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What will IR35 in the Private sector cost you?

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Since the change was announced that the new IR35 rules will extend into the private sector from April 2020, contractors and agencies have been scrambling for more information. 

Contractors are justifiably concerned about how this legislation might impact their take home pay, and if they will be able to continue to be paid through their limited companies in the new tax year.  

For agencies, the challenge is to evaluate alternate methods of payment for assignments that have been deemed to be inside IR35, and to communicate this change to a contractor base who will primarily view this as bad news. 

The good news is that it doesn't need to be that bad, if you plan.

Contractors

Have you been told that your assignment is inside IR35 and that you will no longer be allowed to use your limited company or PSC from April 2020?

Using the services of a reputable and complaint Umbrella company seems to be the most popular alternative alongside agency PAYE.  Being paid through an Umbrella company certainly has its advantages, both from an employment and tax benefit perspective. 



Your take home pay post April 2020

Are you wondering what your take home pay will be through an Umbrella company or Agency PAYE?

This will give you an idea of what to expect and to plan for:

Hours/Days worked - 
Hourly/Daily Rate -

PAYE

Umbrella

MyPSC

Gross

£ £ £

PAYE

£ £ £

Employer Costs

£ £

Employees NI

£ £ £

Admin Margin

£ £ £

Net Due

£ £ £

Tax brackets are for the 2019/20 Financial year.  Employers Costs include Employers NI & the Apprenticeship Levy.
The above table assumes that you;
-are on the standard tax code for the current Financial Year
-have not submitted any business related expenses
-would receive a 15% lower rate on PAYE



Recruitment Agencies

Are you still deciding on what course of action to take from April 2020?   In addition to the inevitable conversations around pay rates, you are probably considering whether to introduce the services of an Umbrella company or perhaps even put together a PSL.  You could also be weighing up the pros and cons of  introducing or expanding on your own in-house PAYE.





How can we help?

ESCG represents a number of clients, offering solutions that include PSC, Umbrella and PAYE.  We are in a unique position to be able to provide a range of options and have experience of having advised both agencies and contractors when the change to IR35 was implemented in the Public sector in 2017. 



Contact us

If you are a contractor or an agency looking for an Umbrella company or generally looking for a way forward, we have options.  If you are an agency and thinking of employing contractors on your own PAYE but don't necessarily want to run a payroll, we can offer you a solution.




If you would like us to contact you about our services and solutions, please take a minute to complete the form below.

I am a -  Agency Contractor
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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.

General Data Protection Regulation (GDPR)

What is GDPR?

 

GDPR is an acronym for the General Data Protection Regulation and is the framework which is replacing the Data Protection Act 1998, from 25th May 2018.

The intention of GDPR is to align data protection laws across the EU and will update the current regulations in the ever-changing working environment. The GDPR sets out the requirements for how organisations will need to handle and protect personal data, and will be covered by a new Data Protection Bill.

 

The Regulation will apply to any company processing the personal data of individuals in relation to offering goods and services. The GDPR will continue to apply to UK businesses, regardless of Brexit as the UK will continue to remain a part of the EU until at least 2019, regardless of Brexit negotiations. It is also likely that any replacement legislation post-Brexit, will be largely similar if not the same as GDPR.

 

Are there fines or penalties for non compliance?

Significant penalties can be imposed on employers who breach the GDPR, including fines of up to £17 million or 4% of the businesses annual turnover, whichever is greater. This is far higher than the maximum £500,000 currently at the Information Commissioners Office's (ICO) disposal.

The level of fine will depend upon the type of breach and any mitigating factors, but they are designed to strongly penalise any employers who show a disregard for the GDPR.

 

Who enforces GDPR in the UK?

The Information Commissioners Office.

 

How has this impacted our clients?

Our clients continue to pro actively maintain their compliant business models, and ensure they are striving for long term success and sustainability. In response to the level of work needed to update their current practices and policies as they will apply to the new rules and requirements, our clients have been preparing for the anticipated changes for some time.

 

ESCG have the highest confidence in their clients’ abilities to meet the new responsibilities under the terms of GDPR. During the last few months, our clients have been carrying out full GDPR compliance reviews, analyses and risk-assessments. All data processing documentation that they hold will be relevant to the new Regulation, when it comes into effect.

 

They are taking three key steps to achieve this:

 

  1. Documenting all current processes and data flows, and analysing any potential areas of weakness or vulnerability of all information that they hold. This enables them to identify areas of improvement in advance of the GDPR deadline.

  2. Carrying out detailed internal audits. This is extremely helpful in identifying their overall level of compliance ahead of the introduction of the Regulation.

  3. Conducting risk assessments to identify where any additional security measures may need to be implemented within their software range.

  4. Updating their policy and processes to meet key GDPR compliance requirements prior to the Regulation’s introduction.

 

What should you be doing as a recruiter?

If your agency's policies and practices comply with the current Data Protection Act requirements, you are on track to complying with GDPR.

 

The IOC has developed a 12 step guide to assist you, which can be found here:

https://ico.org.uk/media/1624219/preparing-for-the-gdpr-12-steps.pdf

 

Engaging with one of our clients could assist you in your preparations, and offer support to you and your temporary workers. Please contact ESCG if you require specific information related to preparing for the GDPR.

The Criminal Finances Act – Are you ready?

Brief introduction
From the 30th of September 2017, the Criminal Finances Act 2017 will make companies criminally liable if they fail to prevent tax evasion by a member of staff, or a contractor, even if the senior management of their business was not wholly involved nor aware of what was going on.  These new set of rules are targeting the deliberate and dishonest behaviour and will hold corporate bodies liable where it can show facilitation of tax evasion.

For you, the Recruitment Agency, this also extends to your consultants that recommend to such schemes that facilitate tax evasion.

How would you be liable?
For a company to be liable, 3 stages must be established;

1.  Criminal tax evasion by a individual or firm under existing law
For example, a contractor uses a scheme, where part of their income is treated as a disguised loan.  HMRC have published spotlights on it's website which includes non-compliant schemes such as loans, annuities, job boards etc.  You can find more information on this here:

https://www.gov.uk/government/collections/tax-avoidance-schemes-currently-in-the-spotlight

 2.  Criminal facilitation of the offence by a representative of the firm
For example, the recruitment consultant who recommends the "take home pay of 85%" (or similar) scheme to the contractor.  A referral fee paid to the consultant would provide a clear motive for dishonesty.

3.  Corporate failure to prevent it's representative from committing the criminal act outlined at stage 2
For example, the agency that employs the recruitment consultant who fails to prevent the tax evasion.


What is the defence from criminal liability?
Recruitment agencies will be expected to prove that they have rigorous procedures in place to prevent the facilitation of tax evasion, or that it was not reasonable under the circumstances, to expect it to put such prevention procedures in place.  It will be necessary to carry out checks on your supply chain to monitor referrals made to third parties by your consultants.


What are the Penalties?
  •      Unlimited financial penalties
  •      Ancillary orders such as confiscation order or serious crime preventions orders.
Obtaining a criminal conviction could have serious consequences not limited to just reputational and financial.


What can you do now?
  • Risk assessment -- which suppliers are your consultants referring to?  Are these exposing you to risk of tax evasion?
  • Review your PSL and your supply chain - ask whether they would be happy to sign a disclaimer, and / or provide information that shows that they are not facilitators of tax evasion.
  • Recruiters must show that they have reasonable preventative measures in place which stop their contractors joining these schemes
  • Train your consultants on compliant options - we would be happy to provide assistance with this
  • Update your internal policy and consultant hand book

 Also look out for...
Undisclosed payments -  Payment made directly to consultants for referrals may show motive as well as awareness of the scheme.
Acknowledgement that the contractor is receiving a higher financial net benefit - those schemes that promise a "Too good to be true" take home pay, probably are.

Finally
Does this measure cover tax avoidance?
• The new laws target deliberate and dishonest behaviour at the taxpayer level.
• They do not create any new offences at the individual level - if activity would currently be considered tax evasion under the existing law then it will continue to be so.
• Likewise, if activity would not currently be considered tax evasion, then the new law does not make it tax evasion.


Remember that this becomes enforceable from the 30th of September 2017, if you are at risk, you need to act now.


 ESCG welcomes this piece of legislation and hopes that it stamps out the non compliant businesses that exist in the current market.  We continually ensure that the solutions we promote are complying, and are happy to discuss any concerns that you may already have so please feel free to give us a call:  0207 808 6405

Have you been approached by direct tax avoidance schemes and are they worth the commercial risk?

Legislation over the last 24 months has changed to tighten up on any tax-avoidance loopholes to varying degrees. This is evident in areas relating to Supervision, Direction and Control (SDC), VAT Flat Rate Scheme for limited cost and service companies, employment allowance for 1-man Limited Companies, public sector IR35 measures, and companies issuing ‘loans’ that are never repaid.

It is therefore not surprising to see a host of new (and arguably creative) offerings surface, promising high returns that are seemingly unlikely if not impossible to achieve without being contrived.

If it sounds too good to be true, it probably is. We want to make you aware of such schemes and the risks involved in engaging providers of such schemes so that you are better placed to make more informed decisions.

Employee Benefit Trust (EBT)

This is classed as "disguised remuneration" and occurs where an employer pays a contribution onto a third party (EBT) instead of paying the employee directly.

The EBT then provides the funds to the employee in the form of loan. These loans are generally interest free, and are signed under terms that meant that they would not be repaid in the employee's lifetime.

Alternatives to a loan could be that the funds would be invested by the third party, to be provided to the employee at a later stage. Both are intended to avoid payment of Income tax and National Insurance.

The disguised remuneration legislation was introduced in the Finance Act 2011. Since then, there have been several incarnations of the above including Employer

Financed Retirement Benefit Schemes (EFRBS) which claims that workers are not solely employees.

HMRC is tackling those that have not taken the settlement opportunity by investigating tax returns and seeking full settlement of tax due, plus interest and penalties where appropriate.

Details can be found here and here.

Employment Allowance (EA)

The Employment Allowance (EA) entitles employers to save up to £3,000 in employer's National Insurance per year and is designed to help alleviate the costs incurred on payroll and administration for small businesses. This was never intended for Personal Service Companies and as such the law was refined to exclude companies with only 1 owner/employee.

Since then, certain schemes are being marketed that exploit this by ‘combining’ 2 or more limited company contractors to operate via a single limited company. This tactic has also been used by umbrella company providers.

This pitch has even been extended to the recruitment agency themselves, whereby the agency opens up multiple sub-agencies, each employing 2 or 3 recruitment consultants.

HMRC has strongly advised against this, with the risk of liability for underpaid NI, in addition to litigation costs, at stake. You can view the HMRC guidance here.

 

A case in point: two years ago a company providing such a scheme was brought to light in a BBC recorded meeting, which you can listen to here.

This type of arrangement is unlikely to be branded an ‘umbrella company’, but could be called a PAYE solution, or indeed an entirely new name.

Annuities

An annuity is a type of investment where a person pays a lump sum, usually to a pension company, in return for guaranteed income. Private annuities, such as those used in this scheme are very rare.

The premise of this scheme is that an employee is paid a salary (kept to a minimum to attract little or no tax) and the second part as a non-taxable capital payment for a deferred annuity.

HMRC have been clear when stating that schemes involving annuities are within the scope of the proposed new loan charge, which will apply to all outstanding disguised remuneration loans on 5th April 2019. They have also stated that they will investigate all tax affairs, and that unless the capital sum for the deferred annuity is paid back in full by April 2019, or settled with HMRC, the new loan charge will apply to the outstanding sum.



More on the Loan Charge here.

Job Boards

This could be marketed as an umbrella company, whereby the employee, as the annuity example above, is paid in two parts. The first part is a salary (kept to a minimum to attract little or no tax) and the second part is used to advertise the contractor’s services via a job board. They receive loyalty points for retaining their details on the job board, which can be cashed in by the employees shortly thereafter with no deductions for tax or NI. The employee usually would pay a large margin for using this scheme.

HMRC is, again, very clear when they state receiving and redeeming loyalty points is taxable income, which forms part of the contractor’s employment income.

Both the contractor and any businesses involved in this type of scheme may be found liable for all unpaid taxes. You can find more information on this here.

As with anything, should you wish to discuss the above, or any new offerings / solutions offered to you, we encourage you to get in touch with your Account Manager. We deliver honest opinions, evidenced by legislation and legal advice; and promote sustainable solutions that benefit all parties.

Off-Payroll Working in the Public Sector

In the Autumn Statement of 2016 the government confirmed that it would introduce new measures into the intermediaries’ legislation (IR35) with effect from April 2017.


The most significant measure being a shift of responsibility for determining the status of an engagement, assignment or contract in the public sector from the worker to the client, where a Personal Service Company (PSC) is involved. Under the new measures, the public authority (end-client) will be responsible for determining the status of a contract and whether the new off-payroll legislation should apply.

Where it is determined that the new IR35 rules apply, the “fee-payer” (public authority, agency, or third party) that makes payment to a PSC becomes responsible for deducting and paying associated employment taxes and National Insurance contributions.

This could have significant impact on contractors using a PSC to provide services to a public sector organisation (such as an NHS Trust, government bodies), either directly or through an intermediary (such as a recruitment agency).

The new rules only apply to public sector assignments, so private sector assignments are unaffected and only the existing IR35 rules apply.

What is changing?

  • The Director of a PSC will no longer be responsible for deciding whether an engagement is inside or outside IR35 when the end client is a public body;
  • HMRC is developing a new online tool to determine the status of engagements which is set to replace the current employment status indicator tool;
  • If there is an intermediary who pays the PSC, the public body must inform them of their IR35 assessment;
  • If the engagement is assessed to be outside IR35 then the director can continue to operate as normal and decide how best to structure his PSC’s finances;
  • If the engagement is assessed to be inside IR35 (“deemed employment”) then the party paying the PSC must deduct PAYE and employees NIC from the invoice value, net of VAT, and pay this together with employers’ NIC to HMRC
  • The PSC receives the net invoiced amount from the fee-payer; and
  • The Director, in his personal capacity, will receive credits against the tax that has already been deducted.


How will it affect contracting to the public sector?


HMRC will provide a more practical tool that public bodies can use to aid them in their decision making. We expect this tool to be similar to HMRC’s previous guidance on employment status.

If this is the case then most contractors will be considered by the public sector organisation to be caught by IR35, and therefore National Insurance and PAYE on the invoice value must be deducted from the PSC. The contractor effectively receives a significantly reduced net payment, equivalent to that of a PAYE employee, but is not entitled to any employment or statutory rights from the fee-payer. Furthermore, that contractor will continue to bear the cost and administrative responsibilities of operating their own limited company.

How will this affect recruitment agencies operating within the public sector?

Such agencies should anticipate an increase in administration efforts as a result of the additional calculations, deductions, payments and reporting requirements of all “deemed employment” payments. This will result in a shift of agency resources from their core activity of placing workers to a non-core activity of payroll.

Agencies should also prepare for a direct increase in costs as Employers NI and Apprenticeship Levy will also now be due on such payments. How agencies choose to finance such costs should be carefully considered. One option to avoid such costs is discussed below.

What solutions can we offer?

In cases where contractors only operate within the public sector, ESCG can offer a solution suited to both workers and clients – partner with a well-established Umbrella company. More information on what it means to be a well-established Umbrella company is outlined in a previous article: Sustainable Decision Making.

While an Umbrella company may not provide contractors with the same level of take home pay they are used to, it will provide full employee and statutory rights as well as an employee benefit scheme, helping them to save up to £1000 per year.

Some additional benefits for both the contractor and agencies also include:

  • More cost effective than an Accountants Service
  • Little or no administration when compared to a Limited Company
  • Employers Liability, Public Liability and Professional Indemnity insurance is included at no additional cost
  • Consistency of pay, with no third parties making deductions to invoices
  • Reduced end-client assistance as no IR35 assessment required
  • Agencies only need to make one single payment for all contractors, as opposed to individual payments for each limited company
  • Simplified RTI
  • No joining or leaving fees
  • Same day registration meaning no delays in payment

If you or your business is to be affected by the new changes, take the time to digest the above information and give us a call to discuss the best solutions appropriate to you.

 

 

HMRC guidance on the new measure can be found here :
https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation

Sustainable Decision Making


2016 was an eventful year all-round, specifically for the UK and the UK temporary work sector. Despite the challenges faced, ESCG and its clients have risen above 2016 and are set to move well beyond 2017. We are taking this opportunity to highlight the milestones achieved thus far and demonstrate how the strategies our Umbrella Company clients put into effect have proved, not only fruitful in the short-term, but sustainable in the long-term as well.

Independent Legal Advice
Whenever there is an upcoming legislative change, our clients’ first call to action is seeking independent advice from trusted legal experts within the industry. While there are several associations and organisations that provide ‘blanket’ advice to their members, our clients prefer to obtain specific advice tailored to their specific business model from their own trusted authorities on all matters, despite the additional cost.

Consistency and Continuity
Over the last 10 years, our Employment Business clients (often referred to as Umbrella Companies) have engaged the same legal advisors on all related matters. As such, the advisors have developed an in-depth knowledge and understanding of our clients’ businesses, processes and policies. This, coupled with their tax and employment law expertise, results in objective and practical assessment with no conflict of interest. Our clients are therefore able to expedite the design and implementation of any new changes required efficiently and effectively.

Embrace Change, Stay True
This evolution of one’s business, in line with the ever-changing business environment, can be successfully realised by embracing change and holding true to one’s core values and principles. Having established clear business goals supported by a robust business model is a key factor. Simply ebbing and flowing with the general business tides by making short-term adjustments and workarounds to keep afloat is not a sustainable strategy.

Not all Umbrellas are Equal
Umbrella companies have had more than their fair share of challenges over the last decade, yet our clients have not changed their underlying business model since inception. Their goals are always clear: leverage their bespoke systems to deliver exceptional service to temporary workers and agency partners, supporting them with all their needs in a fully compliant manner. In a nutshell this means taking on all employer responsibilities when engaging temporary workers and providing suitable workers to agencies to place on assignment; followed by invoicing appropriately for services performed and taking a margin on such invoiced work. Our clients have always been fully transparent about this. As new rules and regulations appear, some Umbrellas have made drastic changes to prices, some adopting completely new business models to capitalise on the current form of the law with little attention given to the substance.  Ours, have not.

Example 1 – Outsourced Payroll
Some providers openly charge a ‘fixed fee’ per timesheet or per week, a concept that was never adopted by our clients as it is unclear to whom this fee is being charged. Justifying charges such as ‘fee per unit’ is also challenging as it is akin to the pricing method of an outsourced payroll provider, which is not congruent with the values of an employment business. This incongruence materialises in different forms ranging from poor customer service to subtle acts of non-compliance as the focus is on processing payments instead of providing services.

Example 2 – Salary Sacrifice
Similarly, operating a salary sacrifice scheme was never a considered option due to its inherent contrived nature, and unsurprisingly, the government has legislated that from April 2017 employers operating such schemes will no longer be able to offer any tax or National Insurance advantages, apart from a few exceptions.

Example 3 – Deemed Employer & Flat Rate Vat
Arguably, the most significant deviation away from the spirit of the law (and from the Umbrella model in general) was the introduction of schemes that require temporary workers to establish and manage their own Limited Company solely to circumvent the new SDC legislation. Furthermore, providers of such schemes were not always disclosing the fact that they were exploiting the Flat Rate Vat rules for their own gain (gains which could have been realised for the worker instead).

Offering such a model was frowned upon by our clients as doing so would compromise their integrity by encouraging workers whose circumstances were not necessarily suitable for operating a limited company, to now do so purely to skirt a particular piece of legislation. The government, only a year later, has already introduced a new 16.5% VAT rate from April 2017 for businesses with limited costs, such as labour-only businesses, thus effectively shutting down those schemes and bringing the integrity of those providing such schemes to question.

Collaborate, Educate, Support
Such legislative changes as above are welcomed by our clients as their business models were designed to stand the tests of time. More importantly, their approach to decision making has always been collaborative and supportive; adopted to ensure that any actions pursued will result in the best interests of all parties concerned. This approach is essential, because no degree of integrity or moral high-ground is of value if what you are providing cannot be effectively used by those receiving it. Input and feedback from all parties, specifically recruitment agencies and business partners, is therefore critical to our clients’ success. Only after understanding the parameters and constraints that agencies are bound by, are our Umbrella Company clients able to develop solutions that overcome such hurdles.

A Team Effort – Upcoming IR35 Changes
The recent change to the IR35 legislation affecting public sector bodies brings to light a fitting example of such collaboration and support. A few of our clients’ agency partners, well ahead of the game, proactively sought guidance from our clients on how best to proceed with this change as a large proportion of their candidates using limited companies are to be affected. Our clients confirmed the exact changes and the impact to all parties before they together drafted a plan of action, communicating the changes and the impacts to the contractors, and outlining the specific reasons why the contractors are being encouraged to engage with our Umbrella Company clients from April 2017.

Our Umbrella Company clients then committed resources to ensuring that any queries raised by the affected workers were promptly resolved and that any additional information required to help  make an informed decision was provided. They subsequently rolled this plan out to all their other agency partners. The bottom line is that our clients were there to work with and support their agency partners to adequately address the needs of the affected contractors by designing and implementing specific processes.

Value Added Services
Another form of support is being able to offer value-added services over and above what the law dictates as a minimum. This often comes at the expense of the Umbrella Companies themselves but benefit all parties concerned. One such example is the introduction of an Employee Benefits Scheme that our Umbrella Company clients have made available to their employees which provide access to a plethora of online and in-store discounts, vouchers and cash-back rewards that effectively increase the take home pay of workers without a billing rate increase.

Tying It All Together
A final case in point that brings together all the points addressed here occurred in early 2016 when the new Supervision, Direction and Control changes were soon to become effective. There was much hype around this change, with many marking that point as the start of the demise of Umbrella companies as we knew them.

This was not the case for our Umbrella clients. Acting upon the advice received after discussions with their advisors, our Umbrella clients embraced this change without entertaining contrived alternatives. They collaborated with their agency partners to develop policies and processes that incorporated the changes in an efficient manner. This was accomplished with less than sufficient HMRC guidance in a period of much uncertainty and unknown.

Systems were then updated to facilitate SDC assessments and fully compliant expense claim reimbursements. The changes were rolled out and communicated in a timely manner resulting in a smooth transition with minimal disruption for both their agency partners and temporary workers. Further value was added with our clients’ Employee Benefits Scheme, competitions, promotions and improved systems and mobile app.

Beyond April 2017

It is safe to presume that the reason for many of the April 2017 changes is to reduce what the Government perceives as unfair advantages to certain types of workers within both the public and private sector. With the increase in the number of contrived business models and operations within the temporary work sector in the past year, this comes as no surprise. Most of these newer structures have been established outside the spirit of the law and HMRC has called these out.

ESCG and our clients have always maintained a sustainable, long-term approach to our strategic decisions and the positive results of such decisions are now being realised. While some of the proposed changes will heavily affect the industry, our clients look forward to the new tax year as their offerings and solutions are already in line with the changes.