Recruitment owners and directors; do you understand your personal and professional risk around Onshore Employment Intermediaries legislation and using Elective Deduction (Hybrid) Models?
Onshore Employment Intermediaries Legislation is here, what’s happening?
It's been just over a few months since Onshore Employment Intermediaries legislation came into effect, and yet it still seems that there are many recruitment business owners either unaware of the real impact of this legislation on their business and themselves personally. From conversations with business owners, I can tell you there's still a lot of confusion and worry, and in some cases, a clear danger of false confidence.
This industry can be very creative, especially when it comes to tax. I've seen all manner of models that promise a 'way out' for agencies. Some are obviously unscrupulous, others appear seductively above board. Some are obviously unscrupulous, others appear seductively above board and some may be just about legally ok but clearly are morally and ethically inappropriate... resulting in unforeseen negative impact on the worker.
Together with my colleagues, I've analysed every supposed workaround and clever scheme on the market. We want agencies to know what they're getting into. Without sitting down to understand the ins and outs of your particular business, I can only tell you one thing with complete confidence: Beware anyone selling you a quick fix. There is no 'one size fits all' solution.
Your agency and your workers' circumstances are not identical. It's vital that you are aware of your obligations under the new Legislation but a catch-all option may not be appropriate. You could be personally liable Deliberate phoenixes beware - HMRC has recently indicated that if a recruitment agency cannot meet its liabilities under the legislation, then its director/s will become personally liable. This applies to directors who force their businesses into liquidation.
With your assets at stake, compliance should not be optional.
What are Elective Deduction Models and how do they work?
The Elective Deduction Model (EDM) is being marketed in various forms as a method of classifying workers as self-employed for employment law purposes, but employed for tax purposes. Sound suspect? Let's call it how we see it. By creating a 'combination status', the clear aim is to side step National Minimum Wage requirements, Agency Workers Regulations, Pension auto-enrolment and the recent introduction of Onshore Intermediaries Legislation.
Are Elective Deduction Models legal?
This contradiction of common sense is a compliance minefield. Along with leading trade bodies FCSA, REC and APSCo, I would personally urge all agencies to consider carefully before using any EDMs. HMRC has reiterated that the targeted anti avoidance rule (TAAR) will be brought in to prevent anyone who attempts to avoid the intent of this legislation. Why have EDMs been created? Onshore Intermediaries Legislation certainly has its problems. The proposed legislation, which came into effect on 6th April, seeks to tackle 'the use of employment intermediaries to facilitate false self-employment and avoid National Insurance Contributions and income tax.'
This is a genuine issue, but difficult to resolve. Many believe that the Government has further penalised compliant operators with additional admin and legal obligation, while giving their non-compliant competitors more reason to flout the law and gain a bigger advantage. Several commentators have taken issue with the definition of 'supervision direction, or control.' Engagers are asked to prove HMRC guidance has been released on this topic but proving a negative remains a tough ask.
Do Elective Deduction Models have any future?
Firstly, it is unfortunate but true that there are a lot of underhand self-employed/CIS and umbrella/employed solution providers operating in the UK - particularly in the construction, driving and security sectors.
Many of these intermediaries inappropriately use compliant models for the non-permanent UK workforce and offer schemes that are at best risky, such as EDMs (sometimes referred to as Hybrid models) which reduce HMRC income and leave contractors at risk. To this end, it is important to apply pressure and legislate; however such a crackdown on "umbrellas" would have little impact on tax avoidance and would generate little extra revenue.
Professional, compliant and transparent employment providers take the employer responsibility very seriously and ensure that all statutory and employment obligations are met. It is very frustrating to the compliant providers, who are tarred with the same brush as that of unscrupulous operators who do a huge disservice to both contractors and recruiters, giving the whole industry and its supply chain a bad reputation.
Indeed, companies that offer thorough, supportive and compliant employment solutions, empower a huge number of individuals to secure work, which is a vital part of our growing economy.