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Key Information Document

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From the 6th of April 2020, agencies will be required to provide a Key Information Document (KID) to candidates in order to comply with regulation 13A of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regulations’).

All agency workers must be given this document before agreeing any terms with an agency.  This does not apply to agency workers who signed up prior to 6th of April 2020, and with existing terms with the agency.

The intention of this document is to provide transparency of information to the agency worker and, in particular, how their prospective terms of engagement affect their pay over the course of their assignment.  This includes paying through an intermediary such as an umbrella company,  a Personal Service Company (PSC) or PAYE.

Our Clients are preparing systems to provide recruitment agencies with the ability to obtain all necessary information required in the most efficient manner. 

Information that is required to be included is dependent on how the worker is due to be paid.  For the purpose of this article we will look at an example, for an umbrella company employee:

  • Name of worker
  • Contract type (e.g. Contract of service, apprenticeship, or contract for services)
  • Name of the recruitment agency
  • Name of the umbrella company
  • Who will employ the worker
  • Who will pay the worker
  • Any business connection between the agency and the umbrella company
  • Pay intervals or frequency of payments


The illustration must include both Umbrella company pay and Worker pay information as follows;

“You are being paid through an intermediary or umbrella company: a third-party organisation that will calculate your tax and other deductions and then pay you for the work undertaken for the hirer. We will still be finding you assignments.

 

The money earned on your assignments will be transferred to the umbrella company as part of their income. They will then pay you your wage. All the deductions made which affect your wage are listed below. If you have any queries about these please contact us.”

 

The information should detail all pay related information, including statutory and non-statutory deductions.  It should also included any fees charged to the worker for goods or services, any other non-monetary benefits, leave entitlement as well as any opt out agreement.

 

Whilst the KID will need to include an illustration, this does not need to be the precise figure that the individual worker will receive on that particular assignment.  It can simply be an example.

 

 

Umbrella Income

Worker income

Gross rate of pay to umbrella company

 

£

 

Deductions from umbrella company income required by law (Nicers, AL etc)

 

£

 

Any other deductions from umbrella’s income  (eg.  Margin)

 

£

 

Example rate of pay to you (this is the gross taxable)

 

 

£

Deductions from your pay required by law (Nicees, PAYE, etc)

 

 

£

Any other deductions or costs from your wage (Pension contribution)

 

 

£

Any fees for goods or services and their frequency (eg DBS, once off)

 

 

£

Example net take home pay

 

 

£

 

You can read the full guidance here:

https://www.gov.uk/government/publications/providing-a-key-information-document-for-agency-workers-guidance-for-employment-businesses

 

Should need any further information, please feel free to get in touch with us:   0207 808 6405



 

Off-payroll working (IR35) rules extending into the Private Sector in April 2020

Small Private Sector

WHAT ARE THE OFF-PAYROLL REGULATIONS?

IR35 is a piece of tax legislation that was designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the limited company was not used.  This is referred to as “disguised employment”.

The off-payroll working (IR35) reform was introduced into the Public sector in April 2017. 

The Private sector consultation was issued in March 2019 and will be confirmed in the Draft Finance Bill in July, with the changes scheduled to be made in the Private sector by April 2020.  There will also be amendments to be made to the Public Sector at the same time.



WHAT DOES THIS MEAN TO END CLIENTS IN THE PRIVATE SECTOR?

From April 2020 the off-payroll regulations will apply to companies engaging individuals (on a contractual or freelance basis) through personal service companies (PSCs).  The responsibility of determining the status (whether IR35 applies) will move to the organisation receiving the individuals service (End Client).

If a worker is deemed to be operating as an employee, then the rules will apply.  If the rules apply, the End Client will then need to deduct the relevant PAYE and National Insurance contributions before making a payment to the PSC. 

If the End Client deems that the worker is not operating as an employee on that specific contract, then a gross payment may still be made to the PSC.



HOW IS THE STATUS DETERMINATION REACHED?

Previously the responsibility of whether IR35 applied was down to the worker.  That responsibility has shifted to the End Client under the Public Sector, to be rolled out to the Private Sector in April.

There are three main principles to determine employment status (and in some instances it may not be clear cut);

  • Control
  • Substitution
  • Mutuality of Obligation (ongoing obligation of the End Client to provide work and ongoing obligation of the worker to complete the work)

Other factors include whether the worker is taking any financial risk, nature of the job, nature of the contract, whether they are part of the engagers organisation, being in business on their own accord and provision of equipment.

It is a case of reviewing the characteristics, working arrangements and practices as a whole, and deciding whether or not the worker is operating as an employee.

Determination of the status is the legal obligation of the End Client, and should be done prior to the commencement of each new contract and prior to first payment.  The Status Determination and reasons for the determination must be sent to the worker.

The government intends to legislate that the determination is “cascaded to all parties within the labour supply chain”, including Recruitment Agencies.



CHECK EMPLOYMENT STATUS FOR TAX (CEST) TEST

HMRC developed an online tool called Check Employment Status for Tax (CEST) in 2017 to assist in determining the individuals employment status.

You can access this here:  https://www.gov.uk/guidance/check-employment-status-for-tax

To date, HMRC has said that it will stand by the results of the test, provided that the answers given are to the best of your knowledge, accurate and pertaining to that individual on that particular assignment.  You should reassess if there are any changes to the role or the way in which the work is delivered.

As per the website:  “HMRC won’t stand by results achieved through contrived arrangements designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance with associated higher penalties.”

There has been much criticism of the accuracy of the CEST tool and there have been requests for further improvements ahead of any reforms (it does not factor in all the criteria established by case law and assumes Mutuality of Obligation).


WHAT HAPPENS IF THE WORKER DISAGREES WITH THE DETERMINATION OF STATUS?

The worker has the right to request and receive the determination and the reasons behind that determination.  In the event of a disagreement, the Government believes that the End Client should implement a process to allow for determinations to be challenged, by including the consideration of evidence put forward by the worker and the reasons for the outcome.

This should be factored into an End Clients HR or Procurement process.

If a worker still disagrees, the PSC can attempt to reclaim the tax and National Insurance back via their end of year processes.


IS THERE AN EXEMPTION?

Yes.  If the End Client is considered to be “small” it will have an exemption from these regulations. 

In order for the company to be considered small, in the financial year for your business which ends before each tax year, they must have two or more of the following;

  • An Annual Turnover of not more than £10.2m
  • No more than 50 employees
  • A “Balance sheet total” not more than £5.1m


OUR COMPANY IS A RECRUITMENT AGENCY, NOT THE END CLIENT.  DOES THIS STILL APPLY?

Yes.  If the End Client uses an Agency to engage with the contractor, the End Client will still be legally obliged to determine whether the worker providing their services is operating as an employee or not.  The Status Determination and reasons for the determination is then passed to both the Recruitment Agency and the worker.

The End Client would then pay the Recruitment Agency a gross payment.  Depending on the status determination, the Recruitment Agency would either make a gross payment to the PSC or make deductions for tax and National Insurance under PAYE.


WHAT ABOUT THE EMPLOYMENT COSTS ASSOCIATED WITH PAYING A CONTRACTOR CAUGHT UNDER THESE REGULATIONS?

If the worker is seen as employed, there may be employment costs that may be incurred by the End Client or the Recruitment Agency which they should prepare for. 

These may include Employers National Insurance (calculated at 13.8% on weekly income exceeding £166 in the current Financial Year), and Apprenticeship Levy (if applicable).


WHERE DOES THE LIABILITY FOR UNPAID TAX AND NI LIE?

Initially this rests with the party that has failed to meet its obligations, for example has not passed on the End Client’s determination, or to make the necessary deductions – but that liability will move down the supply chain, as each fulfils their obligations until it reaches the last UK entity in the supply chain.

These proposals reinforce the importance of thorough due diligence and for the full supply chain to ensure it has contractual protection and indemnifications in place.


WHAT QUESTIONS COULD THE WORKERS HAVE?

  • Is my contract outside of IR35?
  • How do I get my contract outside of IR35?  In the event that this is not possible, he/she may want to negotiate an increase in his/her pay rate.
  • Can the worker survive the reduced net payment should their contract fall within IR35?
  • Can I move to a smaller End Client to take advantage of the Small Company Exemption?  (This is likely to be a short term solution)
  • Which other options are available should my PSC no longer be a feasible payment option?


WHAT CAN BUSINESSES DO TO PREPARE?

If you are an End Client – can you rely on the Small Company exemption?

If not;

Identify how many PSCs you engage with and which areas of the business are engaging  PSCs.  Once this is done, you can do a risk assessment of your exposure to IR35 and whether changes are necessary to your HR processes when engaging contractors through PSCs.  If you have a large number of PSCs, you may even want to get an advisor on board to assist with the determinations.

You may want to check the contractual arrangements that you have with your PSCs to ensure that you have the ability to make deductions for tax and NI where necessary.

Check that the payroll software that you are using allows you to deal with Off-payroll workers, or whether an upgrade is needed.  Similarly for the Determination dispute resolution.

Analyse whether you able to bear an increase in the cost of your workers should they be within IR35.

Communicate with those workers that will be affected

Finally consider all other options available to your contractors;

  • Umbrella companies
  • PAYE options



WHAT HAVE WE LEARNED FROM THE REFORMS IN THE PUBLIC SECTOR?


We have seen some agencies allow their contractors to use schemes that facilitate high net returns on their wages (often 90%), believing that they cannot be held accountable if they did not recommend a scheme that is sourced and chosen by a particular contractor. This is simply not true as the Criminal Finance Act is clear that Recruitment Agencies need to do their due diligence on every provider used by their contractors, to ensure that it is compliant and that they are not party to tax avoidance.  It would be insufficient to state you were unaware of the non-compliance of a company.   Agencies may face criminal charges under the Criminal Finance Act.  The only defence would be that an Agency had taken positive steps in order to prevent the facilitation of the tax avoidance.

Read more about the Criminal Finances Act here:  http://www.escg.co.uk/the-criminal-finances-act-are-you-ready/

Schemes currently being investigated by HMRC under the Spotlight are: https://www.gov.uk/government/collections/tax-avoidance-schemes-currently-in-the-spotlight-number-20-onwards#spotlight-50-onwards

Some agencies used a “Blanket assessment” approach, meaning that they deemed a group of contractors all caught by IR35 without looking at each individual and their contractual arrangement.  This meant that some workers were unfairly treated.  The new legislation calls for more duty of care on the part of the End Client.




Please get in touch for more information on how our fully compliant business solutions can help you navigate these challenging times.

Call us on 0207 808 6405

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Off-payroll regulation in the private sector – the impact on recruitment agencies

With the Budget only days away, the biggest and arguably most contentious issue to be addressed is that of the off-payroll regulations potentially being extended to the private sector. Many agree that if this is extended to the private sector, the effects will be significantly detrimental to businesses as most are simply not ready to implement the changes required.

The extension of this measure is aimed at increasing the tax collected as the Treasury Department claims that many contractors offering services through personal service companies are in fact employees therefore paying less tax than if they were employed directly. However, this regulation may end up end up having the opposite effect if there is a similar fall-out to that which occurred in the public sector. In the months following the implementation of public sector off-payroll regulation there were delays to projects, higher costs to hirers and a shortage of skilled workers in crucial areas.

If the changes are rolled out to the private sector, recruitment agencies will have an increased administrative load on two fronts. First, by being responsible for assessing each contract ,and then, by managing the deduction of tax and NI if a contract does fall within IR35. Both of which are non-core recruitment activities for a recruitment agent.

This assessment is not straight forward and HMRC’s own Check Employment Status for Tax (CEST) tool has been fraught with errors since inception. A recent ruling by a tribunal judge rejected the ‘employee’ status that the tool had determined for a particular contractor thus paving the way for other contractors to also claim tax and NI back from being unfairly ‘caught’ by these regulations.

HMRC will not be responsible for this liability despite their tool being the cause of the incorrect tax deduction decision. This liability will fall on the agency and hirer. Furthermore, some recruitment agencies are still paying self-employed workers gross amounts thus running the risk of bearing the full tax and NI liability of the contractors.

There are a multitude of tax avoidance schemes that offer to circumvent legislation in various ways.  A list of some currently in the spotlight can be found here: https://www.gov.uk/government/collections/tax-avoidance-schemes-currently-in-the-spotlight

ESCG represents a new non-umbrella service provider that offers a unique PAYE solution that works within the legislation and results in a favourable administrative and financial position for both the agency and temporary worker.

Each of our service providers have developed their online systems in-house tailoring them to the unique temporary worker environment. Their technology allows them to be more efficient and more affordable than off-the-shelf products. More importantly, we have found that both agencies and workers have a much better overall payroll experience!  By including the use of API’s in their offering, they are also able to facilitate the seamless communication of information and data between their payroll systems and those of their agency partners. This results in a more efficient end-to-end process from sign-up through to payment with fewer errors.



ESCG are confident the solutions we represent will navigate the upcoming changes successfully.  Please get in touch for more details.