House of Lords - Personal Service Companies - Select Committee on Personal Service Companies

Personal Service Companies - Select Committee on Personal Service Companies Contents

CHAPTER 5: IMPLICATIONS FOR THE LOWER-PAID

Introduction and Background

141. The use of personal service companies is often associated with high-skilled, higher paid professions. Much of the analysis presented elsewhere in this report considers the use of personal service companies by freelance professionals such as senior executives, IT software development specialists and oil industry engineers.

142. Our evidence suggested that the use of personal service companies was not limited to these relatively well-remunerated professions. We were told that receptionists, office workers, credit controllers, healthcare workers, telephonists and cleaners had been asked to provide their services through personal service companies.[135] ACCA stated that HMRC enquiry work had established that there was a "significant problem" with abuse of corporate forms in the lowest paid sectors with engagers in the hospitality sector, for example, looking to establish chamber maids in their own personal service companies.[136] HMRC stated that personal service company use extended across all income ranges and across all sectors.[137]

143. The use of personal service companies across a diverse range of sectors and income levels can, in some part, be considered a consequence of the growth of the flexible workforce in the UK. The FCSA told us that the flexible workforce totals between 1.5 million and 2 million workers;[138] the Office for National Statistics (ONS) estimates[139] that 4.37 million people in the UK are self-employed, and that there are just over 1.6 million temporary workers in the UK.[140] The flexible workforce extends from low paid, low skilled people at the one end, to highly paid, highly skilled individuals trying to run a business on their own account at the other end.[141] The CBI gave the following explanation for this growing phenomenon:

142

144. There has been little analysis of the different forms of flexible employment. Whilst we received evidence that some lower paid individuals are engaged through personal service companies, we were told that the number of such people engaged through limited companies had fallen since the implementation of the managed service companies (MSC) legislation in the Finance Act 2007.[143]

145. Martin Hesketh of the FCSA told us that the managed service companies legislation had changed the working structures of "tens of thousands" of people, by ensuring that those working through limited companies have to take on directly the responsibilities of ownership, directorship and management. The net result of this had been to push low paid individuals—who did not want or were not able to manage these responsibilities—out of the limited company arena.[144] The ICAEW and Contractor Calculator echoed this view.[145]

146. Lower paid people are, of course, prominent amongst the flexible workforce. Umbrella companies figured significantly in the evidence that we heard. They provide a vehicle through which members of the flexible workforce can offer their services without having to incorporate individually. The umbrella manages invoicing, payroll and contract matters, and pays the worker via PAYE. The individual is employed by the umbrella, rather than the end-client. Individuals are given an over-arching contract of employment, which allows them to work in different positions, with different end-clients.

147. Frances Corrie, of TaxAid, a charity that helps people on low incomes with their tax affairs, told us that she dealt with significant numbers of lower paid individuals who were engaged through umbrella companies. Example occupations included security guards, couriers, drivers, cleaners and chefs.[146]

148. Agencies also figured prominently here; we heard that agencies provided workers through a variety of engagement methods, including personal service companies. Often, agencies worked alongside umbrella companies to deliver flexible workers, with the agency liaising with and sourcing end-clients and the umbrella paying wages, PAYE and managing invoices. The Institute of Chartered Accountants of Scotland (ICAS) told us that there was "widespread referral of low paid workers to umbrella companies by agencies".[147]

149. The evidence we received identified issues surrounding the circumstances in which lower paid individuals are engaged—whether through personal service companies, umbrellas or by agencies. The remainder of this Chapter considers the extent of these complex problems.

Issues for the lower paid

REDUCED ENTITLEMENTS

150. It is clear to us that where lower skilled workers within the flexible workforce are employed through the use of corporate forms, including both personal service companies and umbrella companies, they generally have lower entitlements compared with those in permanent employment.

151. The Low Incomes Tax Reform Group (LITRG) suggested that the scope for potential exploitation was considerable, noting that many migrant workers, who are often unclear about their rights and responsibilities, find themselves providing their labour through corporate forms.[148] This work was often delivered through umbrella companies, working with agencies, although the LITRG had also seen personal service company use promoted on the internet, with some advertising of personal service company use "clearly aimed at migrant workers", offering to provide a UK registration address and mail forwarding service.[149]

152. The National Association of Schoolmasters Union of Women Teachers (NASUWT) told us that the overwhelming majority of supply teachers deliver their work through agencies and umbrella companies. They were clear in their view that the main beneficiaries from these arrangements were the agencies and umbrellas themselves, rather than the individuals engaged through them, concluding that "we feel there are groups of workers here that are being quite seriously exploited".[150]

153. The issues at play differ slightly, depending upon which intermediary vehicle is used. For any low-paid individuals using a personal service company, the drawbacks would be much the same as they would for a professional contractor; lack of holiday pay, sick pay, paid training and the absence of various rights and protections such as maternity leave and working time protections. It is unlikely that these individuals would benefit from workplace pension provision. Whilst these are features of a non-permanent workforce, there would be an issue of exploitation if the individual in question was unaware of these consequences and had been pushed into the personal service company arrangement without any proper alternative being made available.

154. Individuals engaged through an umbrella company would benefit from many of the statutory rights and entitlements mentioned above, as they would have a contract of employment with the umbrella. These rights and entitlements would be more than those available if a personal service company were used but would typically be less than those available in a conventional employment relationship. They would, however, be exposed to a slightly different set of issues. One such problem is the potential over-inflation of tax deductible travel expenses, which might be encouraged by the umbrella and for which the individual might be liable if subjected to a HMRC investigation. This is discussed in more detail in paragraph 174 below.

155. Other issues cited included the charging of fees for the work of the umbrella company, which were debited from the salary of the individual,[151] gaps in National Insurance contribution records[152] and employers' National Insurance contributions being deducted from gross amounts available to pay salaries.[153] The documentation associated with engagements through umbrellas and agencies did not always clearly set out gross pay rates, contributions and fees, inhibiting awareness of these potential issues.[154]

THE ISSUE OF AWARENESS

156. The ICAEW told us that, whilst higher paid individuals may choose to deliver their services through a corporate form, there were many more lower paid individuals who had little choice over the matter and who were compelled to operate through a personal service company or an umbrella.[155] HMRC acknowledged this, stating: "We are seeing a number of cases where personal service companies are being used at low income levels and, indeed, that people are being—for want of a better term—pushed into these service companies".[156] It is important to note that we saw limited evidence of this push coming from the end-clients themselves; instead, it appeared that any pressure to work in this way came mainly from employment agencies through which the individuals sought work.[157]

157. We were told that some individuals were being forced into delivering their labour through vehicles which they didn't fully understand, with the reality of the situation only becoming apparent when the worker seeks to access benefits or exercise rights.[158] John Whiting told us that "the unadvised, or the person who is forced into a personal service company or umbrella route, is another matter. They may be hazily aware of something lurking but may not appreciate the full impact".[159]

158. These individuals can sometimes become confused when it comes to determining by whom they are actually employed. Neil Carberry, of the CBI, told us that there were issues in parts of the labour market with employees and workers not understanding the status on which they had been engaged.[160] Frances Corrie explained that: "The confusion increases because often, particularly at the perhaps less educated end of the labour market that we see, if you ask people who they are working for they would name their end user. That is where they work".[161]

159. The LITRG told us that the documentation and payslips associated with flexible employment structures for lower paid individuals were often complex, compounding the issues caused by a general lack of information and clarity.[162]

160. We believe that these issues are a cause for concern. It is apparent that some individuals are engaged in or through corporate forms which they don't fully understand and that, in some cases, to engage in this way may not entirely have been the choice of the individual concerned. This lack of awareness gives rise to the opportunity for potential exploitation by end-clients and the operators of umbrella companies and other intermediaries. In addition, it is possible that the individuals concerned are unaware of their potential exposure to issues relating to statutory entitlements, pensions and employment rights; for many, the distinction between employment and engagement is unclear. The fact that employment law does not always directly equate to tax law makes the situation still more complex to the uninitiated.

161. Solutions to these complex issues are not immediately obvious. The LITRG told us that a small number of well targeted investigations into the purveyors of schemes would make a difference.[163] It was also suggested to us that understandable, concise, information about the differences between employment and self-employment should be made available to all individuals working in industries where intermediary vehicles were prevalent.[164]

162. The production of such information would not be without difficulty, given the complex nature of the subject matter and the reliance on case-law for drawing distinctions between employment statuses. The IoD raised the issue of complexity noting that, whilst engagers could have a responsibility for ensuring that any such guidance was passed on to individuals, the onus should be on HMRC to determine what the guidance should contain.[165]

163. We are concerned that, in some sectors, individuals who are providing their services through personal service companies or, more often, umbrella companies and agencies, have a limited awareness of how they have been engaged to provide their work and who it is that has engaged them. This may mean that the individuals are not aware that they have foregone at least some levels of employment protection and benefits to which they would be entitled if they were in conventional employment. We recognise the complexity of the subject matter, and of the case law underpinning some of the distinctions made, but believe that it ought to be possible to present these issues in a concise and understandable manner.

164. We recommend that the Government should develop and publish a short guide setting out the basic differences between employment and self-employment. The guidance should be published across multiple platforms, including both digital and paper, and should be made available to individuals working in all industries where intermediaries are prevalent. (Recommendation 11)

A ROLE FOR THE LOW PAY COMMISSION?

165. A major issue hindering any attempt to propose solutions to the issues raised in this Chapter is the lack of clear robust information and analysis about the scale of the problem. Estimates for the flexible workforce in general are available (see paragraph 143) but, as detailed previously, this is not a homogenous group and will include individuals at the higher end of the income spectrum, as well as those who are lower paid.

166. Major employers from whom we heard had little detailed knowledge about the circumstances of flexible workers at the lower end of the income scale. Almost all used agencies to secure such labour, but were usually unclear about the methods of engagement used between the agencies and the workers they provided.[166]

167. HMRC admitted that they were unclear on the true extent of low paid individuals who might be engaged specifically through personal service companies, stating that they "do not have enough information on the numbers of people at the lower salary level to come to a view as to our best strategy".[167] HMRC acknowledged that there may be circumstances in which lower paid individuals, engaging through personal service companies, did not understand the implications for statutory entitlements and, also, where the liabilities for tax and National Insurance might fall.[168]

168. We asked HMRC what more they could be doing to tackle any exploitation of lower paid individuals engaging through personal service companies. They took the view that, in some of these cases, the engagements might actually be through managed service companies, rather than personal service companies and, if that were the case, the managed service companies legislation should apply. For those affected who were engaged through personal service companies, HMRC suggested that they needed to develop a communication strategy that raised awareness of the issues involved. These approaches came, however, with a caveat that more information was required before HMRC could determine the best route forward.[169]

169. We believe that the Low Pay Commission (LPC) could have a role to play here. The LPC is an independent, statutory, Non-Departmental Public Body set up under the National Minimum Wage Act 1998 to advise the Government on the national minimum wage and related matters. The Commission's stated goal is to recommend "levels of the various minimum wages which help as many low-paid workers as possible without any significant adverse impact on employment or the economy".[170]

170. The Commission produces an annual report, the principal purpose of which is to make recommendations about future minimum wage levels. This report takes its lead from an annual remit for the Commission, issued by the Secretary of State for Business, Innovation and Skills. The remit can request the Commission to include, in its report, advice on particular areas of concern or interest.

171. We believe the developing use of corporate intermediaries to engage lower paid individuals in work is worthy of examination by the LPC. The Commission has the capacity and wider expertise to produce more detailed analysis of the effects of the use of personal service companies, umbrella companies and agencies on the circumstances of lower paid workers. This analysis would help to inform HMRC's approach, which currently suffers from a lack of detailed knowledge. Furthermore, the issues around exploitation and lack of understanding around employment rights that we have discussed in this Chapter are likely to have contextual relevance for consideration of the national minimum wage.

172. We recommend that the Government includes within the remit of the Low Pay Commission a consideration of the use of personal service companies and umbrella companies by lower-paid workers, and the implications for pay, employment rights and statutory entitlements. (Recommendation 12)

Expenses and enforcement

173. We were told that umbrella companies play a vital role in the supply chain for flexible labour[171] and that, operated correctly, they provide an efficient form of tax collection from this element of the workforce.[172]

174. We also heard, however, a significant amount of evidence concerning the way in which umbrella companies managed the expenses of those engaged through them. If an individual working for an umbrella company is engaged on an over-arching contract of employment they are able to claim tax deductible travel expenses covering journeys from home to work. Umbrella companies are able to apply for and operate an expenses dispensation, which allows them to omit relevant expenses from their annual benefit in kind (P11D) returns to HMRC.

175. The LITRG suggested that individuals are often encouraged into the use of umbrella companies by the promise of greater levels of take home pay. They contend that these levels are, in fact, generated by understating taxable pay and overstating tax deductible expenses. Any understatement of pay could lead to a reduction in the value of National Insurance contributions, to the potential detriment of an individual's long term pension entitlements.

176. A number of respondents to our call for evidence raised issues with the manner in which umbrella companies managed expenses dispensations. These included Professional Passport, Sue Christensen (a Partner at Sue Owen Accountants), the AAT and the CIPP, ICAEW, the PCG and the LITRG. The NASUWT told us that they were aware of these issues.[173]

177. HMRC acknowledged that abuse of expenses dispensations by umbrella companies was taking place. They stated that the taxing obligation in these cases would rest with the umbrella company and that, as such, HMRC would seek any tax or National Insurance from the umbrella, rather than the individual worker.[174] Provisions exist, where appropriate, for recovering money personally from the officers of a company, or for transferring liabilities for National Insurance owed to a director of the company concerned.

178. This approach is not reflected in some of the wider evidence that we heard. The LITRG suggested that any investigation into expense abuses by HMRC is likely to result in penalties or problems for the worker, rather than the umbrella company.[175] Professional Passport suggested that when umbrella companies had, in the past, been found to be non-compliant, there had been "numerous examples where the umbrella shuts its doors and walks away leaving HMRC holding all the losses". They also stated that they were not aware of any action taken against directors personally to recover any of these losses.[176]

179. The NASUWT had little faith in HMRC's description of their approach, stating:

177

180. It is widely acknowledged that some umbrella companies are abusing the expenses dispensations that HMRC allow them to operate. HMRC are aware of this issue and have set out clearly their approach to tackling it, although it is apparent that some confusion as to where liability for any under-payment of tax or National Insurance lies continues to exist. It is possible that this liability might vary, according to the circumstances of individual cases. Notwithstanding this, HMRC must act to ensure that these abuses are uncovered, addressed and deterred through action.

181. As it is clear from the evidence that abuse of the expenses dispensations operated by umbrella companies is taking place, we recommend that Her Majesty's Revenue and Customs ensure that enforcement action is taken to end these abuses and to ensure that expenses dispensations are managed correctly. (Recommendation 13)

182. We also recommend that Her Majesty's Revenue and Customs should review its processes for granting and renewing expenses dispensations, in order to ensure that potentially high risk organisations are granted dispensations only when appropriate. (Recommendation 14)

183. The operation of a personal service company allows for expenses to be set against taxable income. This could, potentially, be another source of abuse. We asked HMRC about this issue, and were told that there was no evidence of widespread abuse of expenses rules by personal service companies.[178] We received no substantial evidence that challenged this position.

135 Angela Williams, written evidence and Frances Corrie (Q82). Back

136 ACCA Back

137 Q 123 Back

138 Q 48 Back

139 Figures for October to December 2013 (published in February 2014). See: http://www.ons.gov.uk/ons/dcp171778_350998.pdf Back

140 Ibid. Back

141 FCSA Back

142 Q 94 Back

143 See Chapter two for more detail on the managed service companies legislation. Back

144 Q 48 Back

145 ICAEW and ContractorCalculator Back

146 Q 82 Back