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UK Director of Labour Market Enforcement Lays Out a Plan to Tackle £3.1 Billion 'Wage Theft' May 20, 2018
More than six million British workers had lost around £470 on average in 2016. The total unpaid wages — or wage theft to be more appropriate — amounted to £3.1 billion. About half of this amount was unpaid holiday pay. The extra cash lined pockets of bad employers, which has caught the attention of the UK of Labour Market Enforcement, Mr. David Metcalf.
Metcalf came to know about employee exploitation after visiting businesses and government agencies in Scotland. Discussions with stakeholders revealed shocking abuse of mostly low paid British workers by scrupulous employers.
Citing official statistics, Metcalf said that nearly 360,000 workers in the US were paid less than the minimum wage.
According to Metcalf, failure to pay out holiday pay is a serious issue and that there is no agency that governed enforcement of pay regulations. He said that major companies are responsible if other companies in the supply chain are found guilty of 'wage theft'.
The LME Director recommended establishing a government regulatory body for holiday pay to tackle this issue. He recommended three agencies for enforcement of labour market regulations: the Gangmasters and Labour Abuse Authority (GLAA), HM Revenues and Customs, and the Employment Agency Standards Inspectorate (EAS). He stated that if his suggestions were accepted it will ensure that honest British workers are not undercut by scrupulous employers.
Metcalf also called for a clear complaint channel, a written statement of worker rights, and a payslip stating income and deductions.
To punish the guilty parties, the LME Director proposed an increase in fine for non-conformance to minimum wage regulations. At the moment the average fine is only £156 per worker, which is too low to deter employers from violating minimum wage rules. He also called for shaming companies that break the law by underpaying employees.
Non-compliance Common Across Multiple Sectors in the UK
Non-compliance with labour laws relating to minimum wage and employee exploitation was found across a number of sectors such as nail bars, hand car washes, shellfish gathering, construction, warehousing, hospitality, and personal care. Metcalf stated that the responsibility of noncompliance rests with both brand names and contracting agencies, and called for sanctioning of both parties in order to address the problem.
According to Metcalf, the public sector needs to take a lead in ensuring that all parties within the supply chain comply with employment laws. This is important to ensure that employees are not mistreated and also that the business could prosper in the UK.
The HMRC IR35 tax reform, introduced last year, had attracted a lot of controversies. The tax reform has created financial difficulties for many independent contractors. In the latest case relating to the tax reform titled Jensal Software Ltd v Revenue & Customs, the judge had ruled in the favour of an IT Contractor named Ian Wells who had appealed against a tax bill that exceeded £26,000.
Mr. Wells provided IT services to the Department for Work and Pensions (DWP) between May 2012 and April 2013 through his limited company, Jensal Software Ltd. HMRC had argued that since the there was a direct contract between DWP and Wells, it constituted a contract of service under IR35.
But the presiding Judge Jennifer Dean had ruled that the mutuality of obligation (MOO) does not demonstrate a contract of interest. The level of control does not extend beyond the irreducible minimum. So, there is no contract relationship between the two parties. The elements of contract demonstrated that Mr. Wells had worked as an independent contractor.
Main Points from the Jensal Software Ltd v Revenue & Customs Case
A lot of interesting points emerge from the latest court cases involving IR35. The conclusive ruling in favour of the IT contractor shows that MOO is not enough to show a contract of service under IR35, which has weakened HMRC argument regarding MOO and the decision to omit it from the CEST tool.
In this case, the HMRC had tried to use the strategy of promoting its narrow interpretation of the MOO, but it flopped. According to Judge Dean, no restrictions were imposed on Mr. Wells in the contract. The lack of control suggested that there was no employment contract between DWP and the HMRC.
Judge Dean had concluded that the HMRC cannot use the argument of MOO in proving that there was a contract of employment. Although Wells had agreed to provide progress reports, the level of control was not sufficient to deem it as an employment contract. Mr. Wells had provided services to DWP as an independent contractor and therefore should have been charged a tax.
The outcome of the court case shows that the HMRC can no longer continue to use MOO as an argument for a contract of service between a contractor and an institution. The court outcome will likely influence similar cases that are expected against the HMRC.
The latest report by Experis has revealed that Big Data skills are in high demand across the UK. According to the report titled, the Tech Cities Job Watch, the demand for Big Data skills in Q1 2018 has increased by 78 percent as compared to the same quarter last year.
The report that is published every quarter by Experis, an international IT resourcing firm, sheds light on business and employment outlook in 10 cities in the UK. The quarterly job report monitors IT jobs and income advertised in Web Development, Mobile, IT Security, Cloud, and Big Data segment in the UK.
According to the report, contractor demand of individuals with Big Data skills has increased by up to 128 percent as compared to last year. Also, the demand for permanent jobs has increased by up to 68 percent.
The latest report has also found that the most in-demand programming certifications for Big Data positions include Java, Python, Spark, Hadoop, Cloudera, Hive, MongoDB, and Tableau. In addition, hybrid roles in which individuals have a broad knowledge of IT are also in demand at the moment.
Reasons for Increase in Big Data Positions
The rising demand for Big Data roles in the UK builds on a similar increase in demand last year. Experis UK and Ireland Director of Specialists Markets, Martin Ewings, states that the EU GDPR laws and Internet of Things (IoT) has put pressure on companies to focus on improved data management.
As a result, corporations in the UK are eager to hire individuals with the right skills to manage data.
But Ewings also thinks that most companies don’t fully comprehend the skills required for data management. He says that a data architect or engineer is more important to improve data infrastructure as compared to a data scientist, which not many companies are aware of.
Individuals with Big Data skills earn the highest advertised salary on average of about £67,464. However, the salaries have remained somehow fixed with only 0.1 percent increase since the previous year. This represents the lowest increase in salaries as compared to the other five technologies.
According to Ewing, various reasons can be cited for a stall in the salaries of Big Data positions. A rebalancing in the market is one of the reasons for a ceiling in the salaries. Increasing numbers of IT professionals have updated their skills to meet the market demand. The increase in the supply of IT specialists with Big Data skills has resulted in the stagnation in pay increases. But overall, the demand for the role remains strong.
Survey Reveals UK Employer Confidence on Economy Has Increased but Hiring Remains Hesitant May 14, 2018
A recent employer survey in the UK has registered an increase in confidence about the economy, but business hiring plans remain cautious in the short term.
The survey of 600 employers carried out by the Recruitment & Employment Confederation (REC) found that the net balance of employers who view that the UK economy is getting better jumped by seven points since March this year; however, it remains negative at -3. About 29 percent of employers think that the economy is worsening, while around 26 percent think that the economy has improved.
According to Tom Hadley, the director of REC, the improved employers move represents an important step particularly as hiring of permanent employees has been on a downward trajectory. This is expected to result in businesses hiring new employees and improving their hiring plans.
That said, on the hiring side, employer outlook has become less positive with only around 14 percent of employer reporting that they plan of hiring permanent employees, which is down from 22 percent same time last year.
In addition, the survey found that the percentage of employers who have hired new employees has decreased to 44 percent while employers who have increased pay is down to 47 percent. The figure has been decreasing continuously since June 2017.
Availability of temporary agency workers is also becoming an issue since nearly 47 percent of employers believe that there will be a shortage of candidates, which increased from 35 percent previous month.
About the employer survey results, Hadley says that a lot of employers still feel down about the UK economy. Also, employers are worried about finding specialist workers for temporary roles. Even if they decide to hire new workers, most employers are afraid they won’t be able to find the right employees.
Short-term placements are important for seasonal jobs. Furthermore, they are important for project based jobs such as hotel staff during holiday season and construction workers for large infrastructure projects.
According to Hadley, employers in health, hospitality, and construction sectors particularly rely on short-term workers. These employers will suffer if they don’t get access to specialized temporary workers. He said that the immigration system needs to be modified to reflect post-Brexit situation and the process should be made efficient. This is important to ensure that the employers don’t face issue due to lack of shortage of skilled labour in the country.
UK Director of Labour Market Enforcement Makes Recommendations to Stop Labour Exploitation May 12, 2018
Intermediary and umbrella firms in the UK could face fines of up to £10 million for violating the National Minimum Wage (NMW) regulations. This has been recommended in an independent report published by Sir David Metcalf, the government’s Director of Labour Market Enforcement.
The report has made many other suggestions to tackle the alleged issue of labour exploitations in the country. One of the suggestions includes extending the remit of the Employment Agency Standards Inspectorate (EASI) to tackle the exploitation issue.
The recommendation of the report also includes obliging employers to give holiday pays, as well as a payslip and statement of rights to all employees, irrespective of their status. The report has also made suggestions that leading brands should be made jointly responsible for non-conformance to labour laws by supply chain partners.
The report that was presented to the Parliament in pursuant to the Immigration Act 2016 had made suggestions to tackling the issue of ‘phoenixing’ — the practice of dissolving companies by directors in order to circumvent legislation relating to payment of workers tribunal awards and other penalties.
In addition, the report had pressed for the need for licensing of nail bars and hand car washes, which the Gangmasters and Labour Abuse Authority has identified as places at risk of exploitation of labour.
Increased Vigilance Required from Recruiters
Recommendations made by Metcalf in the report will have wide implications for agency workers, according to Dr. Sybille Steinera, a partner at Irwin Mitchell law firm. She says that recruiters need to recognize their legal obligations. They need to know their responsibilities regarding payment terms with the payroll firms. Also, recruiters need to make sure that their clients don’t underpay staff as this would make them liable for noncompliance with UK labour laws and also damage their reputation.
According to David Israel, a partner in Royds Withy Kings law firm, labour exploitation has been the norm in the UK, and the challenge now is how to police treatment of employees in the country. He said that the emergence of large categories of workers associated with the gig economy has led to increased opportunities for unscrupulous agencies to cheat the employees of their due rights. The change will most likely come from identifying and censuring employers higher up in the supply chain for not auditing their suppliers for non-conformance of labour legislation.
Employers who are guilty of non-compliance with NMW could face severe penalties. According to employment law specialist Jacqueline McDermott, the current civil penalties for non-conformance of NMW are about twice the wage arrears for the employees, which is about £110 for the year 2016/17.
The government has stated that it will respond to Metcalf’s suggestions by the end of this year.
HMRC is chasing freelance workers who used offshore schemes. Tens of thousands of freelance workers accused of tax avoidance say they are facing bankruptcy as the taxman demands sums as high as £900,000.
Her Majesty’s Revenue & Customs (HMRC) is seeking money owed by almost 100,000 contractors who used “disguised remuneration” and similar schemes that avoided paying national insurance or income tax in the 2000s.
The contractors, most of whom work in IT or healthcare, claim they were duped into believing that the schemes — which typically involve an employer making payments to a trust that then makes an interest-free “loan” to the contractor — were within the law.
The taxman disagrees and is adding hefty penalty charges and interest rates to the amounts owed, often more than doubling the value of the debt.
Graham Webber, the director of tax at WTT Consulting, who is representing 2,000 contractors facing retrospective demands, estimates that 40 per cent of his clients will go bankrupt.
“A raft of unscrupulous scheme promoters misled and misrepresented the rules to such an extent that perhaps 100,000 middle-earning professionals were fooled into believing they were doing the right thing,” he says.
“We have tried repeatedly to advance a reasonable solution to HMRC. This sees individuals paying some tax, but the rest being shared by other parties who benefited from the arrangements, such as banks, agencies and promoters — many of whom HMRC has allowed to escape from tax completely.
“These aren’t super-wealthy people who are deliberately avoiding tax. These are IT specialists who got suckered into something they didn’t understand. We have one client who has been sent a bill for £900,000, who will certainly go bankrupt, but others with bills of £4,000 who have no way of paying.”
An HMRC spokesperson says: “These schemes are, and were always tax avoidance. They used contrived transactions to bend the rules of the tax system to gain a tax advantage that Parliament never intended. In reality, the individual will never repay the loan from the third party so it is no different to normal income and is taxable.”
A mother of three from St Albans in Hertfordshire, whose husband runs an IT company, says they are under “intolerable” pressure after being blitzed with Accelerated Payment Notices and threatening letters. Her husband ran their business between 2002 and 2008 through Montpelier, which was declared a tax avoidance scheme in court in September 2015. It paid them in “loans”. She says she was assured that the scheme was legal.
She claims HMRC offered them settlement figures of £96,000 in May 2017, then £147,000 in September, £154,000 in December and finally, £195,000 at the start of this year, payable in installments of £500 a month until 2049 (when he is 85), which they accepted.
The couple, who are now separated, were found to have underpaid £50,000 in tax, and she says the rest was added in penalties and interest charges.
Richard Horsley, 55, also an IT contractor, was enrolled in a scheme called Horizon from 2003 to April 2016, but says he only realised that it fell foul of tax avoidance rules in 2015. He has been told that he has a liability of up to £500,000, including retrospective tax, interest and penalties.
HMRC cites a typical tax avoider caught investing in a disguised remuneration scheme who was being paid in “loans” of about £80,000 but declared £16,000 earnings and paid £2,000 in tax. “It is not normal or reasonable that someone is paid in loans made by an offshore entity so that they pay little to no tax on this income,” it says. “HMRC does not accept reduced payments, this would be unfair on the vast majority of taxpayers who pay their tax in full.”
It warns that unless people take the chance to settle their bills now, or call HMRC if they haven’t been contacted by May 31, 2018, they face further penalties next year when rules get tougher.
Tax experts say that compromises will have to be found because many simply will be unable to pay. Chas Roy-Chowdhury from the Association of Chartered Certified Accountants, says: “The principle is simple: it’s you, the worker, who signs your tax return, and you are responsible for paying the right amount of tax. Many fully believed they were doing the right thing — however misguided that was. People need to be given time to arrange their affairs. No one wants mass bankruptcies.”
HMRC’s IR35 public sector tax reform introduced in April last year had caught a lot of people off-guard, including BBC presenters. Many presenters faced grave financial difficulties after they were caught inside the tax legislation.
Reports have emerged that the BBC has made advances/loans to presenters who had suffered financial problems after they were deemed inside the IR35 legislation. According to an article published in the Telegraph, Anne Bulford BBC’s deputy director general had informed the Common Public Accounts Committee (PAC) that advances and loans were given to a number of presenters who faced temporary financial problems due to the change in tax status.
The UK IR35 tax reform had made it mandatory for taxes and insurance contributions to be deducted from payroll of independent contractors who serve like a regular employee in public-sector organizations.
The BBC has received a lot of negative criticism lately for not doing anything to ease financial pressure of workers who were caught inside the IR35 reform. The move to make ‘hardship’ payments might be a publicity move to gain positive reviews from the public.
Former BBC presenter, Christa Ackroyd, had lost her appeal to the Tax Tribunal and was left with a tax bill of more than £419,000 for the period 2001 to 2013. However, it was found that she was encouraged by the BBC to offer services through a personal service company.
Moreover, in a Select Committee Hearing regarding treatment of freelancers by the BBC held in March this year, it was revealed that some presenters who were coerced into forming their own companies to offer services had taught about taking their own lives.
The Committee Chair, Damian Collins, MP had written to BBC’s Deputy General to respond to the concerns outlined after the session before 16th May.
HMRC Keeps Quit About Controversies Surrounding IR35
HMRC has not responded to criticism raised against the agency for the unfair treatment of public sector independent contractors. While BBC is at least trying to put things right, HMRC has not replied to concerns raised against the reform despite the fact that the BBC has laid some blame on the tax agency.
Many news and radio presenters at the BBC faced grave financial problems due to changes by the HMRC regarding tax status. The Check of Employment Status for Tax (CEST) tool that is used to determine the tax status of an independent contractor has been criticized for being flawed. Thousands of independent contractors have been wrongly deemed to be inside the IR35 tax reform. It is interesting to see how the HMRC will respond to the growing criticisms regarding the tax reform.
A renowned tax consultancy firm known as Qdos Contractor has criticized the HMRC’s decision to omit Mutuality of Obligation from the IR35 Check Employment Status for Tax (CEST) tool.
MOO refers to the responsibility of an employer to provide the work together with the responsibility of the employee to do that work. Without MOO, a contract will not be considered a contract of employment.
According to Kate Hardy who is Qdos Contractor’s Consultancy Manager, the HMRC has made an error by not considering MOO in the assessment of IR35.
However, the HMRC defends this decision by stating that the MOO simply confirms that the contract exists and does not specify the type of contract.
The Employment Status Manual states MOO specifies a minimum employee-employer contractual obligation i.e. a worker is obliged to offer skills while the employer is obliged to pay the worker.
However, Hardy says that this explanation is overly naïve and does not support the case of IR35, which is inconsistent in defining the exact meaning of mutual obligation. The body of law that is relied upon by the HMRC are vague and discrepancies exist in examining the employment status for taxation purposes.
Case Laws Support that HMRC CEST Tool is Flawed
Hardy cites the example of JLJ Services Ltd v HMRC (2011) to prove her point regarding confusion regarding the interpretation of MOO. In the case, the session judge had concluded that while MOO exists to a certain degree in a contract, without the presence of mutuality of agreement when the contractor is not obligated to continue to provide work and the employer is not obligated to continue to pay, it reflects genuine self-employment.
Hardy had also cited other cases related to IR35 such as Marlen v HMRC (2011) and Synaptek v Young (2003). In both cases, the contract workers were not provided any payment for services not rendered by them.
MOO is most likely absent when there is a right by any party to terminate the contract without any notice. In addition, it does not apply in case the employer ends contract once the services are no longer required and also when the contractors are not given any pay in the event they take a time off.
By not regarding the MOO in assessing whether an individual is employed or self-employed, the HMRC’s IR35 CEST represent a flawed take on employment case law.
A UK roundtable conference event has been arranged by PRISM to discuss Matthew Taylor’s review of modern employment practices. The event will be attended by leading companies to discuss the implications of the Taylor review particularly the threshold regarding the Employers National Insurance Contributions (NICs).
Companies that will be attending the event that will be held this year include ACCA, ICAEW, Low Incomes Tax Reform Group, FSB, IOD, and the Law Society, among others. The HMRC, BEIS, HM Treasury, and Office of Tax Simplification have been invited to act as observers during the conference.
In this regard, PRISM has created a short online survey to understand employers’ view regarding threshold related to Employers NIC.
Workers who earn less than £162 per week are below the NICs threshold. Evidence shows that this incentive encourages wrong behaviour among employers. The survey has been created to know whether employers use the incentive as part of their resourcing strategy. It has been created to know whether employers NIC threshold influences the use of zero-hour contracts.
The results of the survey will help determine the general view regarding the incentive of the government. The information gathered through the survey will be shared in the forthcoming roundtable conference. By participating in the survey, you can help shape the policy recommendations that will be discussed during the event.
PRISM — Championing the Cause of Independent Employers
PRISM represents third-party payment intermediaries such as accounting companies and umbrella providers. The independent UK agency has been at the forefront of issues surrounding Employment Practices in the Modern Economy and developing a tax system that supports the latest employment trends.
The agency had established an independent think-tank called The Social Market Foundation in 2016. The aim of creating the group was to critically examine tax-related issues and employment trends. The think tank had published a report titled Rules of Engagement before the publication of the Taylor Report that looked at different employment-related issues in the UK.
PRISM later published its own report named The Case for Structural Reform. This report critically reviewed the Taylor report that represented the Government’s view on modern employment. It had highlighted the incentives and weakness in the tax framework that needs to be addressed. The report had also made recommendations regarding how businesses can change and adapt to the changes related to employment and the tax framework.
The new IR35 rules have garnered increased criticism for being unfair and disadvantageous to independent contractors in the UK. Experts warn that legal challenges could arise relating to the tax status of independent contractors in the public sector.
A recent survey carried out by the Freelancer Contractor Services Association had found that nearly 50 percent of around 33,500 public employees polled had reported that IR35 compliance tests were not carried out on staff who were hired through agencies.
About half of the employees polled in the survey who had stated that compliance tests were carried out, reported that a generic approach was used instead of an individual analysis of specified contracts. The remaining half had stated that individual assessments had been carried out but the HMRC’s Check Employment Status for Tax (CEST) tool was not used.
Nearly 42 percent of those surveyed had reported that all the contractors who were hired were deemed to be inside IR35, while around 8 percent were arbitrarily considered to be outside the tax rule.
A third of intermediaries who were polled believed that legal cases will follow against the decision of the role-based assessments. Also, nearly a third believed that workers would likely challenge their status in the court. These statistics should be alarming for the government, according to Kermode.
Details of the Survey
The Freelancer Contractor Services Association that had carried out the survey is UK’s largest trade association agency for Umbrella corporations that serve as a link between contractors and employers.
According to the CEO of the company, Julia Kermode, the CEST tool was provided by the HMRC only a few weeks before the introduction of the radically reformed IR35 rules. The public-sector employers had already started carrying out analysis using their own methods devised months before the introduction of the government’s tool. They relied on the alternative IR35 analysis tools that were available months before the release of the CEST tools since they urgently needed new workers.
With a large number of employees being incorrectly re-evaluated and forced into paying a higher income tax, Kermode believes that the government could soon face a large number of legal trouble.
Due to the issues in implementing the public-sector changes, the decision to extend the IR35 tax reforms to the public sector will be damaging. Kermode says that the Chancellor has promised that the government will draw from the experience gained from implementing the public-sector reform, and her company will put pressure to make sure that the promises made by the government official will be met.
Contractors’ agencies are increasingly being targeted by the HM Revenue and Customs (HMRC) as per the Criminal Finances Act 2017. The Act that became effective on 30th September 2017 made corporations liable if they failed to take action against tax evasion practices of a staff or an agency.
The new law deliberately targets tax evasive practices by firms in the UK and abroad. It is applicable to both local and international taxes where a UK element is present. With the new law, the HRMC has changed the way in which liability of tax evasive practice is assigned. It made a firm liable even in the case where it was not aware or involved in the act.
The introduction of the law had grave consequences for contractor accountancy firms and umbrella companies that deal with independent contractors. The onus of ensuring that the members don’t commit and engage in tax evasion activities.
According to the Freelancer and Contractor Services Association (FCSA) contractors received payments as ‘incentives’ from one or more umbrella companies. These payments represented the income of contractors that were not taxed.
Not declaring what the agency consultants received from the umbrella company represents a breach of the tax evasion act that has been effective since September this year. The disturbing point for the senior management team of such agencies is that some member organizations are not aware of the incentive payments.
The agencies being targeted by the HMRC likely represent only a portion of total firms carrying on such practices. Incentive payments are also made by accountants as well, according to FCSA. Any payments received in the form of cash, vouchers, or other benefits from an accountancy provider is a taxable income.
Pay Taxes on Incentive Payments to Avoid Unexpected Tax Bill
The FCSA has stated agency consultants should pay taxes on any incentive payments that are received from umbrella organizations or accountancy firms. This is necessary to avoid any prosecution according to Criminal Finances Act 2017.
HMRC’s crackdown on incentive payments will prompt businesses to ensure that their member firms in their Preferred Suppliers Lists (PSL) are aware of the tax responsibility. Firms that show that they had taken reasonable actions to prevent tax evasion can avoid criminal prosecution. They need to put in place reasonable procedures to ensure that taxes are paid to HMRC. Not taking any actions in this regard can result in serious legal action.
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