We were disappointed but not surprised to learn that the Gangmasters Licensing Authority (GLA) has taken the opportunity to issue a press statement appearing to gloat over our decision not to proceed with a judicial review of the judgement handed down by the Employment Tribunal.

We did not intend to make a further statement.  However, we felt it to be appropriate that we set the record straight as to why we did not appeal, which we can confirm was not on the grounds that we accept that the decision to be correct in law.

As we set out in a statement which was published on our web-site, we were advised by Queens Counsel that it was likely we would win an appeal on the grounds that the judge had made fundamental errors in law when applying what is, in essence, complex tax and Social Security legislation.

An appeal to the High Court would have meant spending even more money, with no certainty of being awarded costs even if we won.  We took the commercial decision not to incur these additional costs preferring to concentrate our efforts on our existing clients and extending our client base outside the regulated sector. Our view remains that the GLA is working against the very workers it was formed to protect by denying them access to appropriate relief from tax and National Insurance Contributions within the pay period.

In advance of the Employment Tribunal hearing, we tried to get our appeal heard by a tax tribunal as any decision reached by an Upper Tier Tax Tribunal (subject to appeal), would have been binding on all parties.  We were denied this course of action by HMRC even though senior tax inspectors were present throughout the appeal hearing to provide technical input to Counsel instructed by the GLA.

Due to the fact that HMRC were not party to proceedings, we were unable to cross-examine its interpretation of the legislation. Instead, we are left with a decision which has no relevance apart from in the context of the licensing standards and even then, it is no more than persuasive in future cases.  We suggest that the GLA’s budget of £4m will not go very far if it chooses to pursue others for apparent tax liabilities on behalf of HMRC.

We are also saddened by the fact that Mr Broadbent chose to gloat over the fact that we had decided not to incur considerable additional costs which would have been necessary to embark on an extensive appeal process and his jubilation that an appeal will not take place. We can only assume that, by making such emotive comments, he was fearful of a reversal of the judgement.

Although HMRC has issued two general statements, it has failed to take any enforcement action.  This may be due to the introduction of Real Time Information (RTI) which works on the basis of establishing taxable pay and the “earnings” figure which will be used for Universal Credits.  The Pay Day model works on the basis of RTI and provides a real benefit to low paid workers.

It is plainly wrong for the GLA to declare that our payroll model is illegal as we have not received a financial assessment from HMRC upon which we are able to appeal.  Although the judgement has denied us the opportunity to trade in the GLA sector, we continue to provide a compliant service outside of the sector.

Harry Grierson
Business Development Director
FS Commercial Ltd

Due to the significant financial implications of proceeding with an appeal in the High Court, it is with sincere regret that we will not be seeking an application for a judicial review of the judgement.

We did not take our decision lightly. However, it was felt by our director and shareholders that by committing significant funds to what our legal team remain convinced is an injustice, this may have left us exposed financially, which is something we were simply not prepared to do.

Indeed, when the judgement was published, our legal advisers immediately consulted with Queens Counsel to confirm whether, in his opinion, the Advantage Plus model was still compliant. Counsel told us that we should win an appeal, due to the simple fact that the law relating to PAYE, NIC and the National Minimum Wage had not been correctly applied by the Tribunal.

There is no doubt that being granted a GLA Licence would have opened up new opportunities for us and it was tempting to run with the appeal.  However, we are not prepared to allow an expensive legal process to distract us from our commitment to provide a secure financial service for our existing clients.

Following the judgement,  The Office of Tax Simplification (“OTS”) announced a comprehensive review into travel and subsistence legislation.

www.hm-treasury.gov.uk/d/ots_employee_benefits_and_expenses_tor.PDF

Its terms of reference include the following statement;

“It is therefore proposed that the OTS carry out a review of the rules surrounding employee expenses and benefits. The overall aim will be to look for opportunities for simplification, consistent with the OTS’s rationale, but this will be an opportunity to review the way working patterns have changed since the various tax rules were developed and questions whether the rules are still appropriate and efficient”.

The initial scoping stage, leading to a report on problem areas in practice will be fed back to Government in the spring.  This will be followed by a study of a significant area, for example travel and subsistence expenses, with a view to developing recommendations for simplification.

There will be a period of consultation, including forming and working with a consultative committee.  We see this as a real opportunity to promote the Advantage Plus model as one which is simple to understand and allows tax relief to be applied on an earnings period basis irrespective of the level of pay.

FS Commercial Response relating to the appeal ruling between FS Commercial Limited and the Gangmasters Licensing Authority on 15 November 2012

FS Commercial is both suprised and disappointed by the decision. We are confident that our payroll model is compliant with current legislation. We are currently taking legal advice and intend to challenge the decision by judicial review

We are delighted to announce that FS Commercial has acquired the business of Pavillion Management Services Ltd, a contracting intermediary currently servicing 120 clients and 4000 temporary workers across the UK and Ireland.

We have taken this first acquisitive step to ensure that we will be in the best position to react to a consolidation of the intermediary contracting market-place due to increased regulatory burdens on those businesses which do not have the financial strength to survive.

Peter Hudson (Managing Director) who announced the acquisition said “We are delighted to welcome all PMS employees to this new and exciting opportunity and can confirm that the service level experience enjoyed by all clients and contractors will be enhanced. Our aim, as always, is to exceed your expectations”.

The requirement for nationals of the A8 accession states to join the Worker Registration Scheme ceases on 30th April 2011. This fact was established in a parliamentary written answer on 5 July 2010.

http://services.parliament.uk/hansard/Lords/ByDate/20100705/writtenanswers/part051.html

More information and background on the scheme can be found by clicking on the link below.

http://tinyurl.com/6djup7g

If they have not already done so, Employment Businesses need to revisit their processes and paperwork to cancel reference to the Worker Registration Scheme.

The Government has today written to the Low Pay Commission (LPC) setting out the remit for their 2011 Report.

As with previous years the LPC will monitor, evaluate and review the National Minimum Wage (NMW) and its impact, and review the levels of each of the different minimum wage rates.

This year the LPC is also asked to pay particular attention to:

• the competitiveness of small firms; and
• the employment prospects of young people, including those in apprenticeships and internships.

The LPC will report to the Prime Minister and the Secretary of State for Business, Innovation and Skills by the end of February 2011, with their recommendations for October 2011.

The Government has also today announced its response to the recommendations in the LPC’s 2010 report and laid regulations to bring these into force.

The new rates, which will come into effect on 1 October 2010 will be:

• £5.93 per hour for low paid workers aged 21 and over, increased from  £5.80;
• £4.92 per hour for 18-20 year olds, increased from £4.83; and
• £3.64 per hour for 16-17 year olds, increased from £3.57.

For the first time there will also be an apprentice minimum wage of £2.50 per hour.  The new rate will apply to those apprentices who are under 19 or those that are aged 19 and over but in the first year of their apprenticeship.

Employment Relations Minister Edward Davey said:

“The increases to the National Minimum Wage this year are appropriate for the economic climate. They will strike a balance between helping the lowest paid whilst at the same time not jeopardising their employment.

“The Low Pay Commission estimates that around 970,000 people stand to benefit from these increases.

“Workers on the National Minimum Wage are disproportionately likely to be employed by small firms and so it is right the Low Pay Commission considers their competitiveness when they make their recommendations for next year. SMEs will be vital to our economic recovery”.

Notes for editors

1. The Low Pay Commission was established following the National Minimum Wage Act 1998 to advise the Government about the National Minimum Wage. Commissioners have backgrounds in business, trades unions and academic labour relations. For more details, and copies of the full report, see http://www.lowpay.gov.uk/

2. When the minimum wage was launched in 1999, the main rate was £3.60.

3. The LPC makes recommendations to the Government in its annual report. In addition to the rate increases, the Government has accepted the recommendations that:

• there should be a single apprentice minimum wage rate of £2.50 per hour for those apprentices currently exempt from the National Minimum Wage;
• there should be specific guidance on the National Minimum Wage for the entertainment sector; and
• that HMRC investigates whether contract and agency cleaners in the hotel sector are receiving their entitlement under the National Minimum Wage for their hours worked.

4. The Government notes the Commission’s recommendation that there should be a commitment, as a minimum, to maintaining current funding in real terms for monitoring and enforcement of the National Minimum Wage until at least March 2014.

5. The accommodation offset will rise from £4.51 per day to £4.61.

6. The Pay and Work Rights helpline number is 0800 917 2368. As well as receiving and investigating complaints about non-payment of the minimum wage, the helpline offers advice and information in more than 100 languages.

7. The Low Pay Commission estimates that just over 950,000 people stand to benefit from the increase.

8. The remit for the Low Pay Commission’s 2011 report is to:

Monitor, evaluate and review the NMW and its impact, with particular reference to:

• the effect on pay, employment and competitiveness in the low paying sectors, with particular reference to the competitiveness of small firms;
• the effect on the pay structures and employment of different groups of workers, including in particular different age groups, women, ethnic minorities, people with disabilities and migrant workers.

Review the labour market position of young people, including those in apprenticeships and internships.

Review the levels of each of the different minimum wage rates and make recommendations for October 2011.

Review the arrangements for the apprentice minimum wage.

Report to the Prime Minister and the Secretary of State for Business, Innovation and Skills by the end of February 2011.

Using trusts & similar entities to reward employees – PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax

HMRC is aware that some companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.

In addition our view is that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief.

Participators affected by this may need to self-assess a liability to Inheritance Tax. There is further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts on the HMRC Internet site.

Avoidance of Corporation Tax

HMRC is aware of schemes where companies claim a Corporation Tax deduction for employer contributions to an EFRBS scheme on the basis that either (a) the contribution to the EFRBS or (b) a subsequent transfer to a second EFRBS is a ‘qualifying benefit’. This would allow the company to secure a Corporation Tax deduction before any benefits are actually paid by the scheme to the employee. Our view is that neither transaction involves the provision of a ‘qualifying benefit’. Whilst it has been argued that there may be some ambiguity in the law around the meaning of the phrase ‘transfer of assets’ since it does not state to whom the transfer is to be made, in our view the context resolves any ambiguity. The law defines ‘qualifying benefits’ and such benefits are plainly, from the context, benefits that if paid under the terms of an EFRBS might fall within the employment income charge. So in that context, a ‘transfer of assets’ should be interpreted as a transfer that could give rise to such a charge. This will primarily mean a transfer of assets to the employee but also includes a transfer to a member of the employee’s family. Neither an employer contribution to an EFRBS nor a transfer between EFRBS gives rise to a possible employment income tax charge on the employee. So there is no ‘qualifying benefit’ entitling the employer to a deduction.

Avoidance using Gift Aid (6 January 2010)

We are aware of schemes that seek to generate Gift Aid and Gift of Shares tax relief claims. A cash donation to a nominated charity is required and in return shares are received from an unnamed non UK ‘philanthropist’. These shares are claimed to be worth up to eight times the amount of the cash donation and are in companies listed on a stock exchange that is not recognised by HMRC, for example The Open Market of The Frankfurt Stock Exchange. The scheme anticipates that the shares will be donated to the nominated charity.

There is also strong evidence that these schemes have links to share scams such as ‘boiler rooms’. They usually involve a high level of upfront ‘fee’, paid to the scheme promoters, which is concealed within the original cash ‘donation’ given to the charity.

HMRC’s view is that no Gift Aid is due on the cash donation because the donor receives a benefit (the shares) that is in excess of the donation. HMRC also consider that no Gift of Shares relief is due because the requirement that the shares are listed on a stock exchange recognised by HMRC is not met.

Investments to obtain trade loss reliefs (‘sideways loss relief’) (8 February 2010)

HMRC are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Typically, a large loss is generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC’s view is that these schemes fail to meet the commercial and other fundamental requirements for sideways loss relief so that no relief is available to the participants.

In addition to not meeting the fundamental requirements for sideways loss relief, HMRC’s view is that individuals participating in these schemes also do not meet the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities. HMRC’s view is that the activities which these schemes claim are sufficient to meet the test, for example reading scripts or medical journals, watching TV or DVDs etc, are not undertaken on a commercial basis with a view to profit with the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability.

Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief HMRC will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases. For further and more detailed information on this “Spotlight” article please go to http://www.hmrc.gov.uk/avoidance/spotlights.htm