Subject to any last minute (minor) amendments, we now have a clear idea of how imminent legislative change will affect the Contingent Labour market.
There should be no doubt that these rules will have a profound effect on the way that the contractor market organises itself and suppliers who suggest otherwise either have their heads very firmly planted in the sand, or worse, will be offering non-compliant solutions to the market.
We should be fairly familiar with what will soon to be the new tests for allowable ‘Travelling and Subsistence’ (T&S) expenses as these are the very same Supervision, Direction or Control (SDC) tests applicable to the Offshore/ Onshore Intermediaries Legislation.
But if changes to the T&S regulations were not bad enough, for those with an appetite for risk and willing to “chance” their assessment of SDC, a far more obscure but profound change in the new Statutory Exemption rules (which will effectively replace Dispensations) will also come into effect April 2016. You are forgiven if you are not aware of this change as there has been no discussion, consultation or dialogue between HMRC and the contract industry over this impending change.
Without going into detail, the traditional ‘build-up’ approach to a PAYE salary calculation (i.e. the sacrifice of taxable salary in exchange for a variable amount of tax free expenses) will no longer be accepted by HMRC.
After April 2016, all qualifying salary sacrifice arrangements will require that the amount of salary actually sacrificed must be fixed, i.e. not dependant of the variable level of expenses paid.
This means that even if expenses are deemed allowable under new SDC regulations, there simply is no practical way in which an Umbrella can pay these variable allowable expenses to their workers.
So now we appreciate the problem, what is the solution?
We must accept that the UK plc supply chain will be forced into dramatic change in the face of actual and threatened legislative attack. For skilled contractors who are genuinely peripatetic but not be allowed to claim corresponding T&S costs, the new rules are grossly unfair and financially untenable. I very much doubt that contractors will be eager to accept future contracts without a rate increase to compensate for their lost tax free expenses.
After April 2016, Umbrellas will no longer be able to command the same level of margin from contractors where there is no clear tax advantage offered as part of that arrangement.
Umbrellas will therefore become more of an agency outsourced payroll service rather than a contract service offered to contractors. While contractors may still suffer a margin loss for this new type of service, that margin will be much lower than at present. With lower fee income, Umbrellas will no longer be able to agree generous processing fee arrangements with the agencies that they currently work with.
So with contractors squeezing from one end and hirers resisting rate increases from the other, I believe it is the traditional agency that will end up suffering the greatest effect of forthcoming legislative change.
Traditional Umbrellas will no doubt evolve into glorified payroll bureaux where quantity rather than quality will become the determining factor for their long-term success. But with agencies under unprecedented margin pressure from contractors and without the traditional processing fee income from Umbrellas to help offset overhead costs, agencies will be forced to look at new and innovative ways to remain profitable.
Agencies will need to outsource some, if not all, support functions; such as resourcing, CV verification, time recording, payrolling and everything
else in between! If an agency staff employee is NOT a fee earner, the reality is that their support function can probably be delivered more cost effectively and in a more timely manner by others who are better organised to provide such services.
No doubt we will see a proliferation of new and innovative contractor solutions on offer to deal with post April 2016 legislative change. Providing these are totally compliant, cost effective and sensibly workable, they may well provide a welcome short-term fix. But the writing is now clearly on the wall. While my vision of a brave new world may be a little premature, those agencies able to re-engineer their businesses now rather than in a few years time will no doubt be ahead of the curve.
Written by Barry Roback, Director, Anderson Group and featured in the February 2016 issue of Recruiter magazine.