An Autumn Statement for Recruiters - Read This to See Where Your Recruitment Business Could Be Affected - There May Be Some Surprises!
The autumn statement included a number of measures that will have an immediate impact upon recruitment businesses, to a greater or lesser extent, depending upon your sector:
1. NATIONAL MINIMUM WAGE. Starting with probably the most publicly announced measure; the National Minimum Wage (NMW) increase to a headline rate of £7.50 per hour will impact recruiters supplying low paid temps and put increased pressure on margins and volumes in the most price sensitive of sectors.
The increase in National Minimum Wage has not come with an increase in thresholds for NIC and auto-enrolment, meaning there will be a very small increase in cost from both, depending upon the number of hours worked. Whilst the additional cost is negligible at present, it can be expected that this stealth increase will only increase in coming years.
Recruiters should, if they aren't already, make themselves familiar with recent judgements concerning working time and qualifying hours as an additional £4.3m is going to be invested into NMW enforcement focusing on higher risk sectors; homecare and social care I would imagine will come high on the list.
2. PUBLIC SECTOR OFF PAYROLL WORKING. Something that has raised little air time but has been "eagerly" awaited by many recruiters, was a little more clarification on public sector off-payroll working. Following the recent consultation, from April 2017, responsibility for calculating the correct PAYE and NIC will fall to the body paying the contractor company. Where the contractor supplies direct, it will be the public sector organisation that bears that responsibility. Where the supply is through an employment business, it will be the employment business.
What wasn't expected, was an additional blow in the removal of the 5% tax deductible allowance. Whilst the draft legislation will be published on 5th December, it is likely that where there is any semblance of supervision, direction or control (SDC), it is unlikely that limited company contracting will be worth it for the contractor, after all, who would want to set up, administer, account, insure, calculate CT, run payroll and file statutory accounts when doing so will make you substantially worse off than someone paid PAYE by benefits from paid holiday pay, auto enrolment employer's contribution and AWR equality?
This change to off payroll working could present a problem for contractors who supply direct to the public sector. If there is SDC they will be substantially worse off working through a company but the public sector is unlikely to be equipped to deal with the contractual, HR and administrative challenges of having people on the payroll who are not employee's. This does present a potential opportunity for recruiters to assist public sector organisations by administering and pay-rolling contractors.
3. IR35 AND DISGUISED REMUNERATION. It was anticipated that the Autumn Statement would contain greater tightening of IR35 rules for contractors operating through umbrella or personal service companies (PSC) on what the Government calls disguised remuneration. At this stage nothing more has been said except to extend the legislation to self-employed workers. Construction aside, recruitment companies would be in breach of ITEPA 2003 if they paid self-employed contractors without deduction of PAYE so this is unlikely to have an impact unless you are already non-compliant.
Although it remains to be seen whether the draft legislation expected on 5th December will cast its net wider than the public sector and the self-employed already mentioned, it is not inconceivable that it will.
4. SALARY SACRIFICE. The tax benefits of salary sacrifice schemes will be removed from April 2017 with the exception of pensions, childcare, cycle to work and ultra-low emission cars. Share purchase and benefit based schemes such as private medical/life insurance are therefore likely to be some of the biggest losers. It is expected that the draft legislation (December 5th) will remove the benefit of any such scheme but not necessarily require it to be unwound. That said, there seems little benefit in setting up and administering salary sacrifice schemes if there is no benefit to be had; unwinding them therefore seems a logical conclusion.
For schemes in place by April 2017 you will have an extra year before the benefit ceases, longer for schemes that involve accommodation, cars and school fees.
5. BENEFITS IN KIND. A consultation on benefits in kind is going to be published with the aim of considering how benefits are valued. You don't need a crystal ball to predict that the government aims to increase tax receipts and benefits which are considered the most profitable for either the company or recipient are likely to come under the closest scrutiny.
Car benefit bands will increase by 1% but new lower bands will be implemented for the lowest emitting cars.
6. CORPORATION TAX. The intention to reduce Corporation Tax to 17% by 2020 was restated and CT will reduce to 19% from April 2017. There may be limited opportunity for recruitment businesses to benefit from tax planning but a small benefit may be had from making sure that planned equipment purchases are made before April.
7. EMPLOYEE SHAREHOLDER STATUS. Much was made of the tax advantages of Employee Shareholder Status when it was first published in September 2013, but uptake has been poor and despite it offering reductions in tax, the government seem to be unhappy that it is being used to reduce tax! The result is the removal of the tax breaks for arrangements entered into after 1st December 2016. If you are currently implementing a scheme then speed is of the essence.
8. INSURANCE PREMIUM TAX. Laughably the government refers to IPT as a tax on insurers and any impact upon business is as a result of the commercial decisions of the insurer. Businesses can therefore expect to see an immediate increase of 2% in their insurance premiums. No increase was announced on the higher 20% rate that applies to travel insurances. Recruitment businesses that utilize umbrella company or PSC contractors may expect some push back in terms of pay rates, particularly where IR35 applies
9. VAT FOR CONTRACTORS. The Flat Rate VAT scheme enables businesses with turnover under £150k to pay a flat rate of VAT dependent upon the services provided; for contractors this is likely to be 14% to 14.5%. Because contractors have little recoverable VAT and purchase few goods, they often pay over less VAT than they would if they operated under a normal VAT scheme. For a contractor charging £625 per day this profit could be close to £20 per day or £4,800 per annum.
Whilst the precise rules are yet to be announced, the Chancellor announced that for businesses with very low levels of goods purchasing, the Flat Rate VAT scheme rate will increase to 16.5%. Because of the unique way the scheme works, and the rules published so far, this could mean that for a number of contractors, particularly those with lower charge rates, they could be worse off than they would be operating under a standard VAT scheme. Worse off and having to implement full VAT accounting!
A potentially unforeseen implication of this legislation will be the further erosion of any profits that umbrella companies make where they operate contractors through companies with restricted turnover. If they cannot make profit in this way, they will have to make it through their charges to the contractor or by agreement with the employment business. Either option is unpalatable and as a result we could see, on top of the announcements covered above, more and more contractors switch to PAYE.
Stephen Perrin FCCA
Aperio Financial Solutions
Tel: 07990 574868