Tax risk for users of temporary resource

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The issue

Do you engage temporary workers via resource providers such as staffing companies and umbrella companies? Are any of these resource providers asking you to certify that you do not supervise, direct or control the workers, nor do you have a right to? Can you truthfully make this statement in all cases? If not, you may be exposing your business to a tax (and NICs) risk. Why?

The background

Changes to tax legislation known as the "agency legislation" mean that, since 6 April this year:

  • where a worker personally provides services for you, the end user client, via one or more intermediaries (such as a staffing company and/or an umbrella company); and
  • it cannot be shown that how the worker provides the services is not subject to any person's supervision, direction or control or anyone's right to supervise, direct or control; and
  • employment income tax has not already been accounted for,
  • then the intermediary that has the contract with you, the end user client, will be liable for deemed employment income tax (and NICs) in relation to the worker's remuneration for the services provided.

This is the case except in certain instances of fraud. For example, where the end user client fraudulently confirms in writing to the intermediary that the manner in which the worker provides the services is not subject to the end user client's supervision, direction or control.

The danger

Some resource providers are asking their end user clients to sign a document certifying that they do not supervise, direct or control the workers supplied by the resource providers. Sometimes these requests are accompanied by a veiled suggestion that the cost of hire may increase if the requested certification is not supplied. These resource providers also provide assurances that the agency legislation does not apply because the workers are self-employed, but that, if the legislation is found to apply, payment of the deemed employment income tax (and NICs) will be the resource provider's responsibility and not the responsibility of the end user client.

Such assurances from resource providers that end user clients will not be liable for any such income tax payments may not give the full picture and should be treated with caution. If the end user client has provided the requested certification, but the manner in which the workers provide services is in fact subject to (or to the right of) supervision, direction or control, and HMRC subsequently assesses (correctly) that the agency legislation applies, it could be the end user client and not the resource provider that is called to account for the unpaid tax (and NICs) if fraudulent intent is proved (although this may be difficult).

The fix

In order to protect your business from this potential tax hit:

  • Beware unscrupulous providers of resource. Only work with reputable, professional resource providers.
  • Ensure that you understand all supply models.
  • Review and improve your preferred supplier list of resource providers or put a list in place if you do not already have one.
  • Regularly carry out due diligence on providers of resource to your business. Keep a record of your checks.
  • Review and amend your standard contracts and vary contracts you currently have in place with resource providers, for example, to add tax indemnities and to remove any untrue acknowledgements about supervision, direction and control in relation to how temporary workers provide their services.
  • If you always contract on resource providers' standard terms, consider having your own standard contracts for use with staffing companies, umbrella companies, personal service companies and the like for the supply of temporary resource in order to ensure all potential risk areas for your business are covered.
  • Do not sign statements or contracts that do not reflect reality or represent the true position, particularly in relation how temporary workers provide services, including, of course, whether they are subject to your supervision, direction or control. We are aware of cases where, for example, companies which are effectively payroll providers are masquerading in their client contracts as construction companies with the skills to undertake construction projects. The project work is purportedly performed by self-employed resource. The clients are asked to certify the status of the workers as self-employed when clearly most of them are not, thus exposing the clients to the risk of being hit for tax (and NICs) under the agency legislation in relation to the temporary workers they engage via these companies.
  • In order to reduce your exposure, to the extent that your due diligence can establish this, contract with entities that deal correctly with their tax affairs. Such entities include personal service companies that pay their workers salary from which employment income tax (and NICs) is deducted and accounted for and/or pay dividends as a genuine consequence of their workers' shareholdings in the company; and umbrella companies which employ individuals under contracts of employment and deduct and account for employment income tax (and NICs).

Contact us if you have any queries or require advice or assistance in relation to the above. We can, for example, assist you with assessing your supply models and potential risk exposure, as well as reviewing your contracts with resource providers or drafting new contracts for the supply of temporary resource.