I thought it might be worth mentioning some comments my colleague picked up re HMRC over coffee when discussing “Pay when paid” contracts as they relate to RPOs.
It was pointed out that often “Pay when paid” occurs with “Umbrella” companies. Whilst properly run “umbrella employment contracts” are generally excluded from the MSC legislation it seems that as well as the inconsistent treatment of recruitment companies HMRC have added a rule for some “Umbrellas”, that you won’t find in the legislation but which they indicated means there is no “Umbrella” exemption and therefore possibly no tax exemption for some “Umbrellas”.
It is perhaps worth saying that the way most umbrellas work is that they treat expenses as a “salary sacrifice” and deduct that sum from what would otherwise be Gross Pay, creating a lower Gross Pay sum against which to apply tax and NI. They usually do not have any cash to pay to their worker but more commonly rely upon the agency sending money to them in good time for them to send the money to the worker by Friday following the previous week of work. Of course the Temp business is fast moving, agencies and “Umbrellas” have to work fast and fast payment transactions are expensive and they frequently fail, resulting in workers not being paid that week.
The new HMRC line appears to be that if the workers “wages” are dependent on a “pay when paid” arrangement, it can be argued that they are not true employees of the “Umbrella” and consequently any “over-arching contract of employment” put in place to achieve tax benefit is invalid and tax & NI should be paid on the original “Gross Pay” and not after any expenses “Salary sacrifice” deduction. Such an interpretation could result in up to 6 years of tax underpayment being claimed by HMRC!
It is rarely worth fighting HMRC in court even when they are clearly wrong (I understand the Arctic Systems case took £600,000 to defend and win) but to do so in such a “grey area” could be disastrous for small companies.
Of course, by using an “Umbrella” the agency should be free from the debt transfer provisions of the Chapter 9 MSC liability. However, if as a result of late payment to workers (particularly if the agency can be shown to be part of the late payment “pay when paid” trail), HMRC decrees the exempt “Umbrella” not to be an Umbrella at all because it does not “employ” the workers, then it seems to me that HMRC could go to agency for debt transfer if the “Umbrella” could not meet its decreed tax bill.
The morale of the story seems to be for agencies to ensure that they can make payments on time every time to any “Umbrellas” they work with or only work with those that guarantee the workers will get paid on time even if the agency pays late.
If you want to find one of those go to www.gainadvantage.org
