A VAT tax briefing issued yesterday fails to resolve the issues of how staffing businesses can charge their clients VAT, according to a VAT partner at Deloitte.

In a briefing issued yesterday, HMRC restated its long held position on how staffing businesses are allowed to charge their clients VAT.

The briefing was prompted by a Tier One Tax Tribunal decision in March, which decided that Reed could charge VAT on a margin only basis when supplying temporary workers.

HMRC’s position is that only staffing business that are acting as an agent are allowed to charge clients VAT on a commission only basis.

However, when a staffing business is acting as a principal, by contracting with temporary workers (by way of a contract of service or a contract for services) it must charge VAT on the full amount charged to clients — this includes wages, PAYE and National Insurance Contributions (NIC).

Helen Devenney, a VAT partner at Deloitte, told Recruiterthat the contents of the briefing were “wholly expected” and did nothing to resolve the issues around the Reed tax tribunal.

“I don’t see any resolution of this other than through the courts,” she says. This is because the Reed decision was a Tier One Tribunal decision and therefore not legally binding, she explains.

Litigation could either be through the UK Courts or ultimately in the European Courts of Justice, and would take at least two years, she adds.

Devenney says that HMRC “seems to be saying that the Reed case relates to the period prior to the 2003 Conduct Regulations” and therefore is “not applicable” more widely.

She explains that most employment businesses have a contract of service or a contract for services with workers and therefore as they are acting as principals they must charge VAT on the full amount of their invoices. “That is the point that we feel has been untested,” adds Devenney.

“All the contracts suggest that they act as a principal but the case suggests that it’s the economic reality of the arrangement that determines how VAT should be charged that is probably more important,” she adds.

Devenney says the briefing will have little effect on the ground and that clients of recruitment agencies will continue to put pressure on their suppliers to charges VAT on the margin only, and to reclaim overpaid VAT from HMRC on their behalf.

Tom Hadley, Recruitment & Employment Confederation (REC) director of policy and professional services, told Recruiterthat he was aware of pressure from clients, although he says that this has lessened in recent weeks.  

Hadley agrees that litigation is the only answer to finally resolve the VAT issue. However, he says he would like to see any litigation to have the support of the client community, who will be “the real winners” if the Reed decision were to be applied more widely.

Article courtsey of Recruiter 25/08/2011 – read full: http://www.recruiter.co.uk/1010777.article?cmpid=REC01&cmptype=newsletter&email=true

The Department of Business Innovation & Skills have now issued their supplementary guidance notes for the Education Sector. Importantly, they have clarified who would be the classed as the Hirer, specific Job Roles and more clarity on ‘Holiday Pay & Arrangements’.

Please see below the full article:

Agency Workers Regulations 2010 – supplementary guidance relating to agency supply teachers

This guidance addresses issues relating to agency supply teachers and the application of the Agency Workers Regulations 2010 which come into force on 1 October 2011.  It addresses a limited number of issues which relate only to temporary agency workers who are supply teachers.  It is therefore very important that you read this additional guidance in conjunction with the main guidance on the BIS website to understand all the implications of the Regulations.  The guidance is at: http://www.bis.gov.uk/policies/employment-matters/strategies/awd

Who is the hirer for agency supply teachers?

According to the Agency Workers Regulations, the “hirer” is a “person engaged in economic activity, public or private, whether or not operating for profit, to whom individuals are supplied, to work temporarily for and under the supervision and direction of that person”.

A “hirer” will have its own legal identity and is responsible for supervising and directing the agency worker while they undertake the assignment. The question of who is the hirer is a matter of fact to be determined in the light of the circumstances of each case.

(a) Maintained schools

In foundation schools, voluntary aided schools and foundation special schools, the “hirer” is the school’s governing body, being the legal entity to whom the worker is supplied and who is responsible for the supervision and direction of that worker.

In community schools, voluntary controlled schools, community special schools and maintained nursery schools, the “hirer” is either the local authority or the school’s governing body. It is a matter of fact to be determined in each case and depends on to whom the worker is supplied and who supervises and directs that person’s work.

An agency supply teacher can move between schools where the same local authority is the hirer without stopping the clock on the qualifying period unless it is a substantively different role. If an agency supply teacher moves to a school where a different local authority or a different governing body is the hirer, the qualifying clock resets to zero.

(b) Academies

For Academies, including Free Schools, the “hirer” is the proprietor of the school (often known as the “Academy Trust” – the legal entity that has entered into a funding agreement with the Secretary of State in relation to the running of the Academy), being the legal entity to whom the worker is supplied and who is responsible for the supervision and direction of that worker.

An agency supply teacher can move between Academies where the same Academy Trust is the hirer without stopping the clock on the qualifying period, unless it is to a substantively different role. If an agency supply teacher moves from an Academy to a maintained school or into employment with a different Academy Trust the qualifying clock resets to zero.

(c)   Independent schools

In independent schools, the “hirer” is the proprietor of the school.

Generally speaking, if agency teachers move from one independent school to another (which has a different proprietor), the hirer would change.

In some cases, a proprietor may have more than one school, so the qualifying period would not be broken if an agency teacher changes schools under the same proprietor unless it is a substantively different role.

How is holiday pay accrued?

After the qualifying period, agency supply teachers will be entitled to the same terms and conditions, including working time and annual leave, as direct recruits. It should not be necessary to pay agency supply teachers for additional leave to which direct recruits are not entitled. For permanent teachers in schools maintained by an authority inEnglandandWalesthere is no specific provision in the School Teachers’ Pay and Conditions Document for holidays or annual leave.  There are provisions on working time.

As for other workers, agency supply teachers should receive payment for statutory annual leave when they take the leave, i.e. be paid on a 1/365 basis at regular intervals throughout the year.  

What if a qualified teacher is hired to do a cover supervisor or teaching assistant role?

The relevant rate of pay is determined by the nature of the job, not the qualifications of the teacher.

For example, if a school asks a temporary work agency to provide a Cover Supervisor or a Teaching Assistant, and the person engaged to do the work is a qualified teacher they would be expected to carry out the role of a cover supervisor or a teaching assistant and be paid as cover supervisor or teaching assistant.  The role of a cover supervisor is to supervise a class in carrying out a pre-prepared exercise but it does not involve teaching a class. If, however, the person is asked to do specified work as part of this role then after the qualifying period, they must be paid as outlined below.

What if a qualified teacher is hired to do a teaching role in a maintained school?

If the school asks a temporary work agency to provide a teacher to carry out specified work in a school and the person engaged to do the work is a qualified teacher they should be paid as a qualified teacher. If the person engaged to do the specified work is an unqualified teacher they should be paid as an unqualified teacher. “Specified work” means planning, preparing and delivering lessons and courses to pupils and assessing and reporting on the development, progress and attainment of pupils. The pay scales for teachers in schools maintained by a local authority are set out in the School Teachers’ Pay and Conditions Document (this does not cover teaching assistants or other people who are employed to carry out specified work under paragraph 10 of Schedule 2 to the Education (Specified Work and Registration) England Regulations 2003).

Academies, Free Schools and independent schools are free to set their own pay and conditions of employment.  As such if a temporary workers’ agency is asked to supply a teacher to one of these schools it will need to request information from the school as to the relevant terms and conditions to be applied to the agency supply teacher after 12 weeks in the same role with the same hirer (refer to  main guidance).  These are of course subject to the usual requirements under employment law.  

What is the impact of school closures?

The Agency Workers Regulations recognise that in some instances a workplace might close due to the temporary cessation in the hirer’s requirements for any worker to be at the establishment.

This could be applied to a school closure (for example, summer holidays).  If an agency supply teacher is working before and after such a closure and is, for example, 6 weeks into a qualifying period for equal treatment, the qualifying period would pause at the end of one term and start again at the beginning of the next so long as the agency worker returns to the same job with the same hirer.

For additional help on the eduction sector please contact us on 0845 604 0571

(Pay Day by Pay Day tax relief models)

HMRC has now confirmed their intention to attack NMW avoidance with the release of a detailed statement. For convenience here is the full notice published on HMRC’s website.

Pay day by pay day tax relief models

Who should read this statement:

• All umbrella companies, employment businesses, labour providers and employers engaging and paying temporary workers.

• Temporary workers engaged under employment contracts.

• Those in receipt of the services of temporary workers supplied by employment businesses and labour providers, particularly, but not exclusively, workers paid at or near the National Minimum Wage.

Background

HM Revenue & Customs (HMRC) understands that a number of umbrella companies, employment businesses and labour providers are proposing to operate a business model which applies tax, and in some case National Insurance contributions, ‘relief’ on a pay day by pay day basis: a ‘pay day by pay day relief’ model.

Under pay day by pay day relief models, temporary workers engaged under overarching employment contracts and who incur travelling and subsistence expenses which are eligible for a tax deduction under section 338 Income Tax (Earnings and Pensions) Act 2003 (ITEPA), are paid a gross pay which is intended to be compliant with the National Minimum Wage legislation. However, rather than then subjecting this gross pay to Income Tax and National Insurance, the employer applies tax and National Insurance contributions ‘relief’ to the amount of expenses which the employee has incurred with the effect that only the balance is subjected to Income Tax and National Insurance. This tax and National Insurance contributions ‘relief’ is applied each pay day.

Tax and Social Security legislation

The information obtained by HMRC thus far indicates that the model described above does not comply with the Taxes Acts or Social Security Acts and associated Regulations.

How tax relief is applied

An employer operating such a model is not accounting for the correct Income Tax (PAYE) due to HMRC. Income Tax is an annual tax and is assessed in respect of a particular ‘year of assessment’. Any deductions from Income Tax (for example as provided for under section 338 ITEPA) are made from the total income for the year of assessment. There are various requirements which must be met in order to receive the benefit of the tax deduction at the end of the tax year.

 These include that the claim for the deduction by the employee must be made to HMRC – there is no statutory framework for employers to operate the reclaim process.

 National Insurance disregards

An employer operating such a model would also not be accounting for the correct employers’ and employees’ National Insurance contributions due to HMRC. For the purposes of calculating an employee’s earnings, the Social Security Contributions and Benefits Act 1992 provides that ‘earnings’ includes any remuneration or profit derived from the employment, including wages and salaries. The Social Security (Contributions) Regulations 2001 provide that payments made by the employer to the employee to cover certain travelling expenses incurred by an employee can be disregarded in the calculation of earnings for National Insurance purposes from the employed earner’s employment for the purposes of earnings related contributions (i.e. where such payments are made, those payments will not count as ‘earnings’ for the relevant earnings period).

However, the relevant legislation does not provide for a deduction from the amount of that employee’s earnings where the employee meets the travelling expenses out of total income/earnings.

Summary of position

HMRC have set out below the ways in which tax relief and/or a National Insurance contributions disregard can be given effect.

Separate and distinct expense payments or reimbursements made by an employer which are covered by a dispensation

• The employer pays an amount at least equal to or greater than the National Minimum Wage to ensure compliance with the National Minimum Wage legislation. The income and earnings are subject to Income Tax and National Insurance contributions.

• The employer separately and distinctly pays or reimburses an additional amount in respect of certain travelling expenses.

• If those additional payments in respect of travelling expenses are paid under the terms of a valid dispensation, they may be paid without any additional liability to tax.

• The additional payments in respect of expenses would be disregarded for National Insurance purposes.

Separate and distinct expense payments or reimbursements made by an employer that are not covered by a dispensation

• The employer pays an amount at least equal to or greater than the National Minimum Wage to ensure compliance with the National Minimum Wage legislation. The income and earnings are subject to Income Tax and National Insurance contributions.

• The employer separately and distinctly pays or reimburses an additional amount

• If those additional payments in respect of expenses are not paid under the terms of a valid dispensation, those additional payments would count as general earnings but the employee can claim a tax deduction from earnings from HMRC at the end of the tax year in respect of expenditure which is eligible for a deduction through Self-Assessment.

• The additional payments in respect of expenses would be disregarded for National Insurance purposes.

Expenses paid by employee out of total income received

• The employer pays an amount at least equal to or greater than the National Minimum Wage to ensure compliance with the National Minimum Wage legislation. The income and earnings are subject to Income Tax and National Insurance contributions but there is no separate and distinct payment in respect of expenses. The employee pays for his travelling expenses from his total income.

• The employee can claim a tax deduction from HMRC at the end of the year in respect of expenditure which is eligible for a deduction through Self-Assessment.

• No National Insurance contributions disregard is available in such circumstances.

What you should do – Those operating pay day by pay day relief models

Consider whether your business model is compliant with tax and National Insurance legislation. If you are in any doubt, you are recommended to seek advice from a professional adviser or HMRC. HMRC is seeking to identify those businesses currently operating pay day by pay day relief models. RACS Group operates within this legislation and fully complies with NMW rules and approved HMRC expense procedures.

In summary;

The position that was highlighted earlier this year in relation to the high risk nature of these solutions has now been confirmed directly by HMRC. As HMRC has information on a number of these schemes we anticipate enforcement action to start shortly.

RACS Group does not operate this type of model and is audited and approved by no less than 4 leading industry bodies to safeguard against potential threats like these.

Extract taken from Professional Passport (July) Agency Newsletter