UT parameters – Labour

“Labour” is defined as a combination of payroll costs and headcount; they are weighted 50:50.

It is the place of work that counts, not the residence of the employer.


I am going to assume that we take the average number of employees on the books through the year.  I’m not sure whether to count noses, or to count full-time equivalents.  Following accounting practice I will go with noses, but there are a couple of areas that might need to be addressed:

  • Two people on 16 hours a week will weight the formula more than one on 35.  This may be either a bug or a feature.
  • Should there be a de minimis threshold, as we used to have in UK GAAP?
  • Zero-hours contracts are big news at the moment: a large number of employees with brief periods of work will bump the numbers up considerably, if the Companies Act definition whereby any work in a month gets you 1/12 of a headcount is adopted.

We include all persons working for the firm, including employees of subcontractors providing labour services.  I assume this means staffing agencies rather than all sub-contractors, but there is a bit of difficulty drawing a bright line between provision of staff and provision of services.  Looking at various classes of worker I find my view is rather coloured by UK employment/self-employment tests:

  • Engaged personally under a contract of service: clearly included.
  • Engaged through an agency under a contract of service: defined as included.
  • Engaged as self-employed: probably excluded
  • Engaged on a piece work basis: included if controlled by the business, but excluded if link is loose
  • Staff of a firm providing professional services: excluded.
  • Former staff outsourced en masse to a third party: I’m tempted to include them, but what happens after five years when all the original staff have left?

For clarity I’m going to take a simple definition and only include employees with a solid contract of service, even if it’s through an agency.  If there is any doubt, then they are excluded.  I appreciate that this may permit outsourcing to reduce headcount “artificially”, but console myself that the outsourcing company will include them in its own UT calculations and they will still pull profit to the country.

An alternative measure would be to look at FTEs, perhaps by taking hours worked and dividing by whatever a full-time week is.  Although as all we want is a relative number the raw hours worked would do perfectly well, with perhaps an assumption of 40 hours for salaried staff with no set hours.  But we then get into problems with piece work, and whether directors count as employees, and record-keeping generally.  And should workaholics be capped to 40 hours even if they work 70?

Payroll costs

Clearly we need to include wages and salaries.  Bonuses would seem to be fair game.  Benefits should also be included, although share-based remuneration gives me some pause for thought: I think however that this is just my historic uncertainty over why we take the cost to the P&L in the first place rather than treating it as a cost of the shareholders (I’ve never been philosophically convinced of that one).  Pensions and SAYE and so on should be included too.

Staff welfare generally is an odd one, especially as it is hard to draw a bright line in the spectrum running from operating costs through staff welfare to benefits.  I think the touchstone should be along the lines of “would it be taxable on the employee?”, although given the different tax and benefits regimes we would need to define this more closely.  For my purposes, then, the costs include any amounts which in the UK would go on a P60 or P11d, or be included in a P11d dispensation or PSA.  Amounts which are specifically exempted from that reporting requirement are also included: I want the underlying principle, not the actual taxable amount.

For subcontractors, the actual staff cost is not going to be the amount paid to the subcontractor, as that will include an element of profit.  As however that profit should hopefully be taxed in the same jurisdiction by virtue of the sub-contractor’s staff being there, I don’t propose to adjust for that.

Should social security borne by the employer be included?  I think not, as this would be slightly distorting: by increasing the secondary NI rate, for example, the UK would not only rake in more NI but would also increase the company’s allocated profit: the Chancellor may then be tempted to hike secondary NI and cut CT slightly.  I am slightly uncomfortable at excluding a cost so closely tied in with employment, though, and recognise that this will further increase the impact of outsourcing and using staff suppliers (as the business will then effectively have to include the social security cost inherent in the agency fees).

Initial conclusions

“Labour” is people engaged on a contract of service, whether directly or indirectly.

Headcount is the average number of those people over the year.  No account is taken of working hours.

Payroll cost is the total of amounts paid to people included in the headcount, including benefits and any amounts that could reasonably be taxed on them; plus the amounts paid to sub-contractors in respect of labour (but not services) supplied.

Social security and other costs borne by the employer but which the worker does not benefit from are excluded: only amounts paid to the worker (or agency) count.

I am uncomfortable about a number of aspects of this, as I have had to draw some very simple lines and exclude some costs which are economically very similar to those included.  My gut feeling is that there is going to be scope for a lot of gaming of this area.


2 thoughts on “UT parameters – Labour

  1. I can’t claim to have read it yet, but I’m sure this will be relevant: CCCTB – The Employment Factor Game http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2397283
    (HT @JudithFreedman)
    And I’m afraid I’m going to return to my “where” theme again – if you tax on the basis of where the work is done, how will the apportionment deal with cruise liners? Or aircrew? I can see every territory that the Queen Elizabeth or Queen Mary dock at frantically searching for a taxable nexus to which they can attach a bill based on X’000 crew hours.
    It may not necessarily be a big issue in terms of numbers of people directly affected, but mucking around with the economics of crewing container ships could have significant knock on impacts elsewhere in the economy – or environmental impacts if the system inadvertently makes using qualified crew on oil tankers “uneconomic”.

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