The Daily Telegraph recently published a story suggesting that the Agency Workers Regulations may be watered down or even dropped.

The newspaper claims that lawyers for the Prime Minister have informed him that he could amend or scrap the new rules completely. When the present government took office, it explained that it would be too expensive to oppose the EU over AWR and so the regulations would be implemented. But as implementation draws closer, the picture has changed.

Trade associations have welcomed the news but said consideration must be given to any costs incurred in making changes at such a late stage.

Solicitor Nicola Tager questioned whether David Cameron had left it too late to seek legal advice. The AWR come into effect on the first of October and the Agency Workers directive must be implemented by December 5th or the government will face hefty fines from the EU.

Kevin Green, the chief executive of the REC, said he welcomed the fact the Cameron was taking an interest in the impact of AWR as the Confederation has been tirelessly highlighting some of its complexities. However, there would have legitimate cause to question why it has taken so long to pursue this option after agencies have devoted a lot of time and money into preparation for implementation.

He went on to say that the impact will be minimal in a lot of sectors and recruiters have already started working with clients to ensure equal treatment works. A realistic way forward would be if the coalition agreed to review the Regulations as soon as possible after the first year.

Ann Swain, the chief executive of APSCo, said she welcomed signs that a review will be undertaken into how the AWD excludes limited company contractors and pointed out that APSCo has given the government a methodology to clarify the issue and hopes this will be adopted.

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Last week, the REC responded to the inquiry into workplace pension automatic enrolment, highlighting the challenges the reforms will pose for recruitment agencies that place temporary workers.

Recruiters will be classed as employers under the new pensions legislation, even though they play a very different role in the labour market. The REC has reinforced the fact that the recruitment sector plays a unique role in providing employers with skilled temporary labour, but this will make it very complicated for recruiters to comply with the new rules.

The head of public policy at the REC, Gillian Econopouly, said the 12 week qualifying period will go some way towards helping recruiters cope but there are still other areas of concern. She highlighted the fact that the administrative burden of regular auto-enrolling and un-enrolling temporary workers will detract agencies from their core business which is to help employers find the talent they require.

She went on to say that the Confederation will continue to provide input to the government and the regulator of the scheme and confirmed that the REC will provide practical support to all of its members to ensure they can implement the required changes.

The REC will be holding another Pensions Workshop in the late autumn and it will keep its members informed on the findings of the current inquiry.

Meanwhile, the Pensions Advisory Service is starting to receive more enquiries about auto-enrolment as the date for implementation draws closer. Employees and employers alike have already begun contacting TPAS to discover more about their obligations once the legislation comes into force next year.

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A lack of internships and entry-level jobs could lead to a lost generation of graduates, HR directors are warning.

Recruitment consultancy, Office Team, surveyed HR directors and discovered that there is an urgent need for employers to develop training programmes and internships for younger people. HR directors said they were greatly concerned at the lack of entry-level opportunities and pointed out that graduates could find themselves facing career progression problems if this is not addressed quickly.

57% of the HR directors who took part in the survey think the current economic climate will negatively impact the younger generation when they start looking for their first job. On the other hand, 34% said the economic climate would have no impact and 4% expect it to have a positive impact on graduates’ prospects.

Maybe surprisingly, only 19% of HR directors are concerned that rising tuition costs will have a negative impact on the job prospects of younger workers.

SMEs in the UK now account for almost 20% of all UK employment, but the BCC has discovered that micro-businesses appear to be reluctant to hire school leavers and recent graduates.

47% of respondents to a recent BCC survey said they were nervous when it came to taking on school leavers with A Levels, mainly due to concerns over their level of business skills. Only 22% felt confident about the recruitment of school leavers whilst around 33% said they were fairly confident that a recent graduate would have the right business skills.

School leavers and graduates can gain a lot from working in small firms but this lack of confidence in their business ability is not only holding them back, but also the small business. Edward Mellett from WikiJob.co.uk suggests that small business owners should help young people by offering them work experience and summer holiday placements so they can get a feel of the business and get advice on upgrading their business skills.

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HMRC has issued a warning to recruiters, including umbrella companies, against the adoption of a new business model for travel and subsistence.

The ‘pay day by pay day’ model enables employers to apply NI and income tax relief to employees’ incurred expenses each pay day. The effect of this is that tax and National Insurance are only paid on the balance.

However, the Revenue recently said that this model is not compliant with the Social Security Acts or the Taxes Acts. Any employer using the model is not calculating the correct PAYE because Income Tax liabilities are calculated over the course of a year.

HMRC also pointed out that the Social Security (Contributions) Regulations 2001 do not allow for deductions from earnings in situations where an employee pays travelling expenses out of his total income.

In May, the Revenue said it was looking into a different business model whereby the employer could pay travel and subsistence claims to their employees in cash and the employees then pay a voluntary ‘financial advice payment’ back to the employer.

Following HMRC’s announcement, Saffery Champness, a firm of accountants, warned that employment businesses using the model could find themselves coming under increased scrutiny.

A spokesman for the company said it would be interesting to see how the Revenue handles this, but any business operating the ‘pay day by pay day’ model should expect to find themselves under greater scrutiny and possibly even investigation.

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If you are entering into a contract with an agency you will no doubt have been faced with the daunting options of choosing your route – either going PAYE directly with the agency, going limited or using an umbrella company.
From our discussions with contractors, many are still unaware of the what each option actually means to them and what, if any, the risks are to them.

Agency

Working directly to the agency is by far the simplest and safest route open to contractors. You get paid by the agency for the hours you work, everything is taxed and Ni’ed at source, you get holiday pay and statutory sick pay etc. so what hits your bank is yours and you don’t have to think about anything else.
The downside is that due to legislation the agency has to pay you PAYE and you cannot claim travel expenses week by week, as although you suffer the Tax and NI consequences as though you are an employee, you don’t get the advantages of employee expenses rules.

Umbrella

The umbrella route is fairly straight forward, you are an employee of the umbrella company, as such you are entitled to national minimum wage and holiday pay for every hour worked. You can also claim genuinely incurred travel expenses, and will usually receive a top up salary if there are any monies left in the umbrella company after it has accounted for its margin and company costs.

In addition, as an employee, you are entitled to all the statutory rights of employees, such as maternity pay/paternity pay, statutory sick pay etc

The risks to you here are fairly minimal, however you must be aware that only those expenses incurred wholly, exclusively and necessary in the performance of employment duties can be legitimately claimed, and if the Revenue were to check it is you, not the company, who are liable for tax and NI on incorrectly claimed expenses. Every contractor should be extremely cautious of umbrella companies encouraging them to simply “shove through” expenses as they could be hit with a hefty tax bill when they least expect it.

Does low risk outweigh the benefit? Quite often unless you have a rate of £10 per hour or more and do a lot of travel for your job then working directly for the agency may be your better option, as unless there is scope to pay you significant travel expenses from the monies received by the umbrella you will not see a substantial difference in your take home pay.

If you do have a significant amount of travel expenditure and your rate is sufficiently high then the benefit in your pay will be substantially noticeable.

Self-Employed Umbrella vs Limited Company

There seem to be a lot of misconceptions among contractors as to what it means to be self-employed, and the risks and burdens associated with being self-employed. Many contractors think that being self-employed means the Revenue will be watching them, that they will have to jump through a ridiculous amount of hoops and that they will end up with a raw deal.

The stigma surrounding self-employment is somewhat unjustified, and many contractors opt to work through their own limited company instead under the misguided notion that it is somehow a “safer” and less “burdensome” alternative.

Burdens – So what are they?

1. As a self-employed individual you must complete a tax return and account for your own tax and NI – True.
As a limited company contractor you would also need to complete a tax return, but on top of this you would need to set up a company and company bank account, register as an employer and ensure your PAYE and NI is calculated and paid across correctly on an ongoing basis for any salary paid out, complete a corporation tax return, file accounts and submit an annual return to companies house.

2. As a self-employed individual you can only claim your expenses back at the end of the year – True – but this only affects the tax due, not what you are paid weekly/monthly.
As a limited company, providing you were also an employee of your limited company, you could reclaim expenses providing they meet the criteria for employee travel expenses, and/or reclaim business on an ongoing basis, however they would still need to be entered on your end of year return/P35 – depending on the expenses reimbursed a P11D and P11D(b) may also need to be prepared.

3 As a self-employed contractor you don’t get holiday pay, sick pay, maternity pay etc and can be terminated at any time.
As a limited company contractor you don’t get holiday pay, sick pay, maternity pay etc from the client and you can still be terminated at any time.

So is it really a burden to be self-employed?

Safer?

As a self-employed individual, who has completed their tax return correctly and paid across their tax and NI there is no risk. If the Revenue were to question whether you are genuinely self-employed it would be the engaging company (the self-employed umbrella) who would be directly in the frame for any liability of unpaid tax and employers’ national insurance. You would not be hit with any further tax bill.

As a limited company contractor, who has completed their accounts and returns correctly and paid the due you would assume there is no further risk, this is simply not true. The Revenue can challenge the company under IR35 (which considers whether, hypothetically, you are a deemed employee of the end client) and it would be your company, not the provider or end client, who is in the frame for liability of TAX and NI. You would be hit with the tax and NI bill.

While limited companies are suitable for a great many contractors, equally they are not suitable for a great many more. They are certainly not the answer if you are worried about self-employment and want a safer alternative. In most cases, as an individual, self-employment is a far safer option than the limited company and it gives you the freedom and flexibility of being independent (which you don’t necessarily get with the umbrella option) without the hassles of running your own limited company (or the worry that your limited company could be a managed service company – a whole other legislative can of worms best avoided).

The risks to the contractor of being self-employed are negligible, the only liability an individual could face is if they incorrectly complete their end of year return, but a decent accountant is not as expensive as many people think and 90% of contractors still benefit from receiving more income than they would have as an agency worker even after paying for accountancy fees.

Limited Company – What are the benefits? What are the risks?

Going limited is a common option open to contractors, the benefits are highly publicised, the contractor can take his income as a small PAYE’d salary (typically up to Personal Allowance) and tax free employee expenses and the remainder by way of dividends out of the company profit, (however the company has had to pay corporation tax 21 % on all profit). This gives the contractor a huge benefit in tax free income (compared to all other models).

Generally speaking if the only reason you are looking at this option is because “someone said you should” or the agency is pushing you that way, common sense dictates this is not an option you should pursue. If you are interested in going limited, speak to professionals, seek advice from your accountant and look at it as an option because you are growing as a business and need a limited company to secure future business, because the risks of just jumping into limited are significant.

There are two huge risks associated with going limited, the first is IR35. IR35 essentially says, hypothetically speaking if we remove the limited company, if the individual were engaged directly by the end client would they be an employee. The upshot of this, if HMRC were successful, is that the limited company would be liable to pay Tax and NI on all divided payments made. This liability rests squarely with the limited company, so the unwitting contractor could see himself lumped with a massive tax and NI bill unexpectedly.

The second biggest risk is the Managed service company legislation. If you are operating through a limited company which is set up, administered and effectively controlled by a provider, and you have little or no control over your company then your company is almost certainly a managed service company. As such if HMRC come knocking for Managed Service Companies legislation it is your company (and potentially you personally), not the provider who set it up for you, liable to pay the Tax and NI on all dividend payments made.

So Which option is best? PAYE or own boss?

This really depends on what you want, generally speaking all options work, but as with everything not all options work for all people. If you are unlikely to keep papers and put your tax to one side neither Limited company or self-employed will be suitable, and if you are a low earner and don’t have reasonable level of expenses the umbrella would likely not be your best options. If however you are after the lowest risk option to you, the contractor, then agency or self-employed have to be your best option.

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The government must make good on its promise to open up the market if recruitment agencies are to help implement its ICT strategy, according to the REC Technology group.

The Public Accounts Committee recently published its report into ICT in Government in which it called on the coalition to explain how it intends to involve more SMEs and contractors (who may work through umbrella companies) in the ICT procurement process.

The REC Technology Group also pointed out that recruiters have a very useful role to play in assessing the skills the coalition will require to implement the strategy successfully. The Public Accounts Committee made it clear that it will be essential to understand future skills if the government wants to put an effective plan in place. The recruitment industry has a great deal of expertise in this type of planning and could provide a significant contribution.

Andrew Tomlinson, the policy advisor for the REC Technology Group, said that a mixed market of suppliers is essential in order to achieve ICT procurement value for money. Recruiters need to be able to help source the best IT staff if the strategy is going to be successful. Having an open market, where small recruiters do not face unnecessary barriers, will be the best way of guaranteeing this.

The REC welcomes the call for the government to explain how it will involve SMEs in the process and how it will measure success. Furthermore, the Committee pointed out that the coalition has not assessed the available resources, or the skills necessary to put its strategy into practice. IT recruiters are keen to assist the Cabinet Office determine how to get the best out of their current capacity and how to meet demand in the future.

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Antal International’s latest global snapshot of employment markets shows that hiring activity rose slightly in the last quarter.

52% of the respondents to the global executive recruitment firm’s survey recruited at managerial and professional level, compared to 50% when the last survey was conducted in February. And 52% said they plan to increase their workforce next quarter. Attrition rates in June were 17%, up one percentage point from February and is expected that this figure will remain stable during the next quarter.

Tony Goodwin, the chief executive and chairman of Antal, said the previous Global Snapshot indicated that stability was returning to the global market and this latest survey confirms that. The overall results fit almost exactly with those predicted in the February report with 52% of companies increasing their managerial and professional workforce and just 17% reducing their headcounts.

In February, the Americas outstripped Asia Pacific when it came to demand for professional and managerial staff, but that situation has reversed as 64% of Asia Pacific businesses looked for more employees.

In the UK, the Reed Job Index for June showed demand increased over the majority of sectors. The Index is now 25% above the 100 baseline set in December 2009.

Demand for employees in engineering, general insurance, industrial areas and professional services is now at its highest level since the Index began. On a regional level, East Anglia and the East midlands registered the largest increase in jobs growth, whilst the South East and London recovered from their dip in May.

Although there are now more job opportunities, the salaries on offer are not increasing. In fact, the Reed Salary Index has shown a decrease in the past two months and is now 2% below the 100 baseline.

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The Department for BIS recently published statistics which show just how dependant the UK economy is on small businesses. In fact SMEs provide 60% of all the UK’s employment.

In January 2010, there were around 4.5 million private sector firms in the UK. These companies had a turnover of £3.2 trillion and provided employment for 22.5 million people, including providing contracts for umbrella company contractors.

A massive 99.2% of these enterprises were designated as ‘small’; that is employing between 0 and 49 employees. A further 28,000 were ‘medium’, employing between 50 and 249 workers and only 6,000 provided jobs for 250 people or more.

The statistics also show that sole traders accounted for about 64% of private enterprises, 8% were partnerships and the remaining 28% were companies. Of the 2.9 million sole traders, only 10% of them provided work for other people. During 2009, there was an increase of 2.8% in the number of sole traders in the UK whilst the number of limited companies dropped by 2.7%.

The business and enterprise minister, Mark Prisk, said it was encouraging to see the increase, especially during times of recession. He also claimed the coalition will be encouraging more entrepreneurs to set up their own business as well as helping existing new start-ups.

Mike Petrook, the Chartered Management Institute’s head of communications, is not surprised at the growth in new start-ups. He explained that people’s priorities are changing and they want to succeed rather than just survive.

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The Rt Hon Margaret Hodge MP has said the point based system for immigration has room for improvement, especially when it comes to the rules regarding intra-company transfers.

The Committee of Public Accounts, of which she is the chair, published a report last week that made particular reference to the situation whereby IT contractors from outside the European Union are brought to the UK when our own IT workers are struggling to find work.

The UK Border Agency was also criticised for not making sure foreign national workers leave the UK when their visas expire. It is thought that more than 180,000 people have overstayed illegally.

Margaret Hodge said the Points Based System is better than the system it replaced but much can still be done to improve it. She explained that the Committee was concerned that there was no control over the number of people coming into the country on intra-company transfers.

She went on to say that the Border Agency has not found a way to ensure migrant workers leave the country when their visas expire and it cannot verify the numbers that have stayed on without permission. Furthermore, the Agency has not carried out proper checks on employers who are sponsoring work visas and has only visited 20% of those who applied for a licence. Basically the Agency does not the management information necessary to manage migrant numbers and enforce compliance of the rules.

MPs have called on the Agency to improve the way it manages information to find out which employers are breaking the rules and Damian Green, the immigration minister, said the report demonstrates the need for radical reform of the immigration system.

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HMRC should focus on detecting genuine cases of disguised employment rather than jumping to the conclusion that all freelancers are subject to IR35 rules, according to the REC.

Jeff Brooks, the REC’s Technology Group chair, stressed the importance of focusing on the rare instances of real disguised employment. He said it was essential to ensure the majority of contractors and umbrella companies do not have to worry about the possibility of an HMRC investigation or a tribunal that could drag on for several years.

The REC is a member of the newly created IR35 Forum which was set up after George Osborne decided to retain IR35 but improve its implementation.

Mr Brooks pointed out that the rules surrounding IR35 are unnecessarily complex and have created unnecessary uncertainty which has made the system unacceptable to both recruiters and contractors. The ambiguity and complexity of IR35 has also led to tax officials spending countless wasted hours on cases that do not fall within the scope of the legislation.

Last week, David Gauke, the exchequer secretary, outlined his commitment to improving the onerous legislation.

He started off by saying that HMRC is committed to overhauling the way IR35 is administered in order to address the concerns of the contracting community. He went on to say that the government has to get this right if taxation is going to be fair and allow contractors to provide their services in an appropriate way.

Chris Bryce, the chairman of the PCG, said he was pleased that the exchequer secretary had recognised the difficulties IR35 had caused freelancers over the last 11 years.

The IR35 Forum will give us chance to make a real difference and the PCG takes the challenge very seriously. We are determined to make HMRC clean up the administration of IR35 and provide clarity, consistency and transparency for all our members and the freelance community as a whole, he added.

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Lawspeed, the recruitment law specialist firm, claims there could be a conflict of interest between HR and finance departments when the Agency Workers Regulations are enforced in October this year.

Lawspeed’s director, Ravi Murphy, said that unlike other rules relating to recruitment agencies, the new regulations contain issues that could lead to conflict.

He cited an example of HR staff finding it hard to fight the unions over the payments made to agency staff whilst finance directors will want to keep costs to a minimum wherever possible. The AWR grants temporary workers the right to the same rate of pay as their permanent counterparts once they’ve been in the same contract for 12 weeks.

The REC has recently raised concerns with the BIS over the draft AWR guidance. The Confederation says further clarification is needed on certain aspects of the AWR including the Pay between Assignments exemption. It would also like to see clearer criteria laid down for the exemption of genuine self-employed limited company contractors.

The REC met with BIS officials last month to highlight concerns and suggest ways in which the final version of the AWR guidelines can be made clearer for recruiters.

Gillian Econopouly from the REC said the organisation has been working with the BIS by holding one-on-one meetings and attending guidance workshop sessions over recent months. More recently, the two bodies met to discuss the guidelines in detail and expect some of the issues raised to be addressed in the final version of the document.

Although the guidance document can never wave a magic wand over dealing with AWR, the REC will continue to urge the coalition to make it as business-friendly as possible.

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Umbrella companies that have been using Employee Benefit Trusts have been offered an amnesty by HMRC. This comes just months after the Revenue said it would be closing EBT schemes down.

The Finance Bill 2011 made provisions to squash the offshore tax loophole that EBTs had been exploiting. Many of the large PAYE umbrella companies restructured their organisations, and in some instances, clients were left out of pocket.

It wasn’t only umbrella companies who made use of EBTs. Other high-profile organisations, such as Rangers FC, made use of the schemes to provide tax-efficient benefits to employees.

In a recent press release, HMRC said companies would be allowed an amnesty so they can settle up outstanding National Insurance and tax liabilities without the need for litigation. This will reduce costs for both parties.

Dave Hartnett, the permanent secretary for tax at HMRC, said the Revenue will try and resolve disputes without litigating if it can be achieved within the law and without damaging the Exchequer. HMRC has adopted this proactive approach to allow customers to work with the Revenue to establish how their case fits the proposals, he added.

Employee benefit trusts, or disguised remuneration schemes, as they are sometimes known, have long been used as a way to avoid paying tax on items such as bonuses. Employees could then take out a tax-free loan from the trust. Under the new legislation, these sums will be treated just the same as if they were paid directly to an employee.

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