FROM FEBRUARY 2016'S RECRUITER MAGAZINE
A LEVEL PLAYING FIELD LIES AHEAD
By Amanda Hobson, CEO, EasyPay Services
Having started in recruitment when recruitment agencies had to be licensed and self-employed people operated on 714 and SC60 cards (yes, I am that old!), I have seen many legislative changes over the years.
Initially we were tackling cash-in-hand payments, but this then brought new loopholes for tax evasion/tax savings.
Over the years, HMRC has closed many of the available loopholes that allow take-home pay to be increased. The latest legislation coming into force in April 2016 will ultimately see umbrella models, as we know them, close down, but this has not changed agencies’ view that there will be more loopholes allowing tax avoidance/savings.
As a back office provider to many recruitment agencies from small to large, £20m turnover ones, I have been listening to the solutions that have been presented to several of my clients. Many are high risk and some mean fundamentally changing either contracts or the way that agencies operate. Suggested agreements between engagers and intermediaries that temporary workers are not subject to the right of supervision, direction and control have implications beyond underpaid tax liability. This is dangerous; what happens in the event of negligence? The client refuses to pay? Yes, there are insurances both held by PSCs [personal services companies] and currently sold to protect agencies, but we all know that most insurance policies, whether for cars, buildings or travel etc., will always have exclusion clauses in the small print to prevent pay-out when you most need it, and that settlement delays can be a major constraint on cash flow.
It is a huge gamble to change established ways of operation to adopt something untested. One wrong move, wrong contract or wrong arrangement will highlight that, in fact, despite the structure, you are still a recruitment agency and PAYE should apply.
Another suggested solution is pushing workers down the PSC route. The issue here is that the worker has to show they need a limited company to operate. If a person simply works for agencies all year, why do they need to be a limited company? IR35 comes into question here. Not only that, but PSCs also face a tax change from April, leaving them not much better off than being paid as a PAYE worker.
Whichever route your agency decides to take, it will depend on your attitude to risk.
Let’s not forget, draft legislation won’t be finalised until February 2016, so any solutions marketed now could still be blocked by last minute legislation designed to do just this!
Having seen all the changes, I feel that the government may have finally nailed it and wonder if this is such a bad thing? Will it not mean that recruitment agencies’ profitability will now be based on professional service and capability, rather than on tax savings and kickbacks? Will it not make a level playing field for all to operate on?
Will post April 2016 not be a better place to be, once recruiters and workers finally accept that there are no more loopholes and no easy-fixes? The industry has had a good run of loopholes and now it is time to get down to real recruitment and pay what taxes are due.
ADAPTING TO MEET THE T&S CHANGES
By Gary Butterworth, director, Zeva
Goodbye Travel and Subsistence Expenses, Hello Great Service and Lower Costs!
Earlier this year, HMRC issued a consultation document ‘Employment Intermediaries and Tax Relief for Travel and Subsistence’, which proposed removing tax relief for travel and subsistence for workers engaged through employment intermediaries where they were subjected to supervision, direction or control of any person (or the right of control).
There was, indeed, an air of inevitability that the government would drive through its stated intention to restrict travel and subsistence expenses for agency workers who are subject to supervision, direction and control (SDC).
It was, therefore, unsurprising when the government ignored the valid concerns of the industry (including Members of Parliament and a Member of the House of Lords) to introduce Clause 9 as part of the Finance Bill 2016.
This Clause introduces two new sections (s339A and 688B into ITEPA and a new chapter (Chapter 3B) into Part 4 of the Income Tax (PAYE) Regulations 2003.
Unless the government has an unexpected change of heart (unlikely given its proven track record), with effect from 6 April 2016, the ability for contractors to claim travel and subsistence expenses will depend on clients, agencies and umbrella companies being able to satisfy HMRC that there is no right to supervise, direct and control each agency worker.
It is beyond doubt that in the umbrella sector that there will be casualties. Too late are many umbrella companies reacting to these changes. Zeva and its advisors have been working on possible solutions since the changes were first proposed, making significant changes in systems and processes, to work within the confines of the new legislation.
As a result, New Zeva has adapted to provide a range of services which will meet all the requirements of our clients both old and new. We believe that Zeva holds a unique position in what we perceive to be a fragmented market.
If you wish to maintain your profit margin after 6 April 2016, give us a call now on 01706 830820!
WRITING IS CLEARLY ON THE WALL
Barry Roback, director, Anderson Group
What will changes to the dispensation regulations and to travel and subsistence legislation mean for the recruitment industry?
Subject to any last minute (minor) amendments, we now have a clear idea of how imminent legislative change will affect the Contingent Labour market. There should be no doubt that these rules will have a profound effect on the way that the contractor market organises itself and suppliers who suggest otherwise either have their heads very firmly planted in the sand, or worse, will be offering non-compliant solutions to the market.
We should be fairly familiar with what will soon to be the new tests for allowable ‘Travelling and Subsistence’ (T&S) expenses as these are the very same Supervision, Direction or Control (SDC) tests applicable to the Offshore/Onshore Intermediaries Legislation.
But if changes to the T&S regulations were not bad enough, for those with an appetite for risk and willing to “chance” their assessment of SDC, a far more obscure but profound change in the new Statutory Exemption rules (which will effectively replace Dispensations) will also come into effect April 2016. You are forgiven if you are not aware of this change as there has been no discussion, consultation or dialogue between HMRC and the contract industry over this impending change.
Without going into detail, the traditional ‘build-up’ approach to a PAYE salary calculation (i.e. the sacrifice of taxable salary in exchange for a variable amount of tax free expenses) will no longer be accepted by HMRC. After April 2016, all qualifying salary sacrifice arrangements will require that the amount of salary actually sacrificed must be fixed, i.e. not dependant of the variable level of expenses paid.
This means that even if expenses are deemed allowable under new SDC regulations, there simply is no practical way in which an Umbrella can pay these variable allowable expenses to their workers.
So now we appreciate the problem, what is the solution?
We must accept that the UK plc supply chain will be forced into dramatic change in the face of actual and threatened legislative attack. For skilled contractors who are genuinely peripatetic but not be allowed to claim corresponding T&S costs, the new rules are grossly unfair and financially untenable. I very much doubt that contractors will be eager to accept future contracts without a rate increase to compensate for their lost tax free expenses.
After April 2016, Umbrellas will no longer be able to command the same level of margin from contractors where there is no clear tax advantage offered as part of that arrangement. Umbrellas will therefore become more of an agency outsourced payroll service rather than a contract service offered to contractors. While contractors may still suffer a margin loss for this new type of service, that margin will be much lower than at present. With lower fee income, Umbrellas will no longer be able to agree generous processing fee arrangements with the agencies that they currently work with.
So with contractors squeezing from one end and hirers resisting rate increases from the other, I believe it is the traditional agency that will end up suffering the greatest effect of forthcoming legislative change.
Traditional Umbrellas will no doubt evolve into glorified payroll bureaux where quantity rather than quality will become the determining factor for their long-term success. But with agencies under unprecedented margin pressure from contractors and without the traditional processing fee income from Umbrellas to help offset overhead costs, agencies will be forced to look at new and innovative ways to remain profitable.
Agencies will need to outsource some, if not all, support functions; such as resourcing, CV verification, time recording, payrolling and everything else in between! If an agency staff employee is NOT a fee earner, the reality is that their support function can probably be delivered more cost effectively and in a more timely manner by others who are better organised to provide such services.
No doubt we will see a proliferation of new and innovative contractor solutions on offer to deal with post April 2016 legislative change. Providing these are totally compliant, cost effective and sensibly workable, they may well provide a welcome short-term fix.
But the writing is now clearly on the wall. While my vision of a brave new world may be a little premature, those agencies able to re-engineer their businesses now rather than in a few years time will no doubt be ahead of the curve.
LEAVE ENOUGH TIME TO PREPARE
By Louise Rayner, chief executive, NumberMill
Travel and subsistence legislation was published on 9 December 2015 and will come in to effect April 2016. Louise Rayner, CEO of NumberMill umbrella and accountancy services and a chartered accountant who has held board-level positions at Adecco and Randstad, comments on key points of the legislation.
Travel & Subsistence tax relief to be no longer permitted
Should a contractor be subject to the right of Supervision Direction & Control (SDC), consider the following:
● Liability – Directors of umbrella companies will become liable for uncollected taxes should tax relief be given where SDC exists
● Fraudulent documents – an umbrella can rely on the existence of SDC, should evidence be provided by an agency of SDC assessment and contractual arrangement. Provision of fraudulent documentation will be punishable
● IR35 – the rules around personal service companies with regard to IR35 remain unchanged, though it is muted that SDC could be overlaid in the future
What does it mean to the agency supply chain?
● Increased cost – The benefit derived by T&S for the worker may reduce their take home pay. This may then make umbrella less attractive and cause the worker to switch to PAYE, adding Employers National Insurance to the agency’s pay bill. Furthermore agencies will have increased employment liability and pension cost. The impact on cost in the supply chain will be significant as margins will be unable to absorb it
● Flexible worker shortage – Being an agency worker may become less attractive, causing fewer to take on flexible work
Potential swing to Personal Service Companies (PSC): What actions are being taken?
● SDC Contracts – Many agencies are looking to establish non-SDC contracts and assessments throughout the entire supply chain
● Uplifts – Many agencies are reviewing uplift levels and looking to negotiate lower umbrella margins to make the umbrella without expenses still viable
● Re-emergence of self-employed models and outsourcing arrangements.
● PSC – Advising workers to seek advice from professionally qualified accountants to see if they can operate compliantly
How to protect the supply chain?
● Commercial – Be aware that the playing field is likely to be more un-level than ever before
● Finance officer liability – Remember that wherever you are in the supply chain you have a duty and are personally liable to ensure that taxes are collected
● Analysis – Ensure that you analyse your workers and margins carefully in order to make the right decisions
● Chartered Accountants and IR35 – Make sure that if your workers use PSC models that they engage professionally qualified experts
● Managed Service Company legislation – Make sure that you have checked that your use of PSC contractors doesn’t create an MSC as this will move the liability to you in the supply chain
Do not under-estimate the time to prepare
● There are answers but don’t leave it too late! – Analysis and decisions need to be made, expert advice should be sought and triangulated
• Systems, contracts and processes may need changing
• Communications, clients, contractors and consultants need educating
DON’T LEAVE IT UNTIL APRIL 2016!
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