The flexible labour market is under intense scrutiny from HM Revenue and Customs (HMRC), which regards certain structures for the provision of flexible labour as being non-compliant.Ã‚Â Clients, employment businesses and Managed Service Providers are all searching for a compliant solution to meet demand for flexible working at a reduced cost whilst maintaining a quality service.Ã‚Â There are a number of structures currently in the marketplace, all of which present opportunity and financial risk in equal measure. Ã‚Â
Managed Service Company legislationÃ‚Â
Since the introduction of the Managed Service Company legislation (Chapter 9, Part 2, and Income Tax (Earnings and Pensions) Act 2003) which came into effect in April 2007, HMRC has seen a growth of intermediary companies which are marketed to individuals for the provision of their services to clients and employment businesses.Ã‚Â Where HMRC successfully challenges an intermediary company as being within the Managed Service Company Legislation – and that company is unable to pay the resultant PAYE and National Insurance debt – HMRC will invoke transfer of debt provisions which may mean additional liabilities and a commercial headache for all parties to the contract. Ã‚Â
It should be also be noted that simply because an intermediary is based outside the UK does not mean the Managed Service Company Legislation does not apply. Ã‚Â
Self Employed Arrangements
HMRC has particular interest in the growth of intermediary companies marketed to individuals for the provision of services under a self-employed contract for services.Ã‚Â In many instances, intermediaries are merely interposed between the employment business and the operative to avoid PAYE and NIC by enabling the individual to claim self employed status.
It is unlikely that these arrangements will fall within the scope of the Managed Service Company Legislation.Ã‚Â However, for those clients and employment businesses who operate in the construction sector, there are specific Construction Industry Scheme (CIS) issues which must be considered when making payment to an intermediary. Ã‚Â
In certain cases, the intermediary will be acting as a “nominee” of the individual rather than a contractor within the meaning of CIS.Ã‚Â Where this is the case, both the intermediary and the individual must hold gross payment status in order for payments to be made gross.
The risk is that HMRC will pursue the client or the employment businessÃ‚Â for 20% or 30% of the value of the payment made to the intermediary for the provision of the services of the operative (even when the intermediary is registered to receive gross payment). Ã‚Â In addition, under the new penalty regime which is effective from 1 April 2009, a careless mistake could involve a penalty up to 30% of the tax due. Ã‚Â
HMRC is also tackling the growth in “payment facilitators” which aim to reduce the administration burden for clients of employment businesses through a “portal” type arrangement.Ã‚Â In this scenario, employment businesses can join what is effectively a club which offers an electronic system whereby clients can process timesheets.Ã‚Â The system also allows clients to make a lump sum payment which is distributed through the payment facilitator to all participating employment businesses within an agreed timeframe. Ã‚Â Outside of the construction sector, this may work as a useful tool for reducing administration and payroll costs. Ã‚Â
However,Ã‚Â such arrangements are caught by the nominee rules under the CIS and, as a consequence, the client of the employment business may become liable for the deduction of 30% which should have been made from the payment made to the payment facilitator plus penalties and interest. Ã‚Â Ã‚Â
Umbrella Company Structure
HMRC has confirmed that umbrella company structures fall outside the Managed Service Company Legislation when the umbrella company treats all income of the employee as employment income.
However, recent announcements from HMRC have suggested that such structures will be examined very carefully by specialist compliance inspectors during prolonged periodic inspections.Ã‚Â The main target area appears to be the employment contract itself with HMRC suggesting that there is no mutuality of obligation between the umbrella company and the “employee”. Ã‚Â
This has a significant knock on effect for the level of qualifying business expenses which are available to be set off against taxable income.Ã‚Â As a result, employment contracts must guarantee a set number of hours to create mutuality and umbrella companies must act as a responsible employer by ensuring that it has a robust expenses and benefits policy in place.
HMRC is obviously keen to eliminate non- compliant intermediary structures.Ã‚Â As a result, clients and employment businesses must take the threat of Transfer of Debt seriously , undertake full due diligence on Preferred Supplier Lists (PSL) and take steps to fully understand the implications of being found guilty of promoting and facilitating the use of structures which fall foul of the Managed Service Company Legislation. Ã‚Â
Conversely, the future is bright for those intermediaries who can provide the following;
- Security for employment businesses from Transfer of Debt,Ã‚Â
- Compliance with HMRC guidelines in relation to employment contracts and expensesÃ‚Â
- Robust procedures in relation to the engagement of self employed workers
Alan Nolan is Senior Partner at Aspire Business Partnership LLP – a specialist adviser to the construction, recruitment and managed service sectors.Ã‚Â Alan can be contacted on 07979 541405 or via his web-page at www.aspirepartnership.co.uk
Allan is speaking at the “Managing a Temporary Workforce Forum 2009” on 23. April 2009. Click here for more information on the event.