Elective Deduction Mode (EDM)... Comply or Evade?


Onshore Intermediaries legislation

Few in the recruitment industry seem to believe the new Onshore Intermediaries legislation is either fair or proportionate to the recruiters identified in the legislation as “Agency 1”. However, for now, that argument has been lost and we are in a new era where the burden of proving that workers are self-employed has shifted from HMRC to the recruiter.

This simple change allows HMRC to issue debt notices where they believe workers are not genuinely self-employed and there may be a shortfall in payments of tax and national insurance contributions. The debt will have to be paid within 30 days of issue, even if the recruiter thinks the notice is incorrect. These debt notices will be issued to the recruitment company and where they fail to pay the burden will move to the recruitment company’s directors. Whether we agree with the legislation or not there is little doubt this threat of liability is proving to be an effective wake-up call.

Previously recruiters did not have to worry about supply chain compliance, beyond the concern over reputational damage, but now the penalties of non-compliance are so high that robust preferred supplier lists are essential and those thinking that the defence of fraud will get them off the hook are sadly out of touch with the legal process. 

I understand that some recruiters operating in the low paid sector are turning to specialists to develop new schemes and test the viability of old renamed schemes in an attempt to avoid the new legislation. Developing a scheme specifically aimed at avoiding legislation cannot and should not be viewed as ‘compliant’. When my company, Orange Genie, talk about compliance we mean we comply with all current legislation, including tax legislation. I believe legislative compliance is something we are and not something we do.   

However we now seen a new model emerge, the ‘Elective Deduction Model’ (EDM), which is a classic example of “it could technically work but is clearly designed to avoid the new legislation” particularly in terms of the exploitation and abuse of low paid workers. EDM is a contrived scheme which seeks to manipulate the rules to create a new status of worker and as such represents a high risk strategy to those seeking to adopt it in order to avoid the regulations. Having been defeated in exploiting low paid workers by the government’s introduction of MSC legislation this sector then turned to payday-by-payday tax relief models. As this model is now being challenged we saw a rush last year into the use of false self-employment models which caused HMRC to introduce the Onshore Intermediaries legislation.

The EDM model is promoted as a method of classifying workers as self-employed for employment law purposes but employed for tax purposes. It is being marketed as a “payroll solution” that is designed to avoid the intent of government legislation in various areas. Using a combination of statuses the clear aim is to side step the Onshore Intermediaries legislation, Employment and Statutory Rights, National Minimum Wage, Agency Workers Regulations and Pension Auto-Enrolment. The model claims to be based on an overarching contract apparently allowing contractors to claim expenses and increase their take home in a similar way to payday-by-payday models.  

Unlike compliant employment, self-employment and limited company models that perform a role in supporting the flexible workforce within the intent of government legislation, this model is clearly out to side step all the key government legislation aimed at protecting worker rights and collecting a fair tax on the work done. Concern about the use of this model caused the Freelancer and Contractor Services Association, REC and APSCo to issue a joint press release condemning the use of this model as its effect is to afford little or no protection to low paid workers.

The emergence of this model clearly highlights that compliance means different things to different people! For more information, please do not hesitate to contact Orange Genie. 

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