift in NICs funds NHS, health and social care".

HMRC has contacted payroll-software providers to request that they include this messaging in their software, but HMRC appreciates that some employers and staffing companies will need to make the change directly.

Employers are reminded that the increase in the wage bill on salaries and the overall cost of other payments made to employees (such as bonuses) will similarly increase. The levy will need to be factored into anticipated expenditure from April 2023.

Tax avoidance: be vigilant

There is another reason to watch out for tax avoidance in your supply chain. Some workers and employers may be more attracted than before to look at self-employed and "outside IR35" models. The increase in NICs will result in a rise in costs associated with being employed – whether PAYE or inside IR35 – by 2.5%.

Some will respond by using engagement models that involve genuine self-employment, with engagement on an output and non-controlled basis rather than a time and material-controlled basis. This will mean they avoid half (that is, the employers NICs aspect) of that increase.

However, genuine self-employment  and "outside IR35" arrangements are not suitable for many roles. In some of the more difficult cases, we anticipate an increased use of unlawful tax-avoidance mechanisms including via a minority of  "dodgy" umbrella companies: these could include loan scheme usage (which still goes on), mini-umbrella arrangements, offshore schemes, expenses schemes and share based arrangements.

All involved in labour supply chains will need to be alert to this given HMRC's increased scrutiny of what goes on in supply chains and the increasing likelihood that entities higher up the chain will be liable for tax non-compliance lower down their supply chain. HMRC has issued guidance on due diligence principles that set out what it expects organisations to check in their supply chains.

HMRC has also increased its focus on the use of the Criminal Finances Act to prosecute organisations who fail to prevent the facilitation of tax evasion in their supply chains (for which the penalty can be an unlimited fine). We would hope that HMRC steps up its actions against promoters and operators of dodgy schemes which otherwise will undercut those end clients, staffing companies and umbrella companies who try to do the right thing.

Passing on costs

Can staffing companies pass on the new cost to clients? Not all staffing agreements link charges directly to the statutory costs incurred by the staffing company and not all will include a right for suppliers to increase their charges if there is a change in law that leads to an increase in statutory costs such as NICs.

It is, for example, commonplace to describe the element of the charge to clients that represents NICs as a "round sum". This is usually for the purpose of simplification because NICs are calculated on weekly earnings and subject to a sliding scale. Consequently, they are often charged on a headline rate basis rather than an actual cost basis.

The problem is that, when there is an increase in NICs, this approach may not give the staffing company the right to pass on the increased cost. There have been multimillion pound claims for refunds by major end clients in the past where suppliers have automatically increased NICs without, strictly speaking, the legal right to make this increase.  Where supplies involve lower paid workers, the increase in the earnings threshold may prompt some end users to seek reimbursement of what they consider to be their funding of actual NIC costs (rather than merely an agreement to add a calculation for NICs to hourly or daily rates for all PAYE temporary workers).

As a result, many staffing companies may need to look at their contracts and negotiate new charge rates to cater for the increase.