Review supply chains before new 1.25% levy

The Health and Social Care Levy is on its way with a rise to NICs taking effect from 6 April. It’s an extra cost, obviously, but where in the supply chain will this cost land? We will come onto that shortly.

On 7 September the government announced the creation of a new Health and Social Care levy to fund investment in the NHS and social care, a tax of 1.25% on earnings for employees, the self-employed and employers. It will tax earnings in the same way as NICs except that it will also apply to the earnings of those over state pension age. It will come into force in the tax year starting in April 2023.

As a temporary measure, before the levy is introduced, all three rates of NICs will increase by 1.25% in 6 weeks’ time. This has the same effect as the levy, except that it will not apply to earnings over state pension age. NIC rates will then return to their current levels in April 2023, when the levy comes into effect. That seems an odd approach but it's for administrative reasons - HMRC can’t introduce an entirely new tax, with a new tax base, in the few weeks they’ve got, hence the why the levy will be preceded by temporary NICs rises which are just 6 weeks away. 

So, how will this affect end users? Emma Johnston is currently advising a number of clients on this point, and she joined me by phone from Glasgow to discuss it:

Emma Johnston: “The forthcoming changes are important for end user clients and Tier 1 contractors, and other intermediaries further down the supply chain because there is a question as to which entity bears this additional cost. So, under normal circumstances an employee will bear the additional 1.25% increase in employee national insurance contributions, however, the increase in employer cost will depend on the commercial arrangements in place in the supply chain and it’s vital that this cost is built into the arrangements for supplying labour from the outset to avoid a situation where intermediaries further down the supply chain are unable to afford to continue the arrangement. That’s based largely on the fact that profit margins reduce significantly further down the supply chain and so, usually, these increased statutory costs might be expected to fall to the end user to pay on the basis that it is this unavoidable cost of supplying that labour. That said, if the increase is pushed down the supply chain, the overall cost in general to the end user will likely increase any way, if not immediately, then then probably in due course.”

Joe Glavina: “What’s your advice to clients? Any steps they should be taking at this point?”

Emma Johnston: “It's worth clients reviewing their labour supply chains in advance of this increase to determine the potential implications of this in terms of costs to ensure that there is a healthy and sustainable supply chain in place. I think is also another issue that's really important here and that's connected to umbrella companies. I’ve spoken before about an ongoing government consultation about the potential for increased regulation in terms of umbrella companies because of the potential for unscrupulous practices in terms of lack of transparency in paying these workers. In terms of the employer increased cost, employer national insurance cost, there is a concern that that cost might be pushed on to umbrella workers. So there is a big issue here from an ethical perspective and also a reputational one for end users, or Tier 1 contractors, where these individuals are being exploited but there is also a knock on effect, legally, in terms of compliance with the Agency Worker Regulations because under the Agency Worker Regulations a worker should be paid the same as a compatible employee hired directly by the end user and if an umbrella company worker is being paid less, because this increased cost has been pushed on to them unlawfully, then their rights to parity of pay under the regulations will be breached. So, this is a big point that we anticipate needs further exploration by end users and all parts of the supply chain.”

Joe Glavina: “So is your final message to HR professionals to review their commercial contracts?”

Emma Johnston: “There definitely needs to be a discussion in terms of the commercial arrangements before these increased costs take effect so that all parties are clear as to what their obligations are in relation to this because it's likely that if the commercial contracts don't address the point there will need to be some form of negotiation beforehand to understand where there was cost land.”

Joe Glavina: “What the risk here, ultimately, if these checks are not carried out?”

Emma Johnston; “If there's nothing in the commercial contract to regulate where these costs land then there is a risk that ultimately the correct national insurance rates will not be paid and while the biggest risk in relation to that sits with the company that's deducting the PAYE, generally speaking, no corporate entity in the supply chain is going to want to potentially be implicated in an HMRC investigation or audit in terms of lack of payment of the correct tax and national insurance payments. So, there could be quite a knock-on impact, right the way up to the end users if these issues aren't addressed at the outset.”

The government has produced guidance to help with preparing for the new Health and Social Care levy. We have put a link to it in the transcript of this programme.

LINKS
- Link to government guidance on Preparing for the Health and Social Care Levy