With HSBC, the ‘known knowns’ are too scant to say if it has an IR35 fix

Another adviser on IR35 has already tried to see through the opaque arrangements proposed at HSBC, and although certainty to what the bank is proposing cannot be achieved until the small print of the third-party structure is disclosed, I will try do the same -- while broadly agreeing with that adviser’s analysis, writes David Kirk, founder of David Kirk & Co, a niche tax consultancy specialising in employment status.

In the case of the ‘third-party’ being an umbrella company or recruitment agency, the result is likely -- on the face of it -- to be far more expensive for HSBC than putting people on the payroll, as the bank would have to pay VAT on the ‘supply’ of contractors, plus a margin to accommodate their costs. This is because unlike many other forms of client, banks do not get their input VAT back.

We must therefore look for some other reason to explain the appeal of the ‘third-party’ arrangement. This could be:

  1. A crude attempt to avoid giving away employment rights. Adding on an extra 20% looks like a very expensive way of doing that, and so this is unlikely to be it.
  2. An equally crude attempt to make the contractors pay the Employer NICs.  This would be done (as it is currently in the public sector) by quoting an ‘umbrella rate’ which is what they give the third-party structure who have to pay the Employer NICs (at 13.8%) out of this, as well as to have some money to cover their own costs, and so would quote a gross pay rate well below this umbrella rate.  But this would be unlikely to work for long. And, furthermore, there is a growing expectation that the big financial services companies realise that they are going to have to pay the Employer NICs in addition to what they are paying out at the moment -- and are preparing to do so. So, this is unlikely to be the reason either.
  3. HSBC have found a way of dealing with the VAT issue, so that they are actually going to gain from this arrangement whereby, perhaps, in future they will pay the Employer NICs but free themselves of the obligation of having to pay the VAT.  This could be done by setting up a separate payroll of people who are on PAYE but not employees, which would be administered by the third party who would receive the money from HSBC and physically pay it over, but as agents for the bank.  Their own administration charge on top of this would be subject to VAT, but that would not be too painful.
  1. It is easier for HSBC to set up their systems this way. They would probably avoid giving away employment rights, but their motivation might actually be different: their systems are all global and integrated and probably easier to change in this way than to operate PAYE on a whole lot of limited companies. For example, if they were simply to apply the public sector IR35 rules (effective since April 2017) themselves, they would need to find ways of identifying (a) that they need to pay VAT on the full principal amount despite the fact that they will not actually be paying that full principal, and (b) that people on whom they are operating PAYE are not actually employees. Failure to do which will cause problems with the integration with their HR systems and potentially lead them to report false figures to the world’s stock exchanges, possibly attracting the wrong sort of attention from regulators on Wall Street and elsewhere. Bearing in mind that budgets for this sort of IT upgrade are set once a year and that it will be a very small matter in the global scheme of things, outsourcing this might look altogether easier.

As signalled above, the nature of this piece is speculative because there are ‘unknowns’ leading from the few ‘known knowns’ at HSBC. So, not for the first time in history, we have ‘known unknowns.’ And of course, there are probably the infamous ‘unknown unknows’ – things (about this HSBC plan) that we don’t know we don’t know!

But it’s all a speculative move for HSBC too, because the draft regulations to implement the April 2020 IR35 reforms are not with us, and will not be with us until later this summer. My sense in all of this, and based on my two decades of experience specialising in employment status -- often dealing with corporations -  is that HSBC’s ‘third-party’ arrangement is probably a combination of options 3 and 4, above.

However, if the third-party was a consultancy providing a genuine outsourced service, then it is hard to see how the double charge of Employer NICs and VAT could be avoided, as it would be up to the consultancy to operate the rules. And it would be unlikely to be a ‘small company’ and so exempt from them. 

The consultancy could of course come to its own view as to whether the IR35 rules apply, but HSBC would probably insist on certain ‘compliance levels,’ which could constrain it.  All that the bank would likely end up gaining from this arrangement is reputational damage-limitation, in that it would be the consultancy’s name in the frame -- not theirs as ‘HSBC.’ But even then, it might not actually be effective -- and not just because HMRC is wise to these third-party or intermediary arrangements, seemingly before they have even been put in place.

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Written by David Kirk

David Kirk MA FCA CTA was educated at Oxford University and trained as a chartered accountant with Thomson McLintock & Co. After a career in banking and as a finance director in industry he started his own chartered accountancy practice, David Kirk & Co., in 2000.
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