The Government has unveiled a raft of new measures that target contractors, self-employed people, temporary workers, freelancers and personal service companies in recent months and many of these will come into effect within the next few weeks.
I’ve spent the past few months visiting recruitment agencies, staging events to help them prepare and developing a range of resources to equip them with the knowledge and skills they need to adapt to these changes.
However, with the UK being home to around 30,000 recruitment agencies, I’ve only scratched the surface and I’m concerned many agencies are burying their heads in the sand and aren’t managing the risk that these changes present.
Key incentives like restrictions to travel and subsistence claims, increases in dividend tax, the loss of salary sacrifice, Employment NIC Allowance no longer being allowed, the apprenticeship levy, pension auto-enrolment, a proposed shift in responsibility to deduct tax at source for some PSCs and continuing confusion over IR35 should all concern recruitment firms.
Each should have a clear strategy in place to manage these important changes or they should have identified a quality expert partner to provide them with the support they need. Get it wrong and an agency will be hit with heavy penalties and/or see a big impact on their margins.
But, what should recruitment agencies be aware of and how do they identify a quality employment partner to provide them with the support they need. Here, I attempt to answer some of these questions.
What should recruitment agencies be aware of in 2016?
The Government has changed the landscape for the contractor and self-employment sector and recruitment agencies that provide freelancers and temporary workers need to carefully consider how to manage these. Critical developments include…
Restrictions to travel and subsistence claims
From April 6 2016 new restrictions on travel and subsistence claims will come into force. Anyone working through an intermediary such as a recruitment agency that directly places candidates and who is under the “supervision, direction or control (SDC)” of an employer will no longer be able to claim tax relief for expenses incurred getting to the place of work and staying over while at the site.
This will have a significant impact on take home pay for contractors and may limit the distance they want to travel for work. This will obviously have a major impact on margins for agencies. While the Government claims the end client will pay more to offset this loss, agencies will have to work hard to raise rates and will be at the mercy of market forces.
Agencies to be responsible for deducting tax at source for public sector contractors
In the most recent Budget, Chancellor George Osborne launched a new £12bn tax crackdown and one of the key elements was a proposed move to make employers and agencies responsible for deducting tax and national insurance from personal service companies in the public sector.
Under the rules, the public sector organisation or recruitment agency that provide the public sector with freelance workers would be responsible in ensuring that workers pay the correct tax from 2017. These people are described as “off-payroll working in the public sector” and include those people working for Government departments, local government, NHS, schools, BBC and publically owned companies.
This will only affect workers who fall under the IR35 intermediaries legislation, but this is still currently under review by the Government. I believe this heralds a move to make the private sector take on the same responsibilities in the months to come.
For agencies, this will need them to become well-versed in IR35 and accurately assessing whether each candidate on their books falls under IR35. This will create major administration costs and will once again hit margins.
Pension auto-enrolment for recruitment agencies
In addition to your core staff, some agencies will also have to provide pension schemes for the contractors they ‘employ’. Under the rules, agencies must find a suitable pension scheme and then pay directly into it to support the candidates on their books who respond to roles assigned to them by the agency.
Many will already be tackling this issue, but it comes with heavy administration costs and all costs will be hard to offset by increasing rates with end users.
How can recruitment agencies best manage the tax changes?
The other key changes will also cause major headaches for agencies who lack the expert financial skills needed to implement and manage the changes. Having hundreds of contractors who answer directly to you on your books could also distort the perceived size of your business and influence key initiatives like the Apprenticeship Levy.
When it comes to manage risk and offsetting the impact of these changes, the best solution is to look for a quality umbrella partner or Employment Business that already has the necessary skills, systems and appetite for taking on this increased burden.
By using a quality provider that has the technology, expertise and processes to ‘employ’ your candidates and manage their finances and obligations, you help contractors to access a wealth of benefits and operate more efficiently while also minimising the risk to your recruitment agency.
What are the benefits of using a quality umbrella company or employment business?
By outsourcing the burden of payroll to an employment business like Danbro you can save a great deal of time and money. Outsourcing is more efficient than running your own in-house department and frees up time for your team to focus on revenue generating activities.
Similarly, by using an employment business, you gain a level of flexibility that allows you to instantly adapt to ever-changing payroll needs as you meet new contracts and your workforce grows and shrinks.
You also get access to a wealth of expertise from a business dedicated to financial activities and, with a quality partner, get access to dedicated technology and a range of added services for contractors and employees like pension schemes, cover for illness, accidents and medical procedures, systems for maintaining income when you’re out of work and, with Danbro, a rewards scheme that delivers an average of £1,600 a year in savings across all aspects of your life.
Ultimately, it’s about having a safe pair of hands that cuts your risk, protects your data and ensures all of your contractors and employees are protected and are maximising their take home pay.
What do recruitment agencies need to watch out for with umbrella companies?
The new rules are very tight and you should be wary of anyone who claims to have found a loophole or a way around the new legislation. The only way people can gain relief is if there is no salary sacrifice and no supervision, direction or control.
When it comes to managing your risk around employment and taxation, be aware of any marketing spin, get to know your suppliers and understand their experience, values, reputation and expertise and make sure you don’t rush your decision and seek professional advice.
Some of the dubious models to watch out for are “PSC Light” initiatives where a salary is paid but the PSC operator gets the benefits of flat-rate VAT, a multiple person PSC, anything offshore, anything involving contractor loan schemes, a hybrid/EDM model and anything with QC Approval.
Ultimately this all comes down to building a trusted relationship with an employment business and making sure their values mirror your own. There is no easy fix and no loophole to exploit so make sure you are getting the support and service you need that protects your agency and your contractors.
As I’ve said, I’ve worked hard to educate as many agencies as possible and if you would like to know more please do get in touch.