At the end of 2013, Chancellor George Osborne announced plans to pursue tax avoidance through so-called 'disguised' or 'false' employment. But whilst some months have passed since these changes were first communicated, much confusion remains as to what 'employment intermediaries legislation' means to recruiters and the implications of this - and other legislation - which comes into force as early as April this year.
Employment Intermediaries Legislation is the next step in the Government's series of measures designed to clampdown on practices which it deems as both unlawful and unethical.
Its introduction comes on the back of a number of recent developments, which includes HMRC's £158 million action against Reed Group's travel and subsistence scheme, and the introduction of the general anti-abuse rule (GAAR) which makes those companies who benefit from artificial contracts arrangements culpable and liable for the full amount of tax avoided. Not forgetting the House of Lords Select Committee review of Umbrella and personal service companies (PSC) arrangements.
Essentially, this new legislation has two primary objectives: to safeguard contractors and to claw back tax revenues. It is aimed at preventing employers and recruiters from 'disguising' employment as 'self-employment' or classifying employees as 'directors' in an attempt to avoid employment taxes and deny employment rights to contractors.
So why do they do this?
Simply put, it is a way for the Umbrella company to avoid paying the statutory 13.8% employer National Insurance Contributions (NIC). Typically, said company would 'encourage' the contractor to accept being 'self-employed' as a condition of their employment, and deduct a nominal fee each week which unbeknownst to the contractor is not the tax deduction they are led to believe it is. Sadly this has resulted in a reported number of contractors receiving a rather hefty - and unexpected - tax bill at the end of the year.
Of course, it would be naive to suggest that all contractors are innocent victims in all this – there are some who are aware that these so-called 'tax savings' are not exactly above board and are willing to take a share of this fee or accept some other form of incentive.
However, the overwhelming evidence points to the fact that these savings are on the whole shared between the recruiter and their Umbrella partner, leaving the contractor vulnerable to a tax claw back at the end of the year.
Moreover, what little savings they make are quickly devalued by the fact that being classed as self-employed automatically makes them responsible for paying their own taxes and NIC at the end of the year anyway. This is further compounded by the loss of employment rights such as sick pay, holiday entitlement, maternity/paternity pay and pension contributions.
According to HMRC, Employment Intermediaries Legislation could generate as much as £400 million a year once the legislation comes into effect in April. After that date, recruiters will be fully responsible for ensuring that those contractors' employment taxes are paid correctly.
Whilst putting responsibility squarely on the shoulders of intermediaries may be unpopular within the recruitment industry, there is at least certainty and a clear picture of where liability lies. Now each relevant party can review their arrangements and determine how any increased costs should be apportioned.
The challenge for the Government will be in how effectively they enforce it.
One Click Umbrella supports the Government's initiatives to prevent tax avoidance, but we fully understand the concerns that many recruiters may have over this new legislation.