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Levelling the Playing Field? Employment Tax Changes in the Recruitment Sector and the Impact on Contractors

In the 2015 Autumn Statement, the government published legislation in the draft Finance Act 2016 to change specific rules on travel and subsistence (T&S) expenses. If enacted as drafted, this legislation will prevent many workers engaged through an employment intermediary, such as an umbrella company, personal service company (PSC) operating within IR35, or a recruitment company, from claiming tax free reimbursement of home-to-work travel and subsistence expenses. T&S relief will be restricted where the individual provides personal service and is under the supervision, direction or control of any person. For PSCs, T&S relief will be restricted where IR35 applies. For further details on the policy, read HMRC's review: http://bit.ly/1lOExZU

So why are HMRC implementing these changes now? Well, with HMRC having suffered a tax loss of up to £265 million per year, they fear this willl only increase without new legislation. HMRC also profess that contractors choose to work in this way i.e. a full time employee doesn’t receive T&S relief for their commute to work every day so why should an agency worker?

Last month, APSCo (Association for Professional Staffing Companies) hosted several regional meetings with a guest speaker from Deloitte, discussing these changes to aid understanding within the recruitment sector about this new legislation.

Oliver James Associates attended this meeting and as a result, we set up a Q&A session with Kate Young - Compliance Manager at Oliver James Associates, Chris Ashworth – Manager, Finance and Regulation (Contract) at Oliver James Associates and Ik Onyiah – Head of Operations at Oliver James Associates to discuss these changes, the impact on the wider recruitment market and the implications for contractors…

1. It is predicted that 750,000 workers in the UK will be affected by these changes, seeing their income decrease by approximately £3,500 per year. If contractors are put off assignments (so to speak) as a result of the removal of relief, will we see a higher assignment rate due to a skills shortage?

Kate: The bottom line is, this new T&S legislation is likely to impact on the number of contract workers willing to travel to assignments which, in turn, may create a skills shortage.

Chris: Yes, it is likely that this may then lead to higher assignment rates in order to attract appropriate workers. Contractors may then be forced to increase their rates to take into account the lack of T&S relief. However, we are more likely to see this knock-on effect in certain sectors where a greater amount of travel from site to site is required.  It is less likely to impact the Financial and Professional Services market at this stage.

2. Will this change the recruitment sector entirely and force agencies to ‘re-engineer’ their business model?

Ik: It will solely depend on the recruitment sector. As Chris mentioned previously, sectors where site to site travel is required regularly will be impacted to a greater extent.

However, in the long run, if the projected IR35 changes come into process then that will most certainly affect us and the wider recruitment market. It is all still up in the air and only time will tell. It may be that companies will have to start weighing up whether it is worth taking payroll for contractors in house. I predict that in about 3 years’ time though, clients may think it is not worth the risk due to great complications.

3. In today’s world, where flexible working is so prevalent and encouraged, are HMRC now taking away a contract worker’s ‘rights’?

Ik: Again, the implications are really sector dependant. The bottom line is, contractors’ contract predominantly for the flexibility in lifestyle and they will not want to travel if they are not being paid the T&S relief - that is the reality. Perhaps it could be said that we are placing greater strain on the economy with this new legislation as there will be skills shortages, more assignments to fill and more money required to secure the right candidates.

4. What pressure will these changes have on agencies and assignment rates?

Chris: We predict that there will definitely be added pressure on recruitment agencies to fill contract roles within specific sectors. Once companies truly realise there is a skill shortage, 10 CVs per job for example, may reduce to 5 per job and then they will have to pay much more to attract the right candidate.

Ik: I think it is likely that we will see HMRC’s fixed pay rate model come into full force. So, to put this into perspective, if the candidate is paid £100 a day and they are paying £10 a day for T&C, agencies may charge £110 to make up for the lost T&S. It is also worth noting that this new legislation does not include mileage; for example, if a contractor was driving from London to Manchester for work, they would be able to claim for the mileage but not for any accommodation incurred. The candidate just claiming mileage is not really sustainable for long distance travel.

5. These changes will essentially remove a model that the contract market has been accustomed to. Will we see more contractors re-evaluate their way of working and switch to become a ‘Limited Company’?

Chris: Yes, definitely. They will way the cost up of having their own insurance versus money they will lose in travel expenses.

6. Could we envisage a future in which agencies approach companies and say ‘we have got this group of contractors, can you employ them?’, so companies/clients are the employer of record, not the agency or the end user — a model already popular in the US?

Ik: Essentially, this business model would mean less money for recruitment firms, less money for candidates and more money for the government. It also poses the question of how quickly the wider recruitment market would adjust to it and whether there would be added risk. Some larger global firms have these models in place currently but it could be suggested that they are not using them effectively, resulting in greater risk on all sides.

It is clear then that this proposed new legislation will have the greatest impact on umbrella firms PSCs that operate within IR35.

In terms of the wider recruitment market, it is a waiting game, especially until further information on IR35 is released. However, it is important for recruitment businesses to check their PSLs in the meantime to mitigate risk. With the IR35 consultation taking place between June and September (with the possibility of it coming into fruition from April 2017), it is key to prepare for a worst case business scenario.

For further clarification on how this legislation may impact you, see our summary of changes below or alternatively, contact us directly +44 (0) 207-649-9464 info@ojassociates.com for advice.