Foolish to ignore legal changes

1 April is D-Day for employment legislation affecting recruiters. Colin Cottell explains the changes

Next month will see a raft of new legislation taking effect, with a significant impact on recruiters and their clients.

Without doubt the most important is the abolition of the VAT staff hire concession on 1 April — that is, unless the government has a last minute change of heart. The change is expected to have far reaching consequences for the recruitment industry.

So what are the changes coming into effect on 1 April? “Where an employment business supplies workers to an end-user client, that employment business will be required to charge VAT on the full amount of the supply, which will include the full salary, employers’ National Insurance and commission,” Stuart Neilson, a partner at law firm McGrigors told Recruiter.

“Instead of paying 15% on the commission element only, they will now be paying 15% on the full cost of the supply.”

However, certain agencies may be able to continue not charging VAT. “Some agencies supplying care staff regulated by CSCI [Commission for Social Care Inspection] may be able to frame their services as providers of care or health services rather than staff suppliers,” says Kevin Barrow, a partner in the recruitment group at law firm Blake Lapthorn. However, “HM Revenue & Customs reserves the right to challenge this”, he adds. Roles regulated by CSCI include nurses and domiciliary care workers.

Recruiters, backed by industry trade bodies, have warned that the removal of the staff hire concession will have damaging consequences. The Recruitment and Employment Confederation (REC) estimates that the cost to clients of using temporary staff will increase by £400m a year.

Earlier this month, Alistair Cox, Hays’ chief executive, described the legislation as “badly thought out, ill-timed and effectively a tax on jobs”, and predicted up to 150,000 temporary jobs would be lost. Until now some recruiters have been allowed to charge VAT only on the commission rather than the full charge rate.

The concession was originally introduced in 1997 to provide a level playing field between agencies whose clients could recover all or some the VAT, and those who were unable to reclaim VAT.

VAT-exempt clients included banks and insurance companies, charities, private care homes and healthcare providers, as well as universities and private schools.

It is recruiters in these sectors and their clients who look certain to be hit hard on 1 April when the removal of the concession increases their charges by an estimated 10-13.5% overnight, depending on the commission rate.

Shahul: freelance locums

Shahul: freelance locums

Salim Shahul, chief executive of medical recruiter dr-locums, told Recruiter that most of his clients were “very concerned” because they didn’t have the funding to cater for the increased costs.

Shahul predicts that, as a result, clients will gravitate towards using freelance locums. Whereas before 1 April it was around 8% more expensive for a client to use his agency rather than take on a freelance locum from the NHS’s own bank, after April this will widen to 25%, he
estimates.

“If we don’t alter how we deliver our service the business is not going to survive, it’s going to vanish,” he adds.

Andrew Norton, managing director Michael Page Financial Services, told Recruiter that in an effort to mitigate the consequences, the company has been talking with clients about possible alternatives.

Avoiding the changes

Barrow: directly employ

Barrow: directly employ

So what are the possible ways around the changes? “Some organisations are looking to employ agency workers direct, which will not attract VAT,” says Barrow.

One possible option involves the end-user engaging the temps and contract workers via a special purpose vehicle (SPV) set up as a wholly owned subsidiary of the end-user company,” continues Barrow. The SPV is effectively a staffing company which then hires on the workers to members of the end-user group almost as if the SPV were an independent staffing company.

An independent staffing company is then appointed by the end-user to help ‘manage’ the SPV, and among other things feed candidates into it (for which it is paid an introduction fee akin to its traditional margin).

“We may see the end user engaging the services of the individual directly and either employing that individual, which doesn’t attract VAT, or engaging them in a contract of service say on zero hours contract, or a limited company on the basis that the individual services falls below £72,000, the VAT threshold,” he adds.

McDougall: charge increase

McDougall: charge increase

Ian McDougall, client relations director at Castlerock Care Services, told Recruiter the healthcare industry was looking at an increase in charges to clients of 10- 13%. “Quite a few of the clients won’t be able to reclaim the VAT in any way,” he adds, with charities, nursing homes and GP practices affected, to name but a few.

McDougall says that the company is working with clients to ensure they come up with something they are comfortable with. However, “10-13% is a large difference”, he says, and difficult for agencies to absorb themselves in a time of lower margins and the current economic climate.

There has been much speculation about the possible impact of the ending of the staff hire concession. Only time will tell whether the more apocalyptic scenarios come to pass or ingenious solutions are found to mitigate the effects.

Minimum statutory holiday entitlement
Also on 1 April, the statutory entitlement to paid holiday will rise from 24 to 28 days, including public holidays. “This change applies to all agency workers,” says Barrow. “Contract workers with their own limited companies will be responsible for their own holiday pay.”

McDougall estimates that the change will add an additional 1.84% on the rate charged to clients, adding that agencies are not in a position to absorb the full cost increase themselves. “Some will have no option but to pass it on to clients,” he adds.

However, he says most clients will accept some form of increase on the basis that it came about as a result of government legislation.

Shahul doubts whether his private health sector clients will be happy to absorb all of the additional cost, and expects that his agency will be forced into sharing the pain in accepting lower margins.

Barrow says there may be ways around the new rules. “If you engage someone on a genuinely self-employed contract or they work through a limited company it may not apply, but it is complicated.”

Changes to points-based immigration system (PBIS)
The minimum requirements for non-EU migrants to enter the UK under Tier 1 (highly skilled category) will increase on 1 April from a Bachelors Degree and minimum salary of £17,000, to a Masters Degree and minimum salary of £20,000.

“We expect to see more applications under Tier 2 (work permits),” says Hanneke Oosthuizen, immigration adviser at immigration advice company Smooth Migration.

Under Tier 1 non-EU migrants do not have to have a job offer in the UK and can look for one after they arrive. Tier 2 visa applicants must have a firm job offer and an employer to sponsor them.

“This would mean an increase in the number of permanent placements and a reduction in the number of contractors available under Tier 1,” she predicts.

Graham Rawlin, an immigration adviser at international technical recruiter NES, says the changes to the points-based system include a strengthening of the Resident Labour Test for Tier 2 (new work permit scheme). “Unless they are in a shortage occupation, before a non-EU migrant can take up a job under Tier 2, the position will first have to be advertised in Jobcentre Plus,” he says.

Completion date for roll out of Tier 4 (students)
At the end of March, schools, universities and colleges will be required to apply for a sponsorship licence to recruit non-EU students. There are no changes to the amount of work non-EU students can undertake outside academic hours.

National minimum wage penalties
On 6 April, increased penalties for failure to pay the national minimum wage (NMW) will come into force. The Employment Act 2008 provides increased powers for the enforcement of the NMW, including:

- increased remuneration where arrears of the NMW have been outstanding over a period of time
- increased penalties for failure to comply with an enforcement notice
- removal of the restrictions on the exchange of information between HMRC and the Employment Agency Standards Inspectorate.

Flexible working extended
And finally, the right to request flexible working is extended to parents of children up to the age of 16 on 1 April.

There may seem a lot to take on board, but recruitment firms must keep themselves up to date with these changes in legislation or face the likelihood of running into trouble with government agencies.

FINANCIALS: Empresaria reveals fall in profits, but Offshore Services delivers growth

Empresaria’s Offshore Services operations proved to be the shining light in the company’s fortunes in 2023, according to the global specialist staffing group’s annual results.

Financials 27 March 2024

Gi Group trains mental health first aiders to support staff wellbeing

HR and specialist recruiter Gi Group plans to train around 100 mental health first aiders (MHFAs) across the business.

27 March 2024

Recommendations for better integration to support refugees into work

The current integration of refugees system is “broken, expensive, inefficient and damaging” for both refugees and the UK, according to the chair of the Commission on the Integration of Refugees.

Legislation 26 March 2024

HMRC employment tool CEST not updated in five years

The underlying decision engine of HM Revenue & Customs’ Check Employment Status for Tax (CEST) tool has not been updated in five years.

26 March 2024
Top