18.10.10 Reputational Risk provides impetus for improved procurement policy

“No Problem” the man said and the die was cast.

This is the opening line from a new film about the relationship between a labour user, employment business and an umbrella company focusing on the importance of ensuring that reputations are left intact at the conclusion of an investigation by the various authorities which police the temporary labour market.  What price would you place on your reputation and what lengths would you go to, in order to protect it?

Increased Margins – What Price?

With considerable pressure being placed on margins, it is very easy for all parties to the transaction to seek the cheapest option.  This isn’t always the best option, leading to poor client service and the possibility of prolonged scrutiny from the authorities.  The 'rebate culture' often referred to as a 'return on investment' has become central to the sales patter of many umbrella salesmen and is welcomed by employment businesses that see the 'rebate' as an increase in operating margin.

It is critically important that hirers, employment businesses and individual contractors undertake sufficient due diligence on their service providers to ensure that any short-comings do not have a detrimental effect on individual and corporate reputations which, once damaged, can become irreparable.  Whilst a significant 'rebate' may look favourable to an employment business at first glance, a quick look at the operating model often reveals shortcomings in compliance, financial irregularities and excessive deductions made from contractors pay.

It is important to select the most appropriate service provider, who understands the complexities of the temporary labour market and can deliver an exceptional client service, who has a robust attitude towards qualifying business expenses and havs given due consideration to contractual relationships.

Overarching Contracts

It is often the case that employment businesses which operate a travel scheme or an umbrella that uses expenses to reduce taxable pay, fail to understand the concept of an overarching contract of employment, more commonly known as a 'guaranteed hours' contract.

In May 2010, HM Revenue and Customs (HMRC) updated its internal manuals to help Inspectors assess whether a contract of employment is 'overarching' i.e. whether the temporary assignments are linked or stand-alone engagements.

It is common to hear the magic number of 336 hours referred to as constituting 'employment status'.  However, it is the period between assignments that is crucial, and whether mutuality of obligation can be established.  HMRC will explore the termination process and whether the employee has been paid, even when he/she has not worked 336 hours guaranteed in the contract. If, in practice, no employee ever reaches twelve months service, then this would be difficult to demonstrate.

Travel and Subsistence 

HM Treasury has previously consulted and decided not to change the legislation under which a temporary workplace is determined.  However, it is abundantly clear that it has asked HMRC to critically review any system that uses expenses to reduce taxable pay and National Insurance Contributions (NIC’s).   Therefore, it is necessary to ensure that any policy or procedure for determining tax-free expenses is robust and can withstand a challenge on both eligibility and qualification.

Recently, HM Treasury announced its intention to change the National Minimum Wage (NMW) Regulations with effect from 1 January 2011 to ensure that the payment of travelling and subsistence expenses incurred 'in connection with' and 'in the performance of' the duties of the employment can no longer form part of the calculation for the NMW.

This change will affect all travel schemes that operate under a salary sacrifice arrangement at or around the NMW due to the fact that they involve a payment of expenses.  There is, however, some doubt as to whether the new regulation will affect umbrella companies that do not actually make a 'payment' of expenses – in favour of disregarding from taxable pay an element of expenses that have been incurred by the employee.  This may lead to a growth of umbrella providers offering a wide range of incentives to tap into what could be seen as a new market.

Regulatory Impact

During recent presentations on behalf of the Association of Labour Providers (ALP) across the UK, I spoke about how the temporary labour market is now regulated out of all proportion with the administrative burden being the biggest threat to growth. One of the biggest threats to the stability of the flexible labour market is the Agency Workers Regulations (AWR) that is due to come into effect in October 2011.

With many business regulations emanating from Brussels, it was refreshing to read about the recent announcement by the European Commission’s latest plans to reduce the regulatory burden on business that promises smarter European regulation in the future.

Business Minister Mark Prisk who recently went 'back to the floor' to experience business life first hand, welcomed the announcement by commenting:

“The Government is working to break the habit of regulation in the UK, freeing businesses to realise their potential for growth. In the coming years I’d like to see the Commission try to do the same, bringing in smarter regulation, and wherever possible, alternatives to regulation.”

It will be interesting to see how the coalition government intends to implement the proposed AWR in its present form – the delay in issuing guidance might just provide an insight into how difficult these new regulations will be to operate in practice.  Surely, this is a classic example of where an alternative solution, which protects vulnerable workers as a sector of the working population, would be more effective than imposing yet another layer of administrative burden on a temporary labour market which is emerging beaten and tattered, but thankfully not mortally wounded from a prolonged period of recession.

It has been equally interesting to see how the most eminent legal brains in the UK have been wrestling with the regulations without contravening the proposed anti-avoidance penalties that are likely to be imposed via the employment tribunal.

The intriguingly named 'Swedish Derogation' or Regulation 10 of the AWR, appears to be the favoured option, taking the supply of workers outside the regulations, but this means paying the temporary worker for four non-working weeks following the end of the assignment at the National Minimum Wage or 50% of the average pay over a twelve week period. The Regulations call for minimum payments 'for not less than four calendar weeks during the contract' which could be interpreted as non-working periods limited to four weeks over the lifetime of the employment – not just at the end of the employment.

Until the guidance is issued, lawyers will continue to speculate and explore 'what if' scenarios. What is certain, is that the regulations will impose a direct threat to the flexible labour market, and early communication between all parties to the contract will be vital to a successful outcome.

Meeting the Standards

It was expected that the Employment Agency Standards (EAS) Inspectorate (who police the Conduct of Employment Agencies and Employment Businesses Regulations 1993) would suffer at the hands of the Chancellor when he announced the forthcoming expenditure cuts.  However, this joy was short-lived when employment relations minister Ed Davy underlined his commitment to a “risk based approach” and a commitment to enforcement of existing regulations.

This response was as a consequence of lobbying by the REC against the extension of the Gangmasters Licensing Act beyond the agricultural and shell fishing sectors, and means that employment agencies and employment businesses will need to continue to be on high alert and to consider the use of the “opt-out” under Regulation 32 relating to the use of limited companies i.e. umbrella service providers.

Is HMRC going soft?

Finally, some good news...it was announced recently that HMRC is to soften its stance on tax disputes with Dave Hartnett announcing that HMRC had been 'too tough' in tax disputes with business.  HMRC’s litigation and settlement strategy, under which it vowed to litigate all cases where it considered there to be a more than 50% chance of success, has clearly not worked.

Interestingly, Mr Hartnett has placed the majority of the blame on beleaguered HMRC staff, claiming 'they thought it was a great sword of justice'.  I am sure this went down well in the tax offices around the country!

A greater willingness to settle cases through negotiation will be welcomed by both individual taxpayers and business, and should also increase the tax yield, as demonstrated by the £1.25bn settlement reached with Vodafone involving a long standing tax dispute.

It is a shame that this conciliatory approach has not been adopted by HMRC Debt Management Division, which continues to adopt a hard-line approach on tax debts.  I have recently witnessed a number of cases where a winding-up order has been pursued, where this course of action is neither in interest of the public nor the Exchequer.

The safest option is to open negotiations at a very early stage with local compliance officers and to offer realistic payment terms... and keep to them

Alan Nolan is Senior Partner at Aspire Business Partnership LLP, a professional advisory practice based in Barnt Green nr Birmingham, which specialises in advising recruiters, umbrella companies and the construction sector.  His film 'No Problem' will be released in November 2010.  Alan can be contacted on 0121 445 6178 or 07979 541405 or alan.nolan@aspirepartnership.co.uk .