Joint employment to make service charge savings: Is it worth the risk?
Joint employment, also known as co-employment or shared employment, occurs when two or more employers share responsibility for the employment of an employee or group of employees.
While joint employment is not a commonly used arrangement in the UK, there are potential advantages for those recruiting, managing or paying for on-site staff.
Foremost of those advantages is a VAT saving. HMRC’s guidance note ‘Supply of staff and staff bureaux (VAT Notice 700/34)’ written in 2012 and updated at the end of 2020 states the following in regard to joint employment at section 3.2 “Where staff are jointly employed there is no supply for VAT purposes between the joint employers.”
Straightforward enough, and it doesn’t seem like personnel providers, managing agents, and RMCs/freeholders are exploiting a loophole at all. After all, as we detail here, if you’re a managing agent employing the site staff, then VAT at 20% must be applied to the cost of the staff.
Until September 2018 when HMRC made the position far clearer, managing agents were routinely passing the cost of the staff to their clients (and therefore the leaseholders) without applying VAT which was of course great for the service charge payers. Agents were incorrectly relying on an Extra Statutory Concession (ESC 3.18) published in April 1994 and updated more than once including here in February 2022, which was available to freeholders and headlessees and not managing agents, although the HMRC should be shouldering some of the blame, as the author is aware of letters from HMRC to managing agents permitting them to use the concession.
While some managing agents ignored the warning signs and continued with the status quo, most wrote to their clients to inform that VAT would be applied going forward.
A minority of managing agents were taken to one side by personnel agencies and told all about the benefits of joint employment – the main benefit to save money.
However, like anything to do with taxation, the devil is in the detail.
So we spoke to KBM UK chartered accountants and in turn they spoke to other tax experts about the joint employment arrangements being applied to site staff engaged on residential developments. There was plenty of discussion back and forth, and here are some highlights which cast serious doubts over the practice.
For clarity, joint employment in our sector means ‘personnel provider plus managing agent’, or ‘personnel provider plus landlord/freeholder/RMC/RTM’ as the two employers. Occasionally but rarely, the managing agent and their client form the joint employment partners.
Shared control over the staff
HMRC will want to know who has the control of the staff and how the control of the staff is divided evenly between the joint employers. If there is departure from this shared control and supervision, then HMRC may take the necessary corrective action.
“Shared control” means over:
Management
Hours, scheduling
Training
Pay
Holiday allowances and cover
Absenteeism/sickness
Appraisals, annual reviews, promotions
Disciplinary matters
In practice, we know that freeholders, head lessees, RMCs and RTMs do not want to be dealing with such responsibilities and they do not want to be “in control” of the site staff, so they appoint a service supplier agent to do the work on their behalf – and in which case, standard VAT applies, and joint employment eligibility falls flat on its face. Once a landlord/RMC etc understands the liability and ongoing responsibility of being a joint employer, the experts explained that the majority would rather pay the extra 20%!
In the opinion of the accountants and tax experts consulted, if one employer controls the payroll and the other employer does everything else, a joint employment arrangement would not be legitimate. In such a case, one employer has insufficient control over the ‘operations’ to make joint employment valid. The sharing of several aspects of the employment is key.
Liability towards staff
Joint employment by its very nature generates a degree of uncertainty when the employer/employee relationship goes off track, which it can do, hence it’s a legal requirement to take out EL cover. “You must get Employers’ Liability (EL) insurance as soon as you become an employer - your policy must cover you for at least £5 million and come from an authorised insurer.” (gov.uk).
It is important that your client’s broker and insurer (and your own broker/insurer) are fully aware of the joint employment arrangements and the scenarios for a claim brought against the employers are thought through carefully.
If the agency jointly employs with an RMC, would the RMC be covered by its own liability insurance or that of the agency? If the joint employer is the managing agent, then the managing agent will have its own EL insurance, so which policy responds to the claim, whether it’s a personal injury claim or employment dispute? Even something as simple as redundancy or holiday pay may increase the levels of confusion.
The experts state that if the joint employers are not jointly responsible for such issues, then joint employment is invalid.
Terms and Conditions of Employment
The experts explain that the employment contract must state who the joint employers are and how the management and administration involved with that employment is divided, evenly.
And for the payslips, they should be showing both employers’ names.
Far from being just a paper exercise, the experts explained that the ongoing effort and burden for both employers should be considerable, if they are demonstrating a legitimate joint employment arrangement.
Tax Avoidance and its Implications
The tax experts believe that HMRC will, at some point, make some significant changes to prevent this ‘loophole’ from being exploited. They may make an example of a particular company, where any wrongdoing in respect of tax avoidance may lead to criminal charges and a fine, in addition to back payments of tax for past years where VAT was avoided. RMCs, RTMs, freeholders, managing agents and personnel agencies may all be found complicit.
Creating separate limited companies through which to employ staff jointly, say the experts, will not protect the company’s directors from prosecution.
HMRC approval of joint employment models
Claims are made by enthusiastic practitioners of joint employment arrangements that their models have been given the seal of approval by HMRC. This may well be the case; but is the division of control and responsibilities detailed in the model an accurate reflection of what is happening on site?
Furthermore, the experts make it clear that each joint employment arrangement needs to be judged on its own merits and agreed with HMRC. Is that happening?
There is undoubted confusion about HMRC’s guidance regarding joint employment and how approval is sought and gained. One joint employment supplier in the sector (which jointly employs with a managing agent or with one of a landlord/freeholder/RMC/RTM) operates under and relies on a VAT derogation that does not exist!
Another supplier that partakes in joint employment (employing with landlords, freeholder, RMCs and RTMs but not seemingly with managing agents) boasts about saving RTMs and freeholders £2 million in VAT, while taking “... full responsibility for all employment matters” when the raison d'être of joint employment is to share the control and responsibilities.
What does the lease say?
It would be remiss of me to leave out the property manager’s first port of call: the lease. Does the lease allow for the employment of staff, and assuming it does, is it prescriptive in respect of the employment arrangements? If the lease states that the RMC is to employ the staff, then the RMC employs the staff, not a third-party agency, and certainly not a combination of employers.
Some thoughts in conclusion
The VAT treatment of jointly employed staff will depend on the specific arrangements and agreements between the joint employers.
If the staff are jointly employed and both employers have a significant and an evenly apportioned control over their work, it is possible that there is no supply of services for VAT purposes between the joint employers.
However, if there is an imbalance of control and responsibilities, then HMRC may see that as an abuse of VAT derogation 700/34 and could pursue criminal charges for tax avoidance. For instance, if one of the joint employers provides payroll and administrative services for the staff (e.g. personnel agency), and the other joint employer (e.g. RMC) reimburses them for these services, this may be considered a supply of services for VAT purposes, thus there are no legitimate VAT savings to be made.
What about the jointly employed members of staff themselves? Are they even aware that their employment has been transferred from a single employer to joint employment? In some cases that we have been made aware of, the on-site members of staff were under the impression that they were employed solely by an agency, as evidenced by their payslips and P60s which show just one employer name; and in the case of the P60s, only one ERN (Employer’s Reference Number) is listed.
Have jointly employed on-site staff been misled and even exploited?
It is important to note that the VAT treatment of jointly employed staff can be fairly complex and may depend on the specific facts and circumstances of each case. Therefore, it is advisable to seek professional advice from an accountant to ensure that the correct VAT treatment is applied and a solicitor to ensure compliance with the lease and to check for tribunal or court determinations.
At Cledor, the advice we have been given is to steer clear of joint employment, especially if the primary motivation is to entice clients into avoiding VAT. Is it worth the risk? We don’t think so.
Nick Regnier
Managing Director, Cledor
This blog is for guidance only and does not constitute advice. We would urge managing agents and their clients to seek expert advice before contemplating a joint employment arrangement. Please refer to our longer treatment of VAT and on-site staff here: cledor.co.uk/vat