What’s new or on the horizon?
The following is a summary of new legislation and what is coming up to ensure that you remain aware of developments that could impact your business going forward.
Currently, an employer is able to make an ex-gratia payment of up to £30,000 on termination of an employee’s employment without deductions for tax or national insurance. After that, income tax applies but not NI contributions.
It was announced in August 2016 that these rules will be revised with effect from April 2018 so both tax and employer’s NI will become payable above the £30,000. This will make things more expensive for employers making termination payments, although the total termination payment will still be exempt from employee’s NI.
Payments in lieu of Notice (PILONs)
A further proposed change to the tax treatment of payments made on termination of employment relates to PILONs. Broadly speaking, the position at the moment is that where an employer does not have a contractual right to make a PILON and does not habitually make PILONs when employees leave, then the PILON may be exempt from tax within the £30,000 band (see above). It is now proposed that all PILONs will be taxable. If this is brought into effect, there will no longer be a reason not to have a contractual right to make a PILON, giving employers more flexibility to do so where they do not require employees to work their periods of notice.
Employers may want to review contracts of employment and update notice provisions.
IR35 and off-payroll working
The government’s consultation on proposals to amend the IR35 legislation for workers who provide their services to the public sector through an intermediary, such as a personal service company (PSC), closed on 18 August 2016. The proposed changes, which are to take effect from April 2017, include provisions that the public sector employer, agency or third party who pays the PSC will be responsible for deciding whether the IR35 rules apply to the engagement. If applicable, the public sector employer, agency or third party will be required to deduct employee tax and national insurance contributions from the payments that they make to the PSC and pay the liabilities through the real time information system.
The consultation has sought views on the definition of “public sector”. At the time of consultation it intended to apply the definition of public sector set out in the Freedom of Information Act 2000 which includes government departments, executive agencies and non-departmental public bodies, the NHS, local, police and fire authorities, educational establishments, the BBC, the British Museum and Channel 4, and devolved administrations. Excluded from scope are private companies and charities carrying out public functions.
Third Parties: Intermediaries supplied through agencies, employment businesses and outsourcing companies
Workers who are supplied (via their PSC) to a public sector body through employment agencies, outsourcing companies and consultancy firms will fall within the new rules. The rules will not apply to employees of an agency or intermediary who are supplied to the public sector body, and who are not therefore supplied through their own company.
It is often the case that there is more than one intermediary or employment business in the contractual chain and it is proposed that the party that has the closest commercial relationship in the supply chain with the PSC will be treated as the “engager” and required to comply with the rules. If that intermediary does not have a contractual or direct relationship with the end-user public sector engager then it will need to have in place suitable systems to collect the necessary information from the parties in the chain in order to fulfil the obligations under the new rules.
The public sector body is required to inform the agency that they are contracting with a public sector body within these rules. They will also be required to check that the agency operates the rules correctly.
Where a third party engager is based overseas, the last engager in the chain will be treated as the engager. Otherwise, the obligations will fall on the public sector engager.
The engager must report information about the worker to HMRC under real time information.
During consultation, HMRC has sought views on the above and also the amount of tax and NICs. HMRC provides an example of how it considers this will work in practice. HMRC has also sought views on who should be responsible for underpaid tax and NICs if the rules have not been applied correctly.
It is understood that, a beta version of a new digital tool for public sector PSCs to test their IR35 status will be released in late autumn and this is still awaited at the time of publication. It is anticipated that this tool will involve three elements – substitution, financial risk and control.
All public sector departments will have to regularly review their need for contractors, including time in the role and progress in replacing them with employees. This is anticipated for Autumn. Subsequently in December, all public departments will come up with a five-year “strategic workforce plan” which will detail skills-gaps and the contractors necessary to fill them. Departments should also by order of the Treasury be made to review whether their off-payroll staff, notably any contractors engaged as companies, should be ‘on payroll’ and on PAYE.
We are currently awaiting the IR35 tool and whether there will be any change of plan or announcements in the Autumn Statement 2016. Whilst this impacts public sector at present it is widely anticipated that the provisions will be extended to PSCs operating in the private sector in due course.
BIS call for evidence on non-compete restrictions
One of the big questions at present is the impact that post-termination restrictions in employment contracts are having on “innovation and growth”. The Business Secretary has announced plans to look into the use of such clauses and whether they work as a barrier to innovation and entrepreneurship, including by preventing employees from leaving employment to start up their own business.
A call for evidence has been launched asking for views on the use and impact of these restrictions. Do they hinder start-ups from hiring the best talent? Do they deter employees from leaving to set up on their own?
Part of the government’s “Innovation Plan”, its pledge to make Britain the best place to start a business, the launch of a consultation also puts the nature and effectiveness of these restrictions under the spotlight. They can be difficult and costly to enforce, with some employers only using them as a deterrent.
If using them, employers need to ensure that they are carefully drafted, tailored to the individual employee and their role and go no further than is reasonably necessary to protect their legitimate business interest.
Gender Pay Reporting
New legislation on gender pay reporting was brought into force in August 2016, although the final parts of the new legislation are not now expected until April 2017 (the original date was October 2016).
It is understood that employers with 250 or more employees will become compelled to analyse gender pay gap data (being the difference in levels of pay between men and women at the same employer) and publish their results. It is expected that the first analysis will be required as at 30 April 2017 and the first report will need to be published a year later.
However, savvy employers will want to consider their analysis early and take steps to ensure any pay gaps are equalised or can be explained, before they have to expose the data and run the risk of potential equal pay claims being brought by disgruntled employees.
A slave to new law: Modern Slavery
If you are a large organisation (being one that has a minimum annual turnover of £36m), there is a new legal obligation to publish a public statement on your website about the actions that your business has taken to ensure that the business and your supply chains are free of slavery and human trafficking.
If you are part of the supply chain to a large organisation, it is highly likely that you will be asked to confirm the steps that you take to ensure your business operations are slavery and trafficking free.
Surely slavery and trafficking is not problematic?
In 2014, the Global Slavery Index by the Walk Free Foundation estimated there were 35.8 million victims of slavery across the world. Slavery and human trafficking can take many forms, from compulsory or forced labour to exploitation or servitude. It was estimated by the Home Office in 2013 that there were between 10,000 and 13,000 victims of modern slavery in the UK.
What should a Modern Slavery and Human Trafficking Statement include?
The statement should include details of all the actions that your organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any part of its own business and in any of its supply chains. There is no set format that the statement must take but you will probably want to include the following:
- details about your corporate structure and supply chains and in particular the risk areas specific to your business;
- your due diligence process and the measures you have taken to ensure that slavery and trafficking is not taking place (for example, you may have insisted on appropriate warranties being included in your commercial supplier contracts, you perhaps have conducted site visits of your suppliers premises to check the conditions of their workforce and/or provided training to your staff so that they are vigilant as to the signs); and
- the ways in which you will continue to monitor the situation going forward.
If your organisation does not take any anti-slavery or trafficking actions, you are required to publish a statement to that effect. Such an admission could result in embarrassment so think hard before doing so.
What should I do with the statement?
The statement should be formally approved (for example, approved by the Board of Directors and signed by a director) and then published on your organisation’s website, with a prominent link to the statement on your home page.
When should I do this?
As soon as possible as the new obligation is already in force, with organisations whose financial years end on or after 31 March 2016 being required to publish a statement as soon as practicable after their financial year end. You will then need to update your statement each financial year thereafter.
What happens if I don’t produce a statement?
If you do not have a statement it is likely to result in potential reputation and brand damage issues which could lead to loss of business (as it is probable that others will not wish to conduct business with organisations who are not publically committed to ensuring their business and supply chains are free from slavery and trafficking). The Home Office may also commence proceedings to compel your
organisation to produce such a statement.
So, what should I do in practice?
- Assess your own business to ensure that it is slavery and trafficking free;
- Map out your supply chain and carry out the necessary due diligence on each of them – which is likely to involve asking them to provide you with a copy of their statement;
- Produce your Modern Slavery and Human Trafficking Statement, get it approved and publish it on your website, adding a link to it on your home page; and
- Continue to review and update your statement periodically and certainly at your financial year end.
Where can I find out more?
The Home Office has published some guidance which can be found at www.gov.uk/government/collections/modern-slavery.
No news round up would be complete without a mention of Brexit. We all await details on when and how Britain will exit Europe but certainly some changes to employment law are likely in the long term.
There has already been some speculation about changes being made to the rules on working time, the transfer of businesses (often known as TUPE transfers) and the rights of agency workers. However, laws relating to discrimination and unfair dismissal are perhaps unlikely to be amended. No one knows what the future may hold but employers will want to keep an eye on developments in this area.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.