As the FT have noted this morning:
A BBC investigation on Sunday said thousands of UK supply teachers were employed by ISS, a Channel Islands-based company, which did not have to pay employers' national insurance contributions because it was based offshore. The BBC did not suggest that ISS was breaking the law and there is no evidence that ISS is one of the companies being investigated by the Revenue. ISS said it was “meticulous in complying with HMRC codes on taxes and expenses”. It told the BBC that HMRC had no grounds to challenge its employees or business partners.
All of which is true. And the BBC said it here.
However, as I said, and as the FT notes:
Richard Murphy, director of Tax Research UK, told the BBC the growth of “umbrella” companies was “the next big UK tax scandal”. At least 150,000 workers are estimated to use such companies, which are set up to pay the salaries and expenses of temporary workers, particularly in engineering, IT and construction.
Now by no means all those people will be paid without employer's NIC being settled, of course. And it is also true that as result of being an offshore employer ISS may not be liable to pay employer's NIC. But the HMRC manual has a lot to say on this issue. The relevant page form the HMRC manual is here. It says:
Where an overseas agency supplies workers within the agency legislation to clients in the United Kingdom, PAYE in respect of those workers should be operated by any branch or permanent representative of the overseas agency in the United Kingdom.
Where the overseas agency has no such branch or representative then the client should be regarded as the relevant person under Section 689 ITEPA 2003, provided the worker is
- within the scope of Part 2 Chapter 7 ITEPA 2003, and
- subject to the general control and management of the client.
The client is, therefore, responsible for the operation of PAYE. The procedure to be applied is set out in paragraph 122 of the Employer's further guide to PAYE.. This procedure should be adopted generally where Section 203C ICTA 1988/Section 689 ITEPA 2003 applies. It is not restricted to employees from abroad.
Similarly for NICs purposes, if the agency does not fulfil the conditions as to residence or presence in Great Britain, the client is treated as the liable secondary contributor by virtue of paragraph 2(c) of column B of Schedule 3 to the Categorisation Regulations. If the worker is covered by European Community regulations or a reciprocal agreement and has a certificate stating that they do not have to pay UK NICs, send the case via the Status Inspector and EST Technical Consultants, to PSN (Technical) for advice if there is any doubt about liability.
In other words, HMRC are very clear employer's NIC (that's the secondary contribution they refer to) is due, and that if ISS are not liable then someone else is. That is the risk I pointed out last night on Radio 5. There could be technical argument as to whether the person liable is the employee (who has been winning from these arrangements to date) or the UK based user of their services but either way NIC is due in my opinion, it is just not payable by ISS. What seems absolutely clear to me (for the technically minded) is that the exceptions in sections 689 and 690 of the ITEPA 2003 will not apply.
Of course it is hard to quantify losses from this arrangement but I note ISS said to the BBC that over £70 million of other PAYE contributions had been made by their staff over the last few years. If employer's NIC was missing using a rule of thumb I would guess up to £20 million has not been paid as a result. I said this on air.
Five things follow. First this needs to be investigated. Second HMRC need the staff to do that investigation. Third legislation is needed to make sure that if there is any doubt in this area it is eliminated. Fourth, massive publicity on this issue from HMRC is needed. But most of all, government itself needs to end the 'temp' culture that promotes this sort of abuse.
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Some of these companies do pay some NIC: they employ the worker on PAYE and pay the minimum wage. All other remuneration is “bonus” and for some reason that part is not subject to normal taxation. Expenses can be set off against it rather as it is for the self employed rather than under the restricted conditons allowed to true employees
I think Employers’ NI itself should be phased out. It is as bad a tax as anyone could devise, carrying a terrible dead-weight loss in the form of disincentivising businesses from creating jobs. The trouble is it has low visibility and therefore no real political cost.
The only thing to be said in favour of NICs, both employers’ and employees’, is that it is a separate income tax which could be hypothecated to fund the state pension. Employees’ NICs stop being paid after 60(?) – not sure if this applies to employers’ NICs as well. The Fabian review of taxes some years back recommended hypothecation but it was not taken up. I don’t recall that the more recent Mirrlees Report covered this at all.
Employers NIC goes on til you die.
There are a couple of things here. Just what is the eventual position with teachers down the line when benefits or such are needed, eg. Health. But there is also teachers superannuation and pension entitlement. Are people being employed, paying their part and then left to find out decades later that they have lost qualifying service?
In a word, yes
Historically teachers were automatically deemed to be employees for the purposes of NICs under the Social Security (Categorisation of Earners) Regulations 1978 (even if they were self-employed for income tax and employment purposes). According to HMRC those regulations applied primarily for the purpose of protecting contributory benefit entitlement.
HMRC consulted on the regulations in 2009 and revoked the part of them that effects “Persons employed at educational establishments in England, Wales, Scotland and Northern Ireland as lecturers, teachers, instructors or in any other similar capacity as well as those persons who arrange for and/or pay the lecturers etc (‘the affected group’).”
The revocation was effective as of 6 April 2012 and from that date “self-employed” teachers are no longer treated as employees for the purposes of NICs. Obviously this opens up the possibility of UK companies avoiding NICs as a supply teacher who does a bit of work here and a bit there may well be able to claim they are self-employed.
HMRC’s internal training and knowledge in this area is very weak. Particularly where there is a UK resident employee with a non-resident employer and no client required to put that individual on their PAYE scheme. In these cases individuals are dealt with using something known as DPNI and most HMRC staff know little if anything about it. You will note that it is almost completely undocumented on the HMRC website and their internal documentation appears to be lacking at best. It is a grossly inefficient system because every individual employee has to have their own DPNI registration which gives them something equivalent to their own personal PAYE scheme.
Most of the HMRC call centre staff have never heard of DPNI and they don’t even know which forms need to be filed at the end of the year (different HMRC inspectors will tell you a P35 is or isn’t required), they don’t know whether penalties apply when forms aren’t filed (different HMRC inspectors will tell you they do or don’t apply) and many of them don’t realise that this is an area where filing must still be done on paper despite the fact that they no longer produce a laser printable P14.
Ultimately the whole thing is a complete and utter mess.
Many thanks for this – I may reuse it as a blog in its own right….
The implicit equation of ‘umbrella companies’ to the ISS model is entirely incorrect.
Legitimate umbrella companies make full deduction of PAYE, EE’s and ER’s deductions and remit them to HMRC.
As well as providing a valuable support service to the UK recruitment industry they provide career contractors with continutiy of employment between asignments and, if properly run, act as effective ‘collection agents’ for an under resourced HMRC. They, as is the flexible labour market, are an integral part of the UK’s economy in allowing people to engage in work that suits their personal circumstances whilst getting their salary net of the correct deductions.
In the absence of true umbrella companies many contractors may be drawn down self-employment, ‘limited company’ or even other tax planning structures such as EBT’s resulting in a lower take for the Treasury.
The point is missed that aggressive structuring providers such as ISS try to use the veil of legitimacy by calling themselves ‘umbrella companies’ and if industry commentators are complicit in failing to draw a distinction then what hope do recruitment agencies or contractors have ?
If HMRC lack knowledge in this area then they should engage with the true umbrella companies and actually use the untried powers available to them (eg MSC transfers of debt) to tacke the outright ‘onshore’ as well as offshore avoidance that is happening through the widespread use of personal service companies.
I do not equate the two, I assure you