It is generally accepted that the private sector will have to pick up the lion’s share of the burden of producing the new jobs needed if the UK economy is going to pull out of its current difficulties, writes Cormac Marum, Harwood Hutton tax partner
The challenge is hard enough in the face of the economic worries stalking our major trading partners across Europe creating so much uncertainty in financial markets. It is therefore so disappointing to see that UK business has the handicap of an increased ‘jobs tax’. Since April 2011 the rate of employer’s national insurance has increased by 1% so that it now stands at 13.8%. This is a significant disincentive to the creation of the new jobs so desperately needed. No wonder the UK jobless figures for September 2011 made such gloomy reading.
Many UK employers faced with the high ‘jobs tax’ and the increasing compliance costs, real and potential, associated with the ever increasing rights enjoyed by full and part-time employees, have looked to outsourcing as a possible solution. Is outsourcing a way in which UK jobs can be created without crippling costs being imposed on UK employers?
One of the great attractions to employers of outsourcing is that the workers are no longer formally their employees and so all PAYE liabilities, including the payment of the ‘jobs tax’, passes to the outsourcing provider. In effect, the old employer can ‘wash their hands’ of that liability and can, subject to the commercial arrangements agreed in the outsourcing contract, also more flexibly turn on and off the supply of that labour. To achieve this benefit, the old employer has to surrender a degree of control over those members of the old workforce, or of the projected new workforce, whose services are outsourced.
Provided care is taken to address the potential legal and tax pitfalls involved, such outsourcing arrangements can be made to work and can help UK employers to preserve existing, or create additional, jobs in a cost efficient manner.
This approach has received tacit approval within the UK tax code with the introduction of the anti-avoidance rules now formally known as the provisions applying to ‘Workers under arrangements made by intermediaries’ but which are commonly referred to as the ‘IR35 rules’. These rules make the intermediary supplier wholly responsible for administrating these tax laws and frees up the client or customer (in many outsourcing cases, the old employer) from any responsibilities whatsoever. The client or customer should qualify for a tax deduction for the arm’s length payments made to the outsourcing vehicle without any risk of the ‘jobs tax’ applying. This gives almost a ‘green light’ to outsourcing solutions.
t is crucial, however, if operations are going to be outsourced to minimise employment costs, that the contractors supplied under the arrangements involved cannot claim still to be workers so as to claim on-going employment rights from the old employer. The recent Autoclenz case has created a little confusion and concern in this area. In this case before the employment tribunal ‘self-employed’ valeters successfully claimed entitlement to the national minimum wage and holiday pay. Many fear that workers outsourced into an independent entity could claim such on-going rights in a similar fashion.
However, Autoclenz was decided very much on its own peculiar facts and HM Revenue & Customs (HMRC) will find it difficult, in practice, to apply this precedent more broadly in challenges on employment status. Crucial in Autoclenz was the finding that the parties included terms in the contract which neither party intended realistically to apply. In genuine outsourcing agreements put in place voluntarily by negotiation by two independent parties, HMRC will find it extremely difficult to claim employment status because they are not parties to the contract in question. Provided the two parties intend all the terms in their agreement realistically to apply, there are no grounds for HMRC to overturn that arrangement.
Even in genuine outsourcing agreements the customer or client will need to take on board the new Agency Workers Regulations introduced on October 1, 2011. These new rules implementing an EU Directive appear to dictate that agency workers supplied by a temporary work agency should enjoy equal terms and conditions as if they were directly employed by the end-user. Inevitably, where the end-user has outsourced part only of his workforce, these new Regulations will blur the distinctions between employees and genuine outside contractors. This may well encourage HMRC to try and challenge the position and claim that outside contractors are really employees and so look to the end-user for payment of employer’s national insurance.
Outsourcing is far from bad news for the workers involved. Although the liability to pay employer’s national insurance would normally pass merely to the outsourcing provider who becomes the new employer, that may well be ‘a price worth paying’ if it preserves the opportunity of work. Also outsourcing can allow the workers greater flexibility and control over working hours and often workers value such flexibility particularly if they have responsibilities with young families. But the main benefit for outsourced workers is often the opportunity to arrange their affairs in a more tax efficient manner. Particularly workers who would normally be paying tax at higher rates (and so proving costly to their old employers in terms of the ‘jobs tax’) can, with careful planning, still significantly reduce their overall tax liabilities even after the introduction of the new ‘disguised remuneration’ tax rules.