The Agency Worker Regulations (AWR from here on in - it's easier !) which came in on 1 October is yet another area where the worlds of employment law and employment taxation are heavily entwined but not altogether consistent.

We will leave commentary on the employment law aspects of the AWR to the lawyers and HR firms out there but we do want to raise some issues and concerns around what the AWR may mean for employers on the tax side as there are a few complications we have come across so far as the rules are bedding in. We are sure that some of these issues will "come out in the wash" and become clearer over the coming months as everyone gets to grips with how AWR will work in practice but, for now, it is important for employers who use temporary workers supplied by third parties to be aware of some of the potential tax complexities that could inadvertently come from this further layer of employment law.

 

AWR and the interaction with tax employment status

Broadly, AWR and the IR35 rules are closely aligned in that a worker providing his services through his own limited company, and importantly is operating a bona fide business, i.e. not just an employee to the agency or end client in all but name, will be outside the scope of both AWR and IR35.

However, the decision as to whether a worker is "in business on his own account" for the purposes of AWR will be taken by an Employment Tribunal whereas the decision for tax purposes in relation to IR35 will continue to be taken by the Tax Tribunal. Common sense would dictate that Employment Tribunals would seek to be consistent with their Tax colleagues in making such decisions, and vice-versa, but we all know that this doesn't always follow just now in general employed v self employed cases and so the concern is that there could be a whole load of confusion and inconsistency, both generally and in specific cases, as to what legislation takes precedence and whether a worker could be in scope for one and out of scope for another.

But what about temporary workers not providing their services through a limited company, i.e. as a sole trader ? Although the AWR rules make no distinction between that type of worker compared to a worker via a limited company, the tax rules are slightly different in that IR35 does not apply but the general employed v self employed rules do. Under current PAYE legislation, the "agency rules" usually apply when unincorporated workers are supplied through a third party agency so that all payments made to the worker are subject to PAYE and employer/employee NI. How will the agency rules interact with AWR and will this make the already complicated issue of employment status even harder to fathom out ?

Also, what about the workers ? If, for arguments sake, they take an agency or employer to an Employment Tribunal to claim employment rights under the AWR, will this have a direct impact on their tax position ? Again, the common sense view may be that the workers can't have their cake and eat it, i.e. they are either treated as employees for both tax and employment law or they are self employed for both. We do doubt though that it is going to be this straight forward in reality !

 

Access to facilities

From Day 1, employers are required to give temporary workers within AWR equal access to onsite facilities enjoyed by permanent staff members, e.g. things like staff canteens, creche facilities, car parking, transport facilities, etc.

On the face of it, this should be straight forward from a tax point of view as most facilities of this nature provided by an employer generally do not give rise to a tax charge for employees.

However, could the following areas be problematic for some employers around this ?

1) The provision of the facility is taxable because it does not meet the strict criteria for tax exemption, e.g. onsite nursery, company transport, etc. For regular employees, the reporting of such benefits can be done on forms P11D or through the PSA but what about AWR workers ? Our understanding is that they are not classed as regular employees of the employer in law so the reporting mechanism, and by whom, for these taxable benefits may need to be considered in more detail.

2) The provision of the facility is "free" to staff by virtue of salary sacrifice arrangements, which possibly may be the case with car parking in particular. How will access to this facility be made that is fair to both the AWR worker and to permanent staff and how practical will it be to collect payments from the AWR worker and/or provide a pass to use the car park ?

 

Benefits in Kind

Under AWR, rights to the same pay as permanent staff kick in after 12 weeks of work for the same organisation. The definition of pay under these rules is basically all monetary payments such as pay, overtime, bonuses, etc plus any vouchers which can be exchanged for cash or used as payment for goods or services.

In addition to some important items such as redundancy pay, company sick pay and maternity pay, etc most benefits in kind are specifically excluded from the definition of pay for these purposes. Perhaps the hope was that this would keep things nice and simple for employers but we are not convinced that this will be the case for those employers who have introduced a more modern approach to staff reward.

Formal Government guidance on AWR mentions that there is no entitlement to salary sacrifice arrangements when the 12 week rights are applied. We can certainly see why salary sacrifice would be excluded as it would be a logistical and costly nightmare for employers to accommodate temporary workers into their salary sacrifice arrangements especially given all the potential issues around joining and leaving at irregular intervals.

However, the days of pay and benefits being completely separate parts of an employee's pay package are long gone so what about those employers who operate some form of Total Reward or Flexible Benefit arrangements ? In many of these arrangements, an employee is entitled to an overall value of reward each year but is then free to choose how the value of the package is made up between pay and benefits which may include a mix of employer funded benefits and salary sacrifice arrangements. What this means in reality is that there is usually a whole mix of different pay/benefit packages across the entire workforce with no "standard" base pay element.

It is far from clear how such arrangements will fit into the AWR matrix for calculating what counts as pay. It is feasible that in some organisations a base pay figure for each role can be identified but we have no doubt that those employers who embraced Total Reward many years ago may have lost that information a long time ago.

 

 

Conclusion

All too often we hear from employers that legislation is too complicated and burdensome in this country especially in relation to hiring staff. Although the AWR is well intentioned, to provide further protection to a group of workers who are often underpaid, once again it is employers who are left with the task of understanding how it all works and what other implications may need to be considered.

It is too early to say how big a problem the above areas will be for employers. What is clear, though, is that in a climate where the hiring of non permanent staff is on the increase, employers will have to be even more in tune with the potential tax implications when making any hiring decisions as the penalties and fall-out for getting things wrong could be significant both for their business and the very individuals that the AWR is trying to protect.

 

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