Shocked by the revelation that the UK Government lobbied the EU against increasing minimum steel tariffs? Stunned as they stepped up to the plate to defend that position as the UK steel industry goes to the wall? As Ronald Reagan said ‘You ain’t seen nothing yet!’.
Since the first Blair administration in 1997 skilled UK workers particularly in the IT industry have been shafted by Governments of all the main parties, the executive, businesses and their lobbyists.
Through a combination of outsourcing, offshoring and onshoring, many thousands of IT jobs have been lost to the lie that there is a skills shortage in IT which can only be addressed by tens of thousands of migrant workers. Many of these migrant workers, onshored into the UK by their sponsors can work here virtually Tax and NI free. Not even the Treasury benefits, yet the Treasury understands how this works and is content to let it go unchallenged. It is after all Government policy, just like their objection to changing the minimum steel tariffs.
Gaming the system - how it works
Companies who onshore Intra-Company
transfer (ICT) workers have to show the worker will be paid the rate for the
job when applying for the work visa. Under Border Agency rules salary and other
payments made to these workers are grouped together into a 'Salary Package' and checked against this job rate. What is not
generally known is that the Border
Agency allows the inclusion of business expenses into this 'Salary Package'. Business expenses are
not considered taxable by HMRC as they are not a component of taxable pay. These
expenses are incurred in performing the job and are received tax free by the
ICT migrant worker
(as is the case for all workers receiving
such business expenses – not all workers from April 2016).
Allowing tax free business expenses to count towards the salary rate for the job, required to issue the visa may not seem significant but it is key to undermining the whole ICT route. This concession allows companies with access to cheap offshore workers, to undercut resident workers and business competitors, and avoid paying significant amounts of tax and NI to the Treasury.
It should come as no surprise that these rules have acted as a financial incentive for foreign service companies to onshore cheap workers into the UK, rather than employ or train resident workers instead. The greater the difference between a migrant workers pay and that of a UK worker, the greater the incentive to onshore. For Indian workers who make up the majority of ICT workers coming into the UK, pay differentials of 8 to 1 are common UK pay rates, Indian pay rates.
This arrangement also provides an arm’s length way for many well known UK businesses to use such workers by proxy. When businesses have positions which they have not already offshored or they have a major project requiring resources, they simply outsource the roles or work to foreign service companies, who can then onshore their workers into the UK to work ‘on-client contract’. It is very damaging to resident workers and resident services companies who are displaced. It leads to a de-skilling of the UK resident workforce because they are shut out of these positions. Resident companies who compete in this space with these foreign service companies are at a substantial disadvantage, as they have to pay the true taxable salary rate to their employees, plus the business expenses incurred in performing their role.
In 2010 the Migration Advisory Committee (MAC) recommended that, tax-free allowances should be excluded when calculating points for earnings under the points based system for intra-company transfer workers, due to significant loss of tax revenue and the undercutting of resident workers and business which could occur (see page 260 para 9.166 and 9.167). The Government response to this advice was to ignore the MAC (Immigration questions Lord Laird WA340).
That decision, announced by Baroness Neville-Jones in the House of Lords on 22nd December 2010, has cost the Treasury a minimum of £1.25 Billion but is probably nearer £2.5 Billion over the course of the last parliament. From an employment perspective tens of thousands of jobs, which UK residents could have done, or have been trained to do have gone to migrant workers instead.
Fast forward to December 2015 and another MAC report on Tier-2 migrant workers Review of Tier 2 Migration Advisory Committee Executive Summary December 2015 and the Governments response Tier 2 (Skilled Workers):Written statement - HCWS660.
The headline Mac recommendations from their report and the Governments responses in red as of April 2016 were :
(a) Short Term Tier-2 ICT min salary threshold of £30,000.
Implemented from Autumn 2016 Short term route closed from April 2017 with one route for all ICTs with min salary threshold of £41,500.
(b) Tier-2 ICT’s be subject to the immigration health surcharge
Implemented from Autumn 2016.
(c) A new route designed specifically for Tier-2 ICT third-party contracting (on-client contract) with a salary threshold £41,500 from April 2017.
Rejected creating new ICT third-party contracting route, however, from April 2017 there will one route for all ICTs with min salary threshold of £41,500.
(d) Introduce Immigration Skills Surcharge for all Tier-2 workers (except for skill transfer and graduate trainee positions)
Rejected for Tier-2 ICTs – Annual loss to exchequer £40m+
(e) Recommend that HMRC and the Home Office work together to consider whether the current tax provisions made available for allowances, and the exemption of national insurance contributions, are working in the interests of the UK.
To be reviewed……… - We will review the extent to which allowances may be counted as salary to ensure we have appropriate safeguards in place against undercutting of the resident labour market and consider how to take forward the MAC’s proposal for a review of skills in the IT sector.
Whilst the review takes place the weekly loss to exchequer will be £10m+, annually £500m+ and if they do not address this issue at all the loss will be £2.5 billion+ over the course of this parliament.
The Governments response to the MAC report could be politely described as timid. Why wait until April 2017 to implement some of these changes? Autumn 2016, 6 months, £250m+ of lost revenue is ample time and cost to wait.
For many a career in IT has become precarious choice, so much so that in an O2 survey in June 2014 10% of Parents 'actively discourage' careers in IT. That survey should be a wake-up call to the Government. People have seen that the Government isn't interested in a level playing field. Their voices on this issue are ignored, the Government contents itself with the view of big business and their suppliers and consequently people are voting with their feet, a career in IT is too risky.
Excluding tax free allowances from inclusion in the ‘Salary Package’ by the Border Agency will not be a disaster for businesses or their suppliers. The world didn’t end when this issue was addressed by Canada in 2014 or Australia in 2012. In Canada a country often held up as an example of having an open work visa system they tightened up the assessment of ICTs entering Canada ensuring with immediate effect in June 2014, that the salary or wage of ICT workers would have to be above the average salary for the role and that business expenses incurred in performing their duties were not to be included in the overall calculation of the salary or wage.
In Australia changes regarding allowances were estimated to generate extra revenue of AUS $661.4m per year by 2015-16 (Fringe Benefits Tax (FBT) Reform living away from home benefits – Explanatory memorandum pg 6 forward estimates).
Contrary to reports in the media backthemac.com is not against Intra-Company Transfers. We seek reform of Border Agency rules to level the playing field with resident workers, so that ICT workers who do come here, are here because they are key workers not cheap workers. Ensuring such workers are paid a true market rate, taxable salary is a key step to achieving that goal – in many cases those workers will appreciate the pay rise ;)
Proposed changes to Tier 2 design to prevent undercutting
Recent revelations of Volkswagen cheating the emission standards show the lengths organisations are prepared to go to, to maintain an unfair advantage. The Tier-2 system needs to be rebalanced so that it is fair to resident workers, companies and the exchequer. Compliance also needs to be effective with the burden shifted from the Border Agency to sponsor companies.
This can be achieved with the following changes and there is no reason why they cannot be implemented from Autumn 2016.
1. Exclude tax-free allowances when calculating points for earnings under the points based system. This rule is currently being operated by the Border Agency and applies to chefs (SOC 5434 pg 12), it should be extended to all occupation codes.
2. At the moment no NI is paid by workers or their employers where they are here for less than 12 months (Exceptions to NICs). NI should be paid by all ICT workers and their employers but at the lower contracted out rate so there are no pension accrual obligations. As NI will now be paid, the immigration health surcharge should be dropped.
3. Compliance that employers are actually paying the rates on the COS application is ineffective (Techsense Ltd). The current model where the Border Agency samples a minimal number of employers for compliance should be replaced. The burden of proof should rest with the sponsor. This can be achieved by requiring employers to submit to the Border Agency the same information they have to send to the tax authorities each year when they do their employers PAYE annual returns. If a worker is paid in the UK and also in their home country then the equivalent information which is sent to the home country tax authorities, should also be provided to the Border Agency. An exception to this rule could be made where the taxable pay in the UK is above the taxable 'salary package' limit, in which case just the UK PAYE end of year return details will be sufficient.
Border Agency compliance officers will then be able to match what has been declared on the COS against what was actually declared to the tax authorities. As companies already submit this information to their tax authorities sending the same information to the Border Agency should not be a great administrative burden for them.
If you think your MP might be interested in the undercutting of resident workers and loss of revenue which the current rules allow let them know via www.writetothem.com.