The UK’s governments review of tax schemes for contract workers – what you need to know

Written on 18 Dec 2014

Are umbrella arrangements doomed? Will the cost of UK contract workers go up? Below we explore 10 key developments facing the sector over the next two years.

The news is full of proposed Government reviews of umbrella arrangements and expenses schemes, and other “frowned upon” arrangements in the staffing sector.

This has culminated in the launch on 16 December of an HMRC consultation (“discussion document”) about umbrella contracts and travel and subsistence (“T&S”) expenses schemes operated by staffing companies and umbrella companies. This consultation was flagged in the Autumn Statement earlier in December and will last until 10 February 2015, with potential legislation coming into force in April 2016.

The discussion document contains some suggestions of how the alleged problem with T&S schemes could be dealt with. It suggests that the Government could look at abolition of tax free T&S schemes for any umbrella worker (or employed temp) supplied via a staffing company. This may also extend to Personal Service Company (“PSC”) workers. This sort of measure would hugely affect the take home pay and/or cost to hirers (and to intermediaries) of relevant umbrella workers and employed temps.

Alongside that there will be consideration of the recent OTS proposals about umbrellas and T&S schemes (and BIS are looking at employment status tests), though legislation flowing from these initiatives may not materialise as quickly as that proposed in the December discussion document.

Even if nothing happens as a result of all of the above: 

  • The Government has decided that dispensations and salary sacrifice for umbrella expenses (and others) will be abolished in April 2016 (there will be some ability to pay tax free expenses, but life will be harder for operators of expenses schemes with NICs going up);
  • HMRC can now use the Reed case anyway to look at whether current and historic umbrella contracts are/were truly overarching; and
  •  Intermediaries Legislation reporting obligations from April 2015 will give HMRC data about PSC usage including any surge…and we think that may lead to further legislation relating to PSCs.

Other issues likely to affect the staffing supply chain include the following:

 Immigration law penalties and enforcement may go up as all parties try to “out UKIP” UKIP – and we think there may be a move to make clearer the circumstances where hirers/MSPs/major staffing co’s are liable for offences; and

Data protection penalties (and compliance requirements) are scheduled to increase vastly in 2015-7 becoming a much more serious issue for hirers, MSPs, VMSs and suppliers who pass personal data about candidates to each other.

We are now running fixed price consultations with users and supplier of contract workers to help identify what their next generation flexible workforce will need to look like, what their supply terms will need to cover, what will give them the best combination of safety and cost-efficiency, and what they need to do now.

In the meantime these are ten suggestions about how things may develop in 2015-7:

  1. Devil in the detail. The options suggested in the December 2014 discussion document are likely to attract a lot of criticism. The consultation paper does not set out many of the benefits to the economy of umbrella arrangements, and the measures seem likely to hit not just umbrella and staffing companies (and users of workers supplied by them) but also any businesses whose workers “work for” other companies from time to time (including consultancies, outsourcing companies who specialise in labour intensive services, and law firms). As ever in this sector it is hard for the Government to legislate effectively without affecting a far wider group of employers and workers than was originally intended. Expect a lot of debate about the exact wording used in the legislation – if it’s wide then there may be collateral damage; if it’s narrow there may be loopholes …but political support for these measures seems likely to be very strong (however ill-advised they may appear to be in some respects), and so suppliers and users of umbrella workers need to start planning for some material changes.
  2. Hirers and MSPs etc. will be made liable to help HMRC with enforcement? There may be a big increase in the number of situations where tax liabilities and other liabilities may transfer (to hirers/MSPs). (At the moment tax debt transfer only applies where the supply chain involves sole traders, offshore schemes, umbrellas who supply sole traders/offshore schemes and volume shovelling of workers into PSCs). Transfer of liabilities to big players seems to us the only way an understaffed HMRC can enforce new tax provisions, and reflects how this area is policed in countries like the USA and Germany…and if there is no enforcement/liability transfer all that will happen is that compliant suppliers will be undercut by new entrants/”cowboys”.
  3. US PEO models in the UK? We believe there will still be situations where umbrella/employee leasing models will be attractive, whatever legislation is introduced. As in the US with PEOs they may be able to manage certain costs and provide benefits better than the end users. We believe an industry of heavily evolved umbrella (aka employee-leasing) companies, which do really act as normal employers, will grow (perhaps dominated by 4-6 larger, regulated, players with auditable processes for tax, DP and immigration and insurance). Some staffing companies will of course keep/bring umbrella arrangements in house instead.
  4. The return of PAYE workers? Some staffing companies may increase their usage (for less skilled/relatively dependent workers) of old-fashioned temping models on a full PAYE basis as per ss44-47 of the Income Tax (Earnings and Pensions ) Act 2003.
  5.  Won’t everyone pile into PSCs? Of course there is already legislation (the MSC Legislation of 2007) making you liable for tax and NICs if you “encourage” people into certain types of PSC, so care needs to be taken. HMRC will certainly be on the look-out for any surge in PSC contracting (and we think a surge is likely if the proposed measures come into force). HMRC will be able to see which staffing companies are involved in any surge because of the reports the staffing companies will have to start providing from April 2015).
  6. PSCs will need to change? Because the MSC legislation is complicated for HMRC to enforce, and because not all decisions to use PSC models will follow “encouragement” by a third party, further legislation seems likely to follow any surge. We think that this legislation may effectively prevent someone using a PSC unless they really are genuinely self-employed. As a result, in the longer term, we consider that in the UK the least dependent workers will increasingly move (as in the US) into genuinely self-employed PSC contract arrangements providing services on a “Statement Of Work” basis. These arrangements will go far beyond current “IR35 friendly” arrangements and may involve true b2b payment terms based largely on charging fixed price for pre-scoped deliverables.
  7. Hirers will call the shots on new contract models? Hirers may in time insist that the UK contingent workforce will mainly move into the binary model of leased employees and genuinely self-employed contractors which is increasingly the norm elsewhere in the world.
  8. Opportunities for larger/more sophisticated staffing companies, and move towards outsourcing models? Hirers will no doubt gravitate towards suppliers who can demonstrate proper grasp of the issues relating to these workforces and can demonstrate compliance, and can help hirers manage the scoping of work for SOW projects, and track delivery.
  9. Growth in direct engagement models? Some hirers, partly influenced by VAT (which will to a certain extent depend on the outcome of VAT test cases in 2015), may move towards in house temp bank models involving direct engagement of temps albeit with those temps introduced/managed/payrolled by third parties (including, perhaps, the evolved employee-leasing and staffing companies mentioned above). There are already signs of this – we have set up arrangements at the NHS and in the financial services sector.
  10. Margin only? Some staffing companies – perhaps the niche suppliers with most confidence about how much hirers truly need their candidates – may decide they are best with a margin-only model, under which they get paid for their introductory services (an ongoing % charging basis) but play no ongoing part in paying/”employing” workers, thereby avoiding tax risk.

In other words we consider that there may well be a move towards “proper” employment and “proper” self-employment, and that umbrellas and staffing companies will evolve rather than disappear (with more sophisticated/ larger ones probably finding it easiest to adapt).

Please let us know if you would like a fixed price consultation about how the new world may look for you and what actions you will need to take in 2015.