April 6 heralds the start of a new tax year in the UK, and for the past few years this has coincided with new tax laws that are either targeted at, or have a disproportionate impact on, the staffing sector.
2017 is no exception. This year, there are two measures that will impose direct and indirect costs on suppliers and users of contingent labor.
The first of these measures involves changes in the way the existing Intermediaries Legislation, known as IR35, is applied in relation to independent contractors working off-payroll in the public sector.
IR35 applies in circumstances when a worker provides services personally to a client through an intermediary limited company (or personal service company (PSC)). IR35 requires the PSC to account for income tax and primary (employee) National Insurance Contributions (NICs) on income earned by the worker in circumstances where, if the contract had been directly with the client, the worker would be regarded for income tax purposes as an employee of the client. The responsibility for making that assessment and paying the tax currently lies with the PSC.
The new IR35 provisions apply when a worker personally performs services, or is under obligation to personally perform services, for a public authority. The change, effective April 6, is that the responsibility for deciding if the legislation should be applied shifts from the worker’s intermediary (i.e., the PSC) to the public authority to which the worker is supplying services.
Where the rules apply, the responsibility for calculating income tax and NICs and paying them over to Her Majesty’s Revenue and Customs (HMRC) lies with the “fee-payer” (the public authority, a staffing agency, or other third party paying the PSC). These amounts will be deducted from the intermediary’s fee for the work provided.
Determining whether IR35 applies is not an exact science. IR35 applies the common law tests used to determine whether a worker is employed or self-employed. These include considering whether the worker:
- Is in business for themselves, is responsible for the success or failure of their business and can make a loss or a profit.
- Can decide what work they do and when, where or how to do it.
- Can hire someone else to do the work.
- Is responsible for fixing any unsatisfactory work in their own time.
- Has agreed to a fixed price for their work regardless of how long the job takes to finish.
- Has used their own money to buy business assets, cover running costs and provide tools and equipment for their work.
- Is able to work for more than one client.
Concerns. Public sector bodies are unprepared for the changes and have expressed concerns that genuine independent contractors will be unwilling to provide their services to the public sector, meaning their access to highly skilled talent could be lost. Some bodies have made a blanket statement that they will not use independent contractors, forcing all workers into employment with umbrella companies, which are not affected by the rules because they already account for income tax and NICs.
Worse, the fee-payer is also now responsible for paying secondary (employers) NICs of 13.8% on pay above £156 per week, if the IR35 rules apply. HMRC’s own guidance suggests that, as a result, the fee payer may seek to renegotiate the fee to take account of this cost. In many cases, the fee-payer will be a staffing agency, which will be left with a choice of squeezing the worker on pay, making the assignment less attractive than similar work in the private sector or increasing the charge for the worker’s services to the client, adding cost to a cash-strapped public sector.
The second measure that is likely to add to the cost of supplying labor in the UK, is the Apprenticeship Levy. Also effective April 6, all employers operating in the UK with a pay bill of more than £3 million each year will be required to pay 0.5% of their total pay bill in the apprenticeship levy. The fund is expected to reach £2.8 billion. The government aims to have 3 million apprenticeships in England by 2020.
To calculate whether an employer is caught by the levy the pay bill is made up of the total amount of their employees’ earnings that are subject to Class 1 National Insurance contributions including wages, bonuses, commissions and pension contributions.
Once paid, employers will be able to access their contributions to fund training via a new apprenticeship service account, which will be topped up by 10% by the government. Beginning in 2018, employers that do not have to pay the levy will also have access to the funds. The funds must be used within 24 months or they will expire and must be applied toward apprenticeship training with a government-approved training provider.
What constitutes apprenticeship training is specified as working toward an approved standard, lasting a minimum of 12 months, and involving the apprentice spending at least 20% of their time on off-the-job training relevant to the standard.
Staffing firms with a pay bill of more than £3 million (comprising temporary workers’ pay as well as that of their own employees) will be liable to pay the levy as well, and will look to pass on this cost to their client. However, the client may argue that it will not benefit from the training received by the workers, either because their workers are not suitable for an apprenticeship, or because the workers’ assignments are not long enough to see any benefit.
Engineering Employers’ Federation and Lloyds Bank Commercial Banking surveyed 114 senior company executives in the manufacturing and engineering sector and found that 75% are worried they will not get back what they put in.
Staffing firms are equally unhappy about the situation. The opportunities for apprenticeships involving temporary workers are likely to be limited. Assuming a client was willing to engage a temporary worker in an apprenticeship role that met the necessary criteria, the assignment will need to be ongoing for a minimum of a year and the hirer will have to agree to off-the-job training. This will require cooperation between the client, the worker and the staffing provider, and is most likely to require new apprenticeship roles to be created rather than providing training to workers in existing roles.
Nevertheless, the obligation to pay the levy does not take into account the type of company, the sector it is in or the type of employees it employs. Who wins the battle between staffing agencies and clients in terms of who pays for it will depend on the strength of the relationship and the desire for an outcome that sustains that relationship.
These measures may seem ill-conceived and/or badly executed, but the issues of declining tax revenue from employment as well as the skills gap among the pool of talent available are serious. These issues are affecting countries worldwide and there is no perfect solution.
Time and time again the staffing sector in the UK has weathered the storms that April’s tax anniversary brings, and I believe that 2017 will be no different.