Welcome to the latest edition of our newsletter! Our goal is to ensure that you are well informed and equipped with the latest information.
Read on to stay ahead, stay compliant, and set the course for success.
IR35: Lowering the Risks Associated with Hiring Contractors in the UK
The revised off-payroll legislation or IR35 of the UK will come into effect in April 2024. The rule’s 2021 update introduced greater risk to employers, deterring them from hiring contractors and gig workers.
The rule intended to evade fiscal distortion due to the differences in taxes of workers with employee and self-employed statuses. However, after the 2021 amendment, the liability to ensure adequate tax payment fell upon organisations hiring contractors or PSCs (personal service companies). Many small and medium-sized businesses, which could not risk getting unexpected tax statements if their contractors did not pay taxes, responded by invariably adding all contractors to their payroll.
Unfortunately, this hampered the flexibility of hiring contractors, the key benefit of such work arrangements. To make matters worse, this rule led to double taxation to HM Revenue & Customs (HMRC) department, leading to employers bearing disproportionate risk, such as the cost of overpayment.
The new amendment eliminates the risk of double taxation, which means that any taxes already paid by the company hiring the contractor do not need to be paid again. This not only ensures fairness but also brings predictability to tax liabilities associated with contractual work.
For most earnings levels, the additional tax burden for hiring companies will be between 12.5% and 15% of the contractor’s earnings. In addition, the need for prolonged and expensive litigation between companies and HMRC will decline since the parties can agree on settlement figures with an automatic offset available.
Provisional Agreement Reached on EU’s Platform Workers Directive
EU member states and European Council lawmakers have reached an agreement for the Platform Workers Directive (PWD). To improve working conditions and regulate the use of algorithms by digital labour platforms, the provisional PWD text strikes a balance between respecting the National Labour Law and providing a minimum level of protection to gig workers.
The law encompasses app-based platforms, such as Uber, Deliveroo and Glovo, where employees are treated as self-employed despite working under rules similar to ordinary employment.
The directive is aimed at making algorithmic workforce management more transparent while strengthening human oversight of automated decisions. It also provisions for employees to challenge algorithmic decisions.
“The agreement confirmed today builds on the efforts of previous Council presidencies and reaffirms the social dimension of the European Union,” said Pierre-Yves Dermagne, Deputy Prime Minister and Minister for the Economy and Employment, Belgium.
There are two aspects of the legislation:
- Determining the correct employment status of individuals working on a digital platform. Member states will have to reach a legal presumption of employment, based on facts indicating control and direction. The facts will be based on national law and collective agreements. The digital platform will be responsible for proving that there is no employment relationship with the worker.
- Regulating algorithmic management to enable workers to enjoy the labour rights they are entitled to. Workers have the right to be duly informed of the use and expanse of automated decision-making while restricting platforms from processing certain personal data, such as biometric information or emotional state.
While member states have 2 years to ensure compliance once the agreement is enforced, digital platform employers need to start maintaining greater transparency in algorithmic decisioning and ensure that employees get the benefits due to them according to their engagement format.
Major Changes Expected in the UK Staffing and Platform Worker Landscape
Manifesto commitments for the forthcoming elections and spring budget announcements point to an upcoming year and a half of significant changes in the British staffing and gig economy work arrangements.
Budget Aimed to Lure Voters
The main rate of Class 1 primary National Insurance Contributions (NICs) has been reduced from 10% to 2%, while the rate paid on earnings above the “upper threshold” and Class 1 secondary NICs has been retained. A reduction in NICs for employees and self-employed individuals is expected to continue to make self-employment more attractive for certain sections of workers.
This is primarily because tax advantages of being self-employed are preserved, while marginal tax rates for regular employees at a broad level are maintained at:
- Basic rate – 28%
- Higher rate – 42%
- Additional rate – 47%
Simultaneously, certain liabilities could be introduced for contractors and staffing agencies to eradicate “dodgy” practices used to avoid taxes. The verdict on the VAT liability of private tax regulation cases will govern how taxation for intermediaries that enable gig-based personal services takes shape.
Labour Laws in Waiting
The UK’s Labour Party intends to weed out “bogus” self-employment and “exploitative” zero-hour contracts within 100 days of assuming control, if it wins the elections. However, much deliberation and consultation will be required if they fail to crack a deal with the EU to the borrow self-employment text.
Whichever party comes to power in the UK, employers have very little time to adapt to the new regime, which prohibits them from rejecting flexible working arrangement requests without an explanation.
The Race to The Bottom Begins as Jurisdictions Start Implementing the BEPS Pillar Two
With the acceptance of the OECD’s global tax deal by 140 countries, certain large economies will apply the minimum 15% tax on large multinational companies for the first time. It is a crucial step towards creating a globally equitable taxation system and an attempt to sustainably implement it.
While many nations struggle to lower corporate taxes, the ones where companies are taxed below the lower limit have to collectively prepare an action plan.
To adequately determine how the rules apply to a multinational firm, the following steps might need to be taken:
- Identify the multinational companies to be covered under the Base Erosion and Profit Shifting (BAPS) group.
- The multinational company must adjust its accounting to meet the Financial Accounting Net Income or Loss (FANIL) reporting criteria.
- The Global Anti-Base Erosion (GloBE) income must be calculated by adjusting income from all jurisdictions, considering transfer pricing and intra-group financing.
- To prevent double taxation, all taxes must be determined and adjusted considering cross-border allocations and post-audit calculations that may alter tax liabilities.
- The ETR (effective tax rate) and top-up tax are to be calculated to bring the minimum global tax to 15%, while accounting for specific global revenue-based exemptions.
- The jurisdiction must finally charge the top-up tax under the three types of provisions – Qualified Domestic Minimum Top-Up (QDMTT), Income Inclusion Rule (IRR), and Under-Taxed Payment Rule (UTPR).
The OECD’s goal is to create a level playing field for multinational companies in the global economy. The key to achieving this goal is to ensure that GloBE rules are implemented transparently, and predictable outcomes are maintained across jurisdictions.
As various countries implement the rule, many organisations will have to acquire new forms of financial data, meeting the guidelines of tax departments of their specific legislation. This may be a significant overhead, and a complicated one for most companies as diverse nations iron out the ways to transparently and coherently implement the Pillar Two of BEPS.