Recent tax changes in the recruitment sector: Executive Summary

The recruitment sector has grown steadily over recent years, with there being an increasing demand for temporary and agency staff, many of which operate through umbrella or personal service companies (PSC).

There are many commercial reasons why workers may operate through such entities and a number of perceived tax advantages. However, the Chancellor has removed a number of these tax advantages in recent Budgets, including restrictions on the ability to claim travel & subsistence costs, a tightening of the IR35 rules for those working in the public sector and an increase in the taxation of dividends, to name a few.  The ability to adapt to legislative changes will impact not only upon your profit margin, but also how attractive your business will be to a potential purchaser.

Below is a summary of the main changes that may impact on your business in the short term:

Travel & subsistence schemes

The Government changed the rules applicable to travel & subsistence claims for agency workers and umbrella companies from April 2016. The new rules restrict the 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 apply from April 2017 impacting on off-payroll working for public sector contracts. From 6 April 2017, it is the public authority which now determines whether IR35 applies, rather than the intermediary itself.

This now passes the responsibility for the collection of PAYE/NIC on any payment to the employment agency, including the employer’s NIC. The ability to pass any additional administrative costs, including the employer’s NIC liability either up or down the chain is therefore paramount so as to maintain profitability.

These changes could see the end of PSCs in the public sector, with a significant burden on agencies.

Apprenticeship levy

The government will introduce an apprenticeship levy that 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 the existing workforce.

VAT flat rate scheme

A new 16.5% VAT flat rate will be 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 will reduce the financial benefits of the VAT flat rate scheme for many contractors.  For example, contractors providing secretarial services, for which the VAT flat rate is currently set at 13%, could find themselves paying an extra 3.5% of VAT.

Impact of the above changes

The above changes are likely to have a profound impact on the recruitment sector, organisations which source labour from recruitment agencies and agency workers. The ability to identify how such challenges will impact on your business, not only in terms of cost but also in terms of disruption, will be of paramount importance to preserve not only your reputation but also the value within your business.

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