FROM MARCH 2016's RECRUITER MAGAZINE

This legislation, combined with another piece of legislation contained in the Finance Act 2015 that replaces the system of dispensations allowing T&S expenses to be paid tax-free with a new regime, means that even if workers pass the SDC test, umbrellas will “no longer be able to operate an effective payment structure”. 

“If you thought the end was nigh for umbrellas companies, it absolutely is,” said Roback.

Adam Shulman, managing director of teacher agency Simply Education, said that with 95% of its teachers working through umbrellas, “and most teachers under SDC”, the legislation “is going to have a big impact”, albeit lessened by only 40% of its teachers actually claiming T&S. 

In response, Shulman said, the company was “toying with the idea of the PAYE route”, where supply teachers would be paid directly by the agency. Shulman acknowledged the potential effect on the agency’s margins as supply teachers seek to make up the drop in their take-home pay by requesting reimbursement for their expenses. “The reality is we are going to have to pay if a teacher wants an extra £5 to travel to a particular school,” he said. 

Gethin Roberts, MD of Drivers Direct Recruitment, said the legislation posed problems for his agency. “We are supposed to ask clients whether the worker is under SDC, which is easier said than done at 3am in the morning when they are short of drivers,” he said.

The situation wasn’t helped by HM Revenue & Customs being “very vague” about when drivers do and don’t come under SDC. By reducing the take-home pay of drivers, Roberts added, the new legislation risked exacerbating the UK’s estimated shortfall of 48,000 drivers.  

David-James Marker, finance director of regulatory compliance and risk professionals recruiter Grovelands, said the company was looking at “options that might be viable for our clients”. One option was the directly employed model, he said, although this raised issues around Grovelands’ lack of HR expertise to deal with pay issues surrounding a temporary workforce, and the reaction of its contractors, of whom currently 60% operate through personal services companies and 40% through umbrella, “for whom it would be a complete change”.  

Jon Carey, operations director of financial services recruiter Morgan McKinley, said that with only 8% of the firm’s contractors working through umbrellas, the direct impact of T&S legislation on the company would be limited. Carey predicted that around half of these would set up their own limited companies, with the other half being taken onto Morgan McKinley’s own books. “I am relatively comfortable where we are and in our ability to deal with it,” he said. 

Paul Day, group finance director at staffing group Passionate about People, said the new legislation “was not unbeneficial”. “It makes the supply chain more transparent by removing umbrella status,” he explained. Day said the group’s multi-sector logistics and technical recruitment business Omega Resource Group wouldn’t take the risk of continuing to engage contractors through umbrellas. “The reality is, most workers will be PAYE or limited companies where they can,” he said. As for Datum RPO, the group’s recruitment process outsourcing subsidiary, Day said: “There is a possibility clients would look more favourably at employing workers directly themselves, with the sourcing of candidates and administration outsourced to Datum RPO.” 

Andy Chamberlain, deputy director of policy and external affairs at the Association of Independent Professionals and the Self-Employed (IPSE), said he was concerned that in response to the loss of tax-free T&S expenses, contractors risked “being pushed into limited companies” by umbrella providers.  

At the moment, Roback explained, limited companies would only be caught by the T&S legislation if they failed to meet criteria for Intermediaries Legislation [IR35], ie. were deemed to be falsely self-employed. However, he predicted that the outcome of the current review of IR35 would most likely be in the introduction of an SDC test, effectively unifying the T&S and IR35 legislation.  

Chamberlain said if the government then “came down heavy on PSCs [personal services companies]” so they failed the new SDC test, umbrella workers who had switched into limited companies would in effect be going from the frying pan to the fire. “They may be able to rearrange their engagement so they are outside IR35 legislation, but one thing they won’t be able to do is carry on as before, otherwise they will be caught,” said Chamberlain.

Carey acknowledged the point. “With the shift into the limited company space and the review of IR35, I might be sitting here in a year’s time with a far more worried look on my face,” he said. 

However, Roback said that agencies and hirers shouldn’t be unduly concerned about PSCs “who get an IR35 call wrong”. In the absence of debt transfer of unpaid taxes up the supply chain to agencies and to hirers, “to be crude, that is their [contractors’] problem”, he said.

But Carey said he disagreed because of the potential bad publicity to clients if only by association. “The banks are not very forgiving in circumstances where they feel they have exposure,” he said. 

Peter Ball, commercial manager at SkyBlue Recruitment, the internal recruitment group for construction firm Carillion, said the company was “keen to understand how the legislation will affect governance of its £40m annual spend supply chain”. With this in mind, he said SkyBlue was working with its existing umbrella suppliers to ensure all workers are engaged, not only in a way that is legally compliant, but is also in line with Carillion’s ethics that protect its brand reputation, while also minimising the risk “of losing good workers”. 

“Post-April, I think we will certainly see more governance in there and more questions will need to be asked of agencies on our PSL [preferred supplier list]. We have to categorically deal with Carillion direct, and say ‘no this is too risky for you, you cannot turn a blind eye to this’,” said Ball. The internal review was also taking into account possible changes to IR35.

“We are taking a long-term sustainable view, because we don’t necessarily want to do all this work now and have to change it later.” 

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