The new Travel and Subsistence Legislation coming into effect on the 6th April 2016 is certainly causing lots of talk within the contract and temporary recruitment industry. Umbrella and limited company providers have been writing articles on how the change will affect how contractors will be paid going forward and how they will still be around as they have a number of solutions on offer. However there has been very little said on what impact this could have on the agencies and how they will need to change the way they engage contractors going forwards.
The new Legislation will mean that contractors using an umbrella company will lose the ability to claim expenses on their weekly/monthly pay which means they will not be any financially better off than being a PAYE candidate. There has been lots of speculation that all umbrella company contractors will move to running their own PSC/Limited Company but those candidates making that choice would still have to pass the SDC (supervision, direction and control) test and the IR35 test to ensure they can still claim the same expenses. Certain roles in certain industries (especially the temporary market) would never pass the SDC test which means no matter which model they use they will lose these allowances they have been used to. HMRC have done this to “level the playing field” between contractors and permanent members of staff doing the same job side by side.
TBOS have been reviewing the position from the point of the agency and we have our own conclusions on the impact the new legislation will have on the contract recruitment market. Here are our assumptions:-
AGENCIES WILL HAVE TO PAY CONTRACTORS THEMSELVES
As contractors will not be any better off financially using an umbrella company or in most cases using a limited company going forward, they will need to be paid by the agency directly. If agencies have relied on the payment of contractors to be completed by an umbrella company in the past this will now have to be changed and agencies will have to review their back office capabilities to ensure they can process the payments instead.
CONTRACTORS WILL ASK FOR PAY RISES
The first reaction of contractors when they realise they are losing their expense allowance will be to ask the agency for a pay rise to compensate them for the reduction in pay. Agencies will need to evaluate whether this is justifiable and either take the hit on their profit or approach the client for an increase in charge rates. Overall this may mean that charge and pay rates will increase across the contract market over the coming year as a way of compensating workers for the loss in the expense allowance.
THERE WILL BE FEWER CONTRACTORS AVAILABLE
If contractors are no longer able to claim the benefits (which makes being on a temporary contract appealing) then this may lead to fewer contractors being available. Contractors may decide to only accept placements which are closer to their home or even decide to leave being a contractor and take a permanent placement instead.
MORE COMPLIANCE ON CONTRACT WORKERS COMPANIES
If many of the contractors using umbrella companies move to using their own PSC/limited company then there will be more compliance checking required by the agency. Instead of collecting compliance documents for one umbrella company this would now need to be done for each individual company to ensure the company they are using is correctly registered.
The changes to the legislation will give lots of challenges to the contract and temporary market and it is up to agencies to review their placements to see what impact this will have on them. Agencies using one or more umbrella companies for a large portion of their temporary workers should start looking at their placements as soon as possible.
TBOS has been working with their agencies to ensure they are up to date with the new legislation changes. We have made recommendations on how they should deal with their contractors using umbrella companies when the changes come into place. In some cases this has meant training the agency how to calculate PAYE rates to account for holiday pay and employers NI provisions to allow them to process candidates through the agency PAYE scheme.
For more information on how TBOS can help and advise you on how to manage your contract workers through the new legislation please do not hesitate to ask.