April 2016 has seen the widely reported introduction of the new National Living Wage (£7.20 for 25 years old and above, if you don’t already know), with Northern Ireland’s Retail and Hospitality sectors being the first to point out the challenges this wage rise will bring and the potential negative impacts.
Not being reported so extensively however is another piece of legislation that was also introduced in early April. This has the potential to have an even greater impact on all employers that use temporary agency workforces.
The last ten years has seen the continued growth of recruitment agencies using employment intermediaries (Umbrella Companies) to payroll their temporary workers, particularly in the industrial sector. The Umbrella Company acted as an employment intermediary and using its payroll methodology, allowed the temporary worker to claim expenses for travel and subsistence (T&S) to a temporary place of work. In turn, this reduced worker taxable pay value, meaning less tax paid overall and therefore greater take-home pay compared to the standard PAYE method. As the worker paid reduced PAYE earnings, it had the potential to have an impact on the workers ability to borrow in the future, or impact pension amounts due to possibly lower national insurance contributions etc. There was also the added danger of a potential breach of minimum wage legislation as the processing of T&S could technically drop minimum wage workers below the NMW floor.
In addition, another reason for payrolling workers through an Umbrella Company is that the agency gains a cost saving in reduced Employer’s National Insurance Contributions on the expenses claimed. These savings can be used either to increase the profits of the employment agency or to lessen the charge to the end user, allowing the agency to be more competitive in its market pricing. The latter is more typical of late with widespread awareness and use of umbrella payroll schemes across the UK.
The new legislation is aimed at stopping agency workers who are under the ‘Supervision, Direction OR Control’ of the end user, being allowed to claim tax relief on expenses such as their ordinary commute from home to work or their food costs during the working day. If there is SDC then the workplace will now be regarded as a permanent place of work. It is the result of a long running HMRC review of these schemes and confirms not only their desire to claw back lost income tax associated with expenses but also HMRC’s commitment to ensuring that the rules are no longer exploited and are only applied to ‘true’ contractors.
So how exactly will it work? From April 2016, HMRC will determine a temporary worker’s right to claim the T&S allowance by testing whether they are under any form of supervision, direction or control in the manner in which they carry out their work. Where there are procedures, methods, and instructions which must be followed, it is likely the worker will not be entitled to use the T&S scheme and the recruitment agency (and the end user) will be responsible for operating PAYE and act as the secondary contributor for NICs. If this is not done, and HMRC decide that full tax and contributions should have been paid for or by the temp worker, it will be the worker, the umbrella intermediary and / or the recruitment company that will be liable for the shortfall. In short, if it looks and feels like employment (as opposed to self-employment), it will be treated as such for T&S purposes!
It’s estimated that over 90% of recruitment agencies in Northern Ireland now use an umbrella company for at least part of their temp workforce, simply to stay competitive. However, as this information isn’t always volunteered to the end user, you may not even be aware that some or all of your temp workforce are actually engaged through such an arrangement.
If you regularly use large volumes of temporary staff and they are under your supervision, direction or control on how they perform their duties, you may want to seek some clarity from your agency on the pay scheme they are operating for your temps, just for your own peace of mind!
Finally, with the implementation of the recent changes, there has been a lot of activity within the umbrella sector offering ‘alternative’ products. Whilst these products and services may be fully compliant in accordance with current legislation, we would advise anyone ‘receiving gifts from Greek gods’ that if it seems ‘too good to be true’, it might well be. In our analysis, although the end-hirer and agency may benefit, the worker may lose out vs. PAYE. Therefore, the implications of pursuing such an option should be considered very carefully.
The team in Grafton are experts in managing the transition of temporary workers, with dedicated HR, Quality and Compliance functions within our organisation. Grafton have taken great pride in our high ethical standards and track record of legal and tax compliance. With our experience, Grafton are ideal to consult and answer your queries in this complex area. Should you have anything you would like to discuss further about this legislative change or the services that Grafton can provide, please contact Pete Feldman (Managing Director) at firstname.lastname@example.org or Claire Dooher (Regional Director) at email@example.com.