Do joint employment models fall within the scope of JSL?

Following a recent virtual workshops with REC, Markel have received a number of queries from recruiters around how to manage the due diligence of various contracting models in their supply chain.  As part of this they became aware of some commentary around joint employment models, namely that they are not within the remit of JSL.

Much like umbrella company operations, joint employment models seem to vary in their set up and operation, they have had varying degrees of popularity, for the most part they're perhaps seen as a vehicle to achieve certain VAT advantages – particularly in sectors where some supplies can be zero rated.

Most common joint employment models operate where an umbrella company and recruiter come together to “jointly employ” the individual:  the umbrella taking on responsibility for payroll and administration of RTW checks, registration etc; the recruiter providing work, finding services and managing the onward supply of services.  The theory being that both parties jointly employ the individual.

Setting aside the employment law complexities of determining which entity may be liable as the employer should a worker seek to bring a claim or assert employment rights, the tax position is more straightforward. While HMRC recognises that joint employment models can exist, PAYE liability will typically sit with the entity whose Employer Reference Number (ERN) is used to pay the individual.

With joint employment models it is typically the umbrella company’s Employer Reference number that the individual is paid under.  Which would mean it is the umbrella whom HMRC would hold liable for any taxes owed.  Before the Joint and Several Liability (JSL) legislation, Markel believed that although the umbrella company was the entity paying the worker and therefore primarily responsible for PAYE, HMRC might have argued that the recruiter also had some tax liability because its role in the employment relationship was sufficiently close to that of an employer.  Some may argue that joint employment models could, by the very nature of their creation, establish a joint and several liability to tax without the need for the JSL legislation.

So where do these models sit in the post JSL world?

One of the requirements of the legislation stipulates:

(a) there is a contract between the umbrella company and (i) the client, or (ii) another person,

(b) under or in consequence of the contract (i) the services are provided, or (ii) the umbrella company is paid, or otherwise provided with consideration, for the services.

Some have commented that as the umbrella company is not the sole employer providing services of the individual to the agency then the JSL legislation cannot apply between the umbrella and the agency.

In our opinion there is still scope for the legislation to apply as the umbrella is receiving consideration for the individual’s services as the PAYE employer.  Nonetheless, even if this were not the case, the legislation contains provisions for “purported umbrellas”, and one of those provisions states:

a) a person (“the purported umbrella company”) participates in arrangements that would, if an individual were employed by the purported umbrella company, result in the umbrella company arrangements conditions being met in relation to services the individual provides to the client,

(b) either—

(i) it is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella  company or the individual, would assume that the purported umbrella  company is the employer of that individual, or

(ii) the purported umbrella company has taken any step that it is reasonable to suppose was intended to give the impression to any person (whether or not that impression is given) that the purported umbrella company is the employer of the individual, (c) the individual is not employed by the purported umbrella company,

This part of the legislation seeks to apply JSL in cases where there is non-traditional umbrella company operation.  Simply that one party in the chain (e.g. the client) believes the individual is employed by an entity is sufficient.  HMRC’s guidance confirms that the legislation goes further than this such that it doesn’t matter whether or not the other party believes the individual was an employee, it is sufficient that steps were taken to create that impression.

With the title of “joint employment” any reasonable person would assume the individual is employed, and many of the explanations we have seen describe the umbrella company as performing the PAYE functions.  I cannot see that any reasonable person could conclude that the employer for tax purposes is anyone other than the umbrella company.  As the recruiter is the party operating work-finding for the individual, and physically paying the money to the umbrella company, I cannot foresee HMRC having any problem holding that recruiter liable under the legislation.

In the event that HMRC could not make a case to hold the recruiter liable in this way, based on how the joint employment model is set up, there is potential here that HMRC may run the argument that the recruiter itself, as a self-proclaimed employer, is the umbrella company for the purposes of the legislation and therefore the client of the recruiter is jointly and severally liable (this may be a stretched interpretation of the legislation but depending on how the model is set up we believe there is potential).

As we have consistently stated, we do not believe there is any good to come from trying to circumvent legislation, and joint employment falls squarely within JSL.  JSL much like other tax legislation can be navigated with due diligence and transparency in the supply chain.  If you need any help with your supply chain due diligence contact us at contractorsolutions@markel.com.

Learn more about Markel Tax