If you’re running a recruitment business or source labour from recruitment agencies using agency workers employment regulations might well affect your organisation’s profitability and that has an impact on how attractive your company is to a potential purchaser warns Andy Turner, partner at Mark J Rees LLP.
Many temporary and agency staff operate through umbrella or personal service companies (PSCs) today - often for good commercial reasons or because of perceived tax advantages. The benefits have, however, diminished considerably in recent Budgets with restrictions on the ability to claim travel and subsistence costs, as well as a tightening of IR35 rules for those working in the public sector and increased taxation on dividends.
All the new arrangements can potentially have an impact on the bottom line of a recruitment business, so here are the major changes to watch out for:
Travel & subsistence schemes
The Government changed the rules applicable to travel and subsistence claims for agency workers and umbrella companies from April 2016. The new rules restrict a worker’s ability to claim a deduction for such costs where they are under the Supervision, Direction or Control (SDC) of either the client or agency.
HMRC have confirmed that they will assume that all agency and umbrella workers are subject to SDC unless the agency or umbrella company has gathered evidence to the contrary.
IR35 and personal service companies
New rules have applied from April 2017 which impact organisations using people working off-payroll for public sector contracts. It is now the public authority which determines whether IR35 applies, rather than the intermediary itself.
The responsibility for the collection of PAYE/NIC on any payment now passes to the employment agency, including the employer’s NIC. If you want to maintain profitability, passing on additional administrative costs (including the employer’s NIC liability) either up or down the chain becomes paramount.
These changes could see the end of PSCs in the public sector, with a significant burden on agencies.
The government has introduced an apprenticeship levy, which requires all employers operating in the UK, with an annual pay bill of over £3 million, to invest 0.5% of that pay bill in apprenticeships.
The money raised from the apprenticeship levy will be collected by HMRC and be accessible via a new Digital Apprenticeship Service (DAS) account. Using the account, employers will be able to select appropriate training courses and find suitable apprentice candidates, who may be new recruits or existing staff, as long as they meet the eligibility criteria.
For recruitment agencies, the calculation of the apprenticeship levy will take into account not only the pay bill for internal staff, but also the pay bill for supplied agency workers. This means that, unfortunately, agencies are likely to be disproportionately affected compared to other businesses.
Nevertheless, it will provide an excellent opportunity to increase the range of skills within the workforce, either by creating structured apprenticeship or school-leaver programmes or offering higher-level professional apprenticeships to existing workers.
VAT flat rate scheme
A new 16.5% VAT flat rate has been introduced for businesses that spend less than 2% of their VAT inclusive turnover on VAT inclusive goods. This includes many labour-only businesses such as contractors.
Unfortunately, this change has reduced the financial benefits of the VAT flat rate scheme for many contractors. For example, contractors providing secretarial services, for which the VAT flat rate was set at 13%, could find themselves paying an extra 3.5% of VAT.
The changes described above are likely to have a profound impact on the recruitment sector. It’s worth taking professional advice if you’re uncertain of the implications for your own business, so that you can ensure you’re able to maintain profitability in a much more demanding environment.
If you would like specific advice relevant to you and your situation please email email@example.com