18 October 2023
The government has issued new guidance to the recruitment sector over use of direct engagement and temporary staffing. We consider the potential VAT and commercial impact of these notices.
The Employment Agency Standards Inspectorate (the ‘EAS’ or ‘EASI’), an enforcement unit of the Department for Business and Trade (DBT), recently issued a flurry of important technical briefs for the attention of the recruitment sector. The briefs focus on intermediaries, the use of direct engagement models, and joint employment; all of which interact with VAT and tax compliance.
Who is an intermediary?
The Employment Agencies Act 1973 (the ‘Act’) and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the ‘Conduct Regulations’), owned by the DBT / EASI, provide a legal framework of how recruitment agencies should operate and how they should contract with their customers and workers. This aids assurance over who employs a worker and helps protects worker rights. As is often the case, the contracting approach then affects the VAT position.
The EASI has reposted their policy on what sort of businesses are caught as either an employment agency or an employment business. In broad terms:
- an ‘employment agency’ introduces workers to third parties. The third party is then directly responsible for paying the worker;
- an ‘employment business’ provides a worker’s services to a third party. Here, the employment business is directly responsible for paying the worker. VAT is chargeable by the employment business on the whole value of their services to the customer, which encompasses worker’s remuneration.
The legislation is purposefully wide and covers a range of arrangements, from traditional recruitment companies to specialist agencies such as entertainment and modelling agents, online platforms, and executive search consultants.
To provide an example of who might fall within the scope, we can look to a recent case brought by the DBT against Simply Learning Tutor Agency & Others (case ref:  EWHC 2461). Private tutoring for children at home has become a big business. The claimants run various businesses with the object of introducing self-employed tutors to clients, usually the parent of children who wish to purchase tuition services from the tutors.
The online platforms argued they were not caught under the legislation as they were not offering temporary workers as the tutors were self-employed. The court disagreed classifying them as a middleman between persons who needed [personal] services and the person offering to supply it to them. It did not matter the tutors were self-employed nor that the businesses were more passive platforms allowing parents and tutors to connect.
What is a direct engagement model (DEM)?
A DEM simply means a recruitment company acts as an employment agency and introduces workers to their customers for that customer to then engage (employ) the worker directly. DEMs usually provide a more inclusive offering than a pure introductory service allowing the customer to outsource more of the onboarding and ongoing HR compliance obligations to the DEM provider.
The DEM is very popular in the NHS and health sector as it mitigates irrecoverable VAT for their customers as no VAT is due on the worker remuneration. The model can be equally effective for other sectors where, traditionally, customers cannot reclaim their VAT costs – for example, education, welfare, financial services, and the non-profit sectors.
What has the EASI said about DEMs and why?
Following recent industry reviews, the EASI inform they are concerned DEM providers are effectively presenting themselves as employment businesses (by fully managing the process). In reality, they are contracting as an employment agency which then mitigates VAT costs for their customers.
They highlight under an employment agency arrangement the customer is responsible for paying the worker directly. Regulation eight (Reg 8) of the Conduct Regulations restricts an employment agency from handling or arranging handling of a work-seeker’s pay.
Setting out their policy, the EASI views the inputting of timesheets and providing work-seeker’s bank account details direct to the hirer’s pay portal, or third party vendor, would breach Reg 8(1)(b). If the employment agency handles a work-seeker’s wages it would be a breach of Reg 8(1)(a).
This updated policy note could have a material impact to many DEM operators who may need to consider changes to their offered managed services.
Joint employment arrangements
The EASI has provided new commentary on the use of joint employment in the recruitment sector. Joint employment simply means a worker has more than one legal employer.
Again, one of the drivers for arranging a joint employment relationship can be to mitigate the VAT impact for the end customer. VAT is not due on an employee’s remuneration whether they are employed by one or more employers. Where joint employment exists, it is common for just one of the employers to pay the worker their whole entitlement and disburse the other employer’s payroll element, free of VAT.
Joint employment can exist between an umbrella and an employment business, and employment business and a hiring business (the end customer) or feasibly across the whole supply chain.
The EASI appear to be expressing concern over the legitimacy of these contractual arrangements and whether all employer legal obligations have been complied with.
They highlight it is essential the worker has clarity over their employment arrangements including regulation 13A (the requirement for employment businesses to issue Key Information Documents (KID) to work-seekers) and regulations 14 + 15 (the requirement for employment businesses to agree terms with work-seekers).
Were HMRC, with the EASI, ever to view specific arrangements as artificial, then those involved could be at risk of having formed an abusive arrangement and be challenged over VAT not accounted for on the worker salary elements. Such assessment could be financially huge thus the warning issued by the EASI should be taken very seriously by those utilising joint employment in the sector.
The new guidance issued by the EASI is important reading for umbrellas, recruitment companies, plus hiring organisations. Conducting supply chain due diligence and having suitable checks or controls in place can help reduce risk of any challenge from either HMRC or the EASI.
The EASI does appear to accept the use of these models; but their stated intention is to ensure they are applied correctly. Having a good understanding of how the legalities and tax rules interact is paramount for ensuring compliance and avoiding any unnecessary pitfalls.
How can RSM help?
RSM has supported many clients on these issues and would be happy to assist with any enquiries you may have.
For more information, please contact Scott Harwood or your usual RSM contact.