The use of employment intermediaries has never been more prevalent than today, as the modern-day workforce becomes more flexible and transient.
Intermediaries are increasingly an attractive means of engaging workers for several reasons, notably the flexibility they offer in onboarding workers quickly, often for short engagements. Intermediaries also reduce internal administrative duties, particularly when it comes to operating payroll and the statutory payments associated with employment.
Despite the benefits employment intermediaries offer, recent court decisions highlight the risks they may give rise to. The following cases demonstrate the complexities involved, from both an employment tax and a legal perspective.
The rulings in Mainpay Ltd v HMRC [2022] TC08678, and Exchequer Solutions Ltd v HMRC provide two examples in the last 12 months where agencies have come under scrutiny. In both cases, HMRC were successful in recovering income tax and National Insurance Contributions (NIC).
The issue before the courts was whether the intermediary companies employed the individuals under an overarching or umbrella contract of employment, which would cover all of an employee’s assignments and any gaps between those assignments, or whether instead there was a series of separate contracts of employment covering each individual assignment.
If there is an overarching contract of employment in place, each place of work is classified as being a temporary workplace and expenses can be reimbursed on a tax-free basis. However, if each assignment is covered by an individual contract, each place of work is considered to be a “permanent workplace” and any expenses that are reimbursed must be subject to tax.
The intermediaries in these two cases -- Mainpay Ltd. and Exchequer Solutions Ltd -- operated on the basis that the contracts held with workers represented overarching contacts of employment. In the Mainpay Ltd, case, the intermediary had obtained specific legal advice on the subject years before. As a result, both intermediaries allowed for income tax deductions in respect of expenses incurred by workers travelling to and from home and their workplace, on the understanding that travel linked to the end-user’s workplace qualified under the “temporary workplace relief” legislation.
In fact, the contracts between the intermediaries and the workers were merely framework agreements. A subsequent contract would be entered into for the worker to provide their services to an end-user, making that the permanent contract for their services.
HMRC argued that income tax relief was unavailable because, whilst each engagement with an end-user was temporary, it represented the entire period during which the worker held the employment. Consequently, income tax relief under the “temporary workplace relief” legislation would be unavailable in respect of any commuting costs.
The courts sided with HMRC in both cases, leaving the intermediaries with significant liabilities to settle dating back multiple tax years.
In the recent case Harpur Trust v Brazel, the claimant was engaged on a part-year contract at a school. In calculating the claimant’s holiday entitlement, the school utilised the 12.07% formula, as was common practice for employees who work irregular hours.
In adopting this approach, the calculation seeks to arrive at a proportionate amount of pay for irregular hour workers compared to their full-time counterparts. The claimant insisted this was unfair, resulting in a claim being made and the ensuing court case.
The court found the employer’s method of calculating entitlement incorrect, and concluded that the holiday entitlement should instead be calculated in line with the method used for full-time workers. In reaching this conclusion, the court recognised that this approach could result in a part-time employee’s entitlement being proportionally greater than that of a full-time employee. However, it concluded that this was not a reason to deviate from the method of calculating entitlement as outlined in the legislation.
Given that intermediaries typically engage workers on irregular/zero-hour contracts, it’s imperative that they take note of this court ruling and update policies and processes accordingly.
In light of the examples noted above, stakeholders should consider their supply chains now more than ever, particularly end users and agencies.
Organisations looking to engage workers via intermediaries should conduct the relevant due diligence before recommending “preferred” intermediaries. Due diligence should seek to clarify the policies and processes intermediaries have in place and should be conducted jointly by employment tax and legal professionals.
Typically, any marketing material that promises overly generous deductions or savings is at risk of not being compliant with relevant legislation.
Intermediaries, on the other hand, need to ensure that they are up to date with all relevant legislation and that any historic advice has been checked to ensure it remains relevant.
The agency business model is well known for operating on tight margins, increasing pressure to find new and creative ways to attract workers to grow profits. At the same time, the legislation relating to intermediaries has tightened over recent years, with the goal of achieving parity with the traditional employer/employee model and ensuring HMRC receive the tax revenue due. Consequently, ongoing monitoring of existing policy/process is vital to avoid unintended consequences down the line.
In the current financial climate, it may be tempting to be drawn to whichever offer delivers the best financials and assume that each stakeholder has completed the necessary checks. Unfortunately, this is not always the case.
Our specialist Global Employer Services team can work with you to review policies and offerings to prevent issues arising down the line. If you require any assistance, please reach out to your usual BDO contact.
Lewis Howarth
BDO in the United Kingdom