Emergency Budget July 2015 - Recruitment Industry Soundbites
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Emergency Budget July 2015 – Recruitment Industry Soundbites
The below summary includes direct ‘lifts’ from the Budget Announcement (the red boxes) for
ease of reference. The Sapphire Comment is an initial view and is subject to change following
more detailed consideration and additional information such as Guidance Notes
Personal Service Companies (PSCs)
1) Corporation tax rates –The main rate of corporation tax will be reduced from 20% to 19% from
April 2017 (and then to 18% in April 2020).
Sapphire Comment: This is the ONLY good news for PSC working in a Budget which will see a tax
increase of approximately £1,500 for a limited company worker earning circa £40,000 before the
impact of the removal of the right to claim Travel and Subsistence (T&S) expenses is factored in (see
below).
2) Eradication of the £2,000 Employment Allowance for PSCs
The £2,000 Employer’s National Insurance allowance will increase to £3,000 from April 2016. PSCs
operating inside IR35 were already prevented from claiming this allowance but this will now be
extended to any ‘one person company’.
Sapphire Comment: This approach shows the government is drawing a clear delineation between
one man companies and limited company working generally and is targeting one man companies with
specific legislation. This theme is likely to continue going forward.
3) A new review of the Intermediaries legislation (‘IR35’)
The Office of Tax Simplification (OTS) and House of Lords have all commented previously that the
IR35 legislation is not effective enough.
Sapphire Comment: Given the focus in this area, it should be anticipated that the IR35 legislation
will be modified (inevitably it will only be made more aggressive) but any change is unlikely to happen
until April 2017 at the earliest
4) Increase in the taxation of dividends
In a major shift of policy, the government is increasing the tax on dividends for all shareholders. This
is a very interesting development and certainly reduces the incentives around tax motivated
incorporation (an explicitly stated government intention).
From April 2016 the government will remove the 10% Dividend Tax Credit and replace it with a new
tax-free Dividend Allowance of £5,000 a year for all taxpayers. The government will then set the
dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for
additional rate taxpayers.
While these rates remain below the main rates of income tax, those who receive significant dividend
income or as a result of receiving significant dividends through a “closed company” will end up paying
far more tax from April 2016.
The table below (using reasonable assumptions) highlights the extra tax which will be paid by
someone earning £40,000 and £80,000 (with and without a 2nd shareholder) per annum.
Interestingly, the net pay difference between being ‘employed’ and limited company working is now
much smaller and therefore the decision to incorporate (rather than be employed) is now a much
more marginal decision.
5) Worked Examples of the Impact of the Dividend Tax and T&S Expense Changes
For a worker earning £40,000, an employed worker would receive circa £27.7k net pay, for a worker
operating through a PSC and with £12,000 expenses, the impact is as follows:
One Shareholder Two Shareholders
From April From April
Current Current
2016 2016
£000s £000s £000s £000s
Expenses £12.0 £0 £12.0 £0
Salary £10.3 £8.1 £20.6 £21.4
Dividends £13.4 £25.1 £5.0 £14.0
Personal Tax Liability 0 (£1.5) 0 (£0.3)
Take Home Pay £35.7 £31.7 £37.6 £35.1
89% 79% 94% 88%
For a worker earning £80,000, an employed worker would receive circa £48.9k net pay, for a worker
operating through a PSC and with £12,000 expenses, the impact is as follows:
One Shareholder Two Shareholders
From April From April
Current Current
2016 2016
£000s £000s £000s £000s
Expenses £12.0 £0 £12.0 £0
Salary £10.3 £8.1 £20.6 £21.4
Dividends £46.9 £58.4 £38.4 £47.3
Personal Tax Liability (£4.6) (£9.4) 0 (£2.8)
Take Home Pay £64.6 £57.1 £71.0 £65.9
81% 71% 89% 82%
Sapphire Comment: This is the most radical reform of taxation policy on dividends ever and it will
increase the effective tax rate for those with significant amounts of dividend income by as much as
6%.
For PSC workers, the impact is no less significant but the extent of the rise in their effective tax rate
depends largely on the amount of T&S expenses claimed (and whether those PSCs will continue to
claim T&S beyond April 2016). Those earning £40k can expect to pay £5k more tax in 2016/17 (£3k
with a 2nd shareholder) and those earning £80k can expect to pay £8k more tax (£5k with a 2 nd
shareholder).
There remain reliefs available which can be utilised for entrepreneurs such as Entrepreneur’s Relief but
it is hard not to conclude that this measure is directly aimed at one person PSC workers in the
temporary labour market.
Employment Tax Rates
6) Income tax: personal allowance in 2016-17 – The income tax personal allowance will be increased
to £11,000 (£10,600) from April 2016. The higher rate threshold will be increased to £43,000 (2015:
£42,385).
Sapphire Comment: This effectively increases the most tax efficient PSC salary from £883 per month
to £916 BUT there are other impacts in terms of dividend tax and employment allowance (see below)
7) National Insurance Contributions (NICs) - Rates remain unchanged - (Employer’s 13.8% and
Employee’s 12%) and there will be no change to the previously announced thresholds at which NICs
are paid: £155 per week (£8,060 per annum) for employees and £156 per week (£8,112 per annum)
for employers. Upper limits are now aligned with the PAYE higher rate threshold.
Sapphire Comment: See below comments in the PSC section on the ‘closure’ of the availability of the
£2,000 “additional” Employer’s allowance for PSCs where the sole employee is the sole director
8) Class 2 National Insurance Contributions abolished (previously announced): Self Employed
workers will no longer be required to account for these and there will be consultation on the reform of
Class 4 NICs to include a contributory benefit test.Low Paid Workers
9) National Living (Minimum) Wage will increase to £6.70 (from £6.50) in October 2015 and
then to £7.20 in April 2016
Minimum Wage will increase by 3% in October and then by a further 7.5% in April 2016 (to £14,040
per annum). A new National Living Wage (NLW) for workers aged 25 and above will be set at £7.20 – a
rise of 70p relative to the current NMW rate, and 50p above the NMW increase coming into effect in
April 2016. It has been pledged that the NLW will increase to £9 per hour by 2020, a full time starting
salary of over £17,500.
Sapphire Comment: This makes the “fully loaded” NMWR for Umbrellas in April 2016 effectively
£8.61 without any scope for an Umbrella margin (£9.15 if a margin of £20 is charged). This huge
increase comes in at the same time as the abolition of T&S, which could well herald the complete
demise of the Umbrella industry (because virtually all Umbrella workers will now be far worse off than
under Agency payroll).
The implications of the increase in the minimum wage, coupled with the abolition of Travel and
Subsistence (T&S) expenses (see below) will inevitably lead to a decline in umbrella working and
margins) in the next year. This will have significant implications in the coming months such as:
- pressure on Agency rebates from Umbrella companies (current rates are a high as 50% of £25 per
week margin charges)
- umbrella company cashflows will reverse (umbrellas accumulate cash when they are growing) so
there may be some tightening of liquidity, perhaps even leading to insolvency in some cases
- the established practice of umbrella companies extending credit terms to Agencies is likely to cease
which, in turn, may affect cashflows and liquidity in certain recruitment agencies
10) Salary sacrifice arrangements have also been highlighted in this budget
Sapphire Comment: This is an interesting ‘place holder’ by the government although there is
nothing specifically new, it is interesting to note that in the Finance Bill 2005, it is already
established in law that expenses cannot be reimbursed when a salary sacrifice arrangement is in
place – this rule is effective from April 2016
Office of Tax Simplification (OTS)
11) The OTS has been reinstated
The OTS issued a comprehensive set of reports before being dissolved at the end of the last
Parliament. The OTS has quickly been reassembled by the current government so we can expect to
see it play a prominent role in legislative developments over the next 5 years:
Sapphire Comment:
The OTS seems to have been placed at the heart of government thinking, perhaps leaving HMRC to
concentrate on policing legislation rather than being the driver of the direction of tax legislation. It is
significant to note that the OTS is chaired by John Whiting, an ex-PwC partner who was a leading
adviser on tax avoidance schemes in the recruitment industry before joining the government in
2012. The old ‘scattergun approach’ to tax legislation changes seems to have been replaced by a
more measured and targeted approach with the clear intention of eliminating many of the tax
advantages enjoyed by temporary workers.Umbrella Companies and Recruitment Agencies
12) Offshore and Onshore intermediaries (Announced in March 2015 Budget) – From 6 July 2015
onwards, Recruitment Agencies will have to send HMRC reports that contain details of all workers and
their payments where the Agency, or the payroll operator, didn’t operate PAYE. Penalties will be given
based on the number of offences in a 12-month period:
£250 - first offence; £500 - second offence and £1,000 - third and later offences
Sapphire Comment: This is an onerous reporting requirement for Recruitment Agencies who will have
to report (by individual contractor) every payment made to an Umbrella company or a PSC. These
reports are due by 6th August 2015 for the Quarter ending 6th July 2015- some have already
experienced difficulty when submitting their report so Agencies are advised to submit these reports
earlier than they need to so there is plenty of time to fix errors before the deadline.
There has been a rise in the use of Elective Deduction Models (EDM) in recent months and, where no
RTI return is being submitted in respect of an EDM model, it is likely that these arrangements will be
more easily targeted.
13) Restricting Travel and Subsistence Claims for Umbrella and PSCs from 6th April 2016
As expected, the Consultation Paper was issued in respect of abolishing T&S expense claims for
Umbrella workers and those in PSCs who do not meet the new “supervision, direction and control”
definition as in the “On-Shore Intermediaries” legislation. The tax saving is estimated at £240m in
2016-17. Although it is described as a “consultation”, it is clear that the decision to eliminate T&S has
already been made. A quote from Page 28 of the Consultation paper is as follows:
From an Agency perspective, it seems fairly clear that there will be some form of debt transfer in place.
There are 2 options set out in respect of debt transfer but it is likely that “Option 2” (transfer of debt to
the first intermediary) will be the one implemented because this is the principle which has already been
used in the On/Offshore Intermediaries legislation. Page 17 of the Consultation states(note the engager
is the end user in this narrative):
Sapphire Comment: This was a widely expected development but it is far more draconian as the
legislation will now encompass PSCs. The extension in the definition follows (perhaps naïve) industry
lobbying and shows that the umbrella industry’s efforts to emphasise “Compliance with legislation” to
secure government support has failed.
The government is clearly intending to eliminate the umbrella industry in its current form. It is notable
that the legislation will be extended to PSCs. The use of terms which were used in the “On Shore
Intermediaries Legislation (OSIL)” probably means we’re going to see Recruitment Agencies made liable
for PAYE debts further down in the supply-chain in the same way as it appears in the OSIL. The ‘greater
transparency’ from the Agency Reporting requirements on how workers are employed will allow HMRC
to pursue workers for whom there is no RTI/PAYE record.
It remains far from clear how a third party can be held responsible for the expense claims of a director
inside their own limited company so it the draft legislation (expected before the end of the calendar
year) will be an interesting read. Those with memories of the introduction of the debt transfer principle
in 2007 with the Managed Service Company (MSC) legislation will know that, however unfair this may
seem, it will be introducedTax Avoidance Structures including Off Shore Schemes
14) Marketed Avoidance Schemes
It is well known that there are providers who masquerade as ‘compliant providers’ and secretly (or not
so secretly) operate offshore structures and aggressive self-employed models which breach minimum
wage. Hot on the heels of the announcements in the March 2015 Budget, regarding additional
penalties for “serial tax avoiders”, a new consultation is being proposed on even more punitive
measures:
Sapphire Comment: This is a particularly draconian move but underlines the determination of the
authorities to eliminate mass marketed avoidance schemes. This may even make accountants nervous
about engaging with those individuals who have been earmarked by HMRC as ‘high risk’ but the
suggestion that “access to tax reliefs may be removed from those who abuse” is a chilling indication of
the government’s attitudes in this area.
Digital Accounts
15) The Digital Tax Accounts Initiative continues…
There will obviously be a need for accounting software providers to engage with government on what
is clearly going to be an area of focus in this Parliament
Sapphire Comment: This probably underlines more than anything else that the role of the
accountant is changing in the modern era. The traditional high street accountant is being
marginalised: initiatives such as monthly payroll RTI reporting and the new digital age mean that
more individuals will operate their own tax affairs with only ‘light touch input’ from an accountant at
their year end
16) Electronic reporting will be extended
It is clear that the government and HMRC will be using electronic records and reporting so that tax
evasion can be identified more efficiently.
Sapphire Comment: Whilst it may take HMRC a couple of years to finesse the reports and the data
currently being collected (e.g. The Agency Reporting of payments where tax has not been deducted
introduced in April 2015), the direction of travel is clear – and there will be a much sophisticated and
greater use of IT analysis going forwardFinally …. It is worth providing a context for the Government’s Policy on
self-employment- it’s all about preserving PAYE Receipts!
17) Self-employment (repeated from the March 2015 Budget Update)
Self-employment has been increasing steadily as a proportion of total employment over the last 14
years, from 11.7% in the 3 months to December 2000 to 14.7% in the 3 months to September 2014.
This suggests ongoing structural change in the labour market, rather than people becoming self-
employed because they cannot find other work:
Sapphire Comment: 45% of total government revenue comes from PAYE and NICs (15 years ago it
was 55%) so it is logical that government is fighting to maintain this stream of revenue. The growth of
self-employment makes the collection of tax revenue more difficult so controlling self-employment is a
government focus. (c/f the elimination of the Construction Industry Scheme in 2014)You can also read
