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hen summer rolls around, the last thing most people want to do is ﬁgure out their ﬁnancial wellbeing and get their heads down in the books to understand the ins and outs of their current ﬁnancial strategy and situation. However, there is no time for recruiters to waste this year, with tax and ﬁnance legislation and signiﬁcant interest in “When our recruitment sector summer rolls from HM Revenue & around, the Customs. last thing In Recruiter’s 2019 most people Finance Supplement, our want to do journalist Colin Cottell is ﬁgure out clariﬁes the onerous their ﬁnancial challenge that is the wellbeing” loan-charge debate, as well as considering the arguments on both sides of the ‘debt against equity’ and ‘equity against debt’ argument for injecting funds into your business. For in-depth advice, consult the ﬁnance professionals represented in this guide so you and your business won’t be caught short after taking that much-needed summer break. And even better, your business will be knowledgeably positioned for the hard work to come.
05 Money for nothing? Whether you raise money through borrowing or external investment, there’s always going to be some sort of trade-off
06 Loan scheme trouble ahead The introduction of off-payroll rules into the private sector could be the catalyst for the revival of ‘loan’ schemes
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MON£Y FOR NOTHING? Whether a recruitment ﬁrm chooses to raise money through borrowing or outside investment, there’s always some form of trade-off, as Colin Cottell explains ith interest rates bumping along the bottom at historically low rates, Nick Hall-Palmer, a former group ﬁnance director at Empresaria and now an investment partner at recruitment investment company Orchard Joint Ventures, estimates that some large temporary recruitment businesses can borrow at between 1% and 1.5% over base rate (currently 0.75%) with most able to borrow at between 2% and 3% over base. The opportunity to raise ﬁnance at such low rates in order to open a new branch, take on consultants or make an acquisition is certainly tempting for recruitment businesses. But according to Hall-Palmer, with many investors willing to provide ﬁnance in return for a stake in the sector, the choice is not as simple as the cost of borrowing. “It all comes down to the trade-off between price (the cost of borrowing) and control over the company,” he says. “If your interest rate suddenly went up to 8% or 9%, it might be more tolerable to take on another equity investor and to sacriﬁce a little bit of control.” To get around this conundrum, Hall-Palmer says that for his own business, he will
I M AG E | I STO C K
always look to raise equity from existing investors ﬁrst. Mike Bowler, a director at 3R, a company that provides support and ﬁnance to recruitment start-ups, says that generally he favours debt over equity because it allows business
In favour of debt against equity • Does not dilute the owner’s interest in or control of the business • Relatively simple • Lender has no claim on the future profits of the business • Paying back the loan can be planned for BUT there is a danger of becoming debt laden and beholden to lenders In favour of equity against debt • Equity doesn’t have to be repaid • Can provide finance in circumstances when funding is not available from banks and other lenders • Outside investors can provide expertise and other services • Owners can enjoy a financial windfall
owners to retain control over their business. One situation where equity becomes attractive is when the investor “brings something to the table”. This could be their experience or their ability to contribute to the strategy of the company. However, he warns that anyone going down the equity route “needs to be thorough on the details and go through an awful lot of due diligence”. Otherwise, he says, choosing equity “could end up being the most expensive loan you could ever take out”. Philip Ellis, owner of Optima Corporate Finance, says the most powerful reason for bringing outside investors into a recruitment business rather than borrowing is when a company is looking to expand rapidly, with an exit event in mind. “This type of situation is well suited for private equity,” he says. However, Ellis says that which option is best can often come down to individual preferences. “Some people are debt averse, and say ‘I want to sleep at night, so I am prepared to give away some equity’, while others might look at the same opportunity and think ‘I don’t mind raising as much debt as possible because I can keep lots of equity and I just have to repay the debt’.”
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TROUBLE AHEAD With schemes paying contractors in the form of ‘loans’ likely to become widespread once again, HMRC would do well to consider compliance right across the supply chain, writes Colin Cottell
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GUIDE TO RECRUITMENT FINANCE 2019
n HM Revenue & Customs (HMRC) crackdown on ‘loan’ schemes is unlikely to succeed unless the government adopts a more joined-up approach to compliance across the supply chain, experts in the contractor market have warned. The introduction of the off-payroll rules into the private sector in April 2020, in particular, is likely to lead to a proliferation of illegal schemes under which contractors receive payment in the form of loans, they say. Loan schemes often work like this: contractors are paid, often from an employee beneﬁt trust in the form of an interest-free loan that is never expected to be repaid. They have become a common feature of the contractor market in recent years as HMRC’s efforts to reduce tax
avoidance have begun to squeeze take-home pay. By being paid in this way, contractors – many of them in IT – have avoided paying income tax and National Insurance Contributions (NICs), and signiﬁcantly boosted their take-home pay. HMRC regards these schemes as disguised remuneration, and is now cracking down hard. Under the 2019 Loan Charge legislation, HMRC is entitled to demand unpaid taxes and NICs on any part of a loan that has not been repaid on 5 April 2019, going back as far as April 1999. This has come as quite a shock to as many as 50,000 contractors who used loan schemes in the past, and are now faced with, in some cases, reportedly life-changing tax bills, with amounts demanded ranging from a few thousand pounds to more than £100k. Accountants estimate that a contractor who worked for ﬁve years on a salary of £30k that was received in the form of a loan now faces a bill of around £40k. HMRC has also been pursuing loan scheme providers under separate legislation (Disclosure of Tax Avoidance Schemes – DOTAS), with some success. In March, it won a tax tribunal case against a contractor loan scheme provider called Hyrax Resourcing, that is expected to yield £40m in unpaid taxes.
SCHEME REVIVAL? Matthew Fryer, group compliance director at contractor accountant Brookson, warns that despite HMRC’s efforts to stamp out loan schemes, the introduction of the off-payroll rules into the private sector in April 2020 will be the catalyst for their revival. I M AG E S | I STO C K
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There are still companies out there providing these loan schemes. We still see them marketed
“There is likely to be a proliferation of tax avoidance schemes ﬂooding the market in the run-up to the off-payroll rules being introduced in April 2020, including loan schemes or similar disguised remuneration schemes,” he says. “Providers of these schemes are able to offer enhanced take-home pay to contractors, and signiﬁcant kickbacks to agencies and agency staff – you can understand why they can be an attractive proposition. “Despite the hardship caused to contractors impacted by the loan charge, I suspect that HMRC’s inability to crack down on the scheme promoters, lack of understanding from contractors, and the inherent unfairness in the off-payroll rules are likely to be the catalysts to reignite the market for these types of schemes.”
HISTORY REPEATING ITSELF Julia Kermode, CEO at the Freelancer and Contractor Services Association (FCSA), agrees that history is likely to
repeat itself: “We saw a huge number of tax avoidance schemes, including loan schemes, when the off-payroll rules came into the public sector. This was a direct response to the off-payroll rules, as a result of contractors’ income going down. I think it will happen again.” Kermode says she has challenged HMRC on this, but that the organisation disputes it, something that HMRC has conﬁrmed to Recruiter. “There is not a link between off-payroll rules and disguised remuneration. There is no need for anybody to engage in tax avoidance to comply with the off-payroll rules – either in the public sector or in the private sector when expansion takes place,” HMRC tells Recruiter. Graham Fisher, CEO of Orange Genie Umbrella, agrees with Kermode, and he predicts “an avalanche” of avoidance schemes, including loan schemes, in the run-up to the off-payroll changes “because that is what happened in the
public sector, and still happens in the public sector”. Crawford Temple, CEO at intermediary trade body PRISM, says that despite HMRC’s efforts to eliminate loan schemes and those that provide them, they remain a problem. “There are still companies out there providing these loan schemes. We still see them marketed. We still hear stories from providers that say they are losing business to non-compliant providers, because contractors are only interested in take-home pay.”
AGENCIES AFFECTED It is not only compliant service providers that are affected, says Temple. Recruiters and end-users are also caught in the crossﬁre. Some contractors, he says, are going back to their agency with their tax bill, and demanding the agency pay it, unhappy with the agency’s role in advising them to work through a loan scheme provider, and asking the agency what checks they made into that provider. However, such an approach is unlikely to prove effective, according to Kermode. “The contractor would have to prove that the scheme was recommended by the agency or the end client,” she says. As long as an agency gave contractors a genuine choice of WWW.RECRUITER.CO.UK 9
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GUIDE TO RECRUITMENT FINANCE 2019
KEY FACTS Loan schemes operate by paying workers in the form of an interestfree loan, that is not expected to be repaid, rather than in income or dividends that are taxable income. Most loans are paid from employee benefit trusts that are set up by scheme providers.
who to engage through, she says, it shouldn’t be held responsible. “It all comes back to offering contractors a vetted PSL (preferred supplier list), which most good businesses will have,” she adds. Louise Rayner, founder of back office, umbrella and accountancy services provider NumberMill is critical of HMRC’s approach, which she says has failed to provide a level playing-ﬁeld. “The problem is that there are many cases that get settled out of court, but nobody gets to hear about it, so there is no deterrent against non-compliant operators,” she says.
LOSING OUT Faced with threats from contractors that they will go elsewhere unless they are paid in the way that maximises their take-home pay, Rayner says that while agencies “are trying to be compliant” by doing so, they risk losing workers. As an accountancy services provider in the sector who puts compliance ﬁrst, she says, “I lose business every day”. She argues that the fairest solution
The Finance (No 2) Act 2017 gave HMRC the right to consider loans received by members of loan schemes as income, allowing it to charge income tax and NICs going right back to 1999/2000. This process is part of a package that HMRC estimates will yield £3.2bn over five years. In a statement, HMRC tells Recruiter: “HMRC will always seek payment of the charge from employers in the first instance. It is only where HMRC cannot reasonably collect from the employer – for example, where the employer is no longer in existence or is offshore – that the individual will be liable to pay the tax that is
due. Around 75% of the overall yield from the charge on disguised remuneration loans is expected to come from employers and, so far, about 85% of the yield from settlements in advance of the charge has come from employers.”
remaining 25% settling for more than this amount.
According to HMRC, loan scheme users typically earned twice as much as the average UK taxpayer. It says that around 65% of contractors who signed up to loan schemes work in professional services, many of them in IT.
The loan charge legislation is not the only legislation available to HMRC to recover taxes on income paid as a loan. The 2011 disguised remuneration legislation gives scope for assessment of other entities that have responsibility to operate PAYE, including staffing companies and end users.
Around 20,000 known contractor loan scheme users have yet to register to settle their tax affairs with HMRC, it says. As of January 2019, HMRC says that around 6,000 users of these disguised remuneration schemes had settled with it out of an estimated total of 50,000, with 75% settling for less than £40k and the
In the past five years, HMRC has launched around 12,000 investigations into employee benefit trusts.
In recent years, HMRC says it has taken civil action litigation action against 10 individuals or businesses that it considers to be major avoidance scheme promoters for failure to disclose under the DOTAS (Disclosure of Tax Avoidance Schemes) regime.
GUIDE TO RECRUITMENT FINANCE 2019
Hirers would want agencies to use only intermediaries that are both compliant with tax legislation and financially stable would be for the end user to be liable for any unpaid taxes in the supply chain. After all, “they are the ones that get away with paying lower prices”. Fisher agrees, saying HMRC simply doesn’t have sufficient resources to police the supply chain, and that the end user would do a better job. Matthew Brown, group CEO of workforce management solutions provider giant group, also favours making end users responsible. “Hirers would want agencies to use only intermediaries that are both compliant with tax legislation and ﬁnancially stable,” he says. “Many other developed countries – most notably the US and Holland – have for a long time made the hirer liable for compliant supply chain 12 RECRUITER
engagement. If the UK followed suit, tax avoidance would be minimised,” he says.
TROUBLE AHEAD However, while Fryer agrees that in principle “this seems like a sensible approach”, he warns that the practical difficulties involved – particularly where the supply chain is a long one – shouldn’t be under-estimated. In addition, he says the danger is “that many end users will simply stop using contractors, or mandate that they are all paid via PAYE to eliminate the tax risk. This is similar to the blanketing approach we have seen in the public sector in response to the off-payroll changes of 2017.” However, HMRC does receive a
modicum of support for its approach. John Chaplin, associate partner at EY people advisory services, says that ultimately, HMRC’s strategy of “getting its pound of ﬂesh from contractors” will prove successful. “It will deﬁnitely go through the courts, and I can’t see how single contractors will have the ability to ﬁght it,” he says. Be that as it may, with many experts predicting that history will repeat itself as the off-payroll rules come into the private sector, even if HMRC ultimately succeeds in driving loan schemes out of the market once and for all, things are likely to get worse ﬁrst.
SUPPLEMENT • 2019
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Advertorial A DV E RTO R I A L Q D O S
Preparing for IR35 reform Seb Maley, CEO of IR35 specialist, Qdos, looks at how the current IR35 climate impacts recruiters and what they can do to get ready for reform
SEB MALEY, CEO, Qdos
fter the IR35 consultation closed last month, all eyes focused towards the arrival of the draft legislation which, barring one or two minor tweaks, I expect will be very similar to the eventual rules enforced in the private sector next year. Following the introduction of public sector IR35 changes in 2017, most recruiters are well aware of the off-payroll working rules already. In a nutshell, reform - much like in the public sector - will see the responsibility for determining IR35 status shift from the contractor to the end-client. Agencies, of course, have a huge role to play in all of this. Despite not being the party that will be in charge of administering IR35, they could be held liable for any mistakes when operating as the fee-payer in the supply chain. Recruiters must work with end-clients The need for recruiters to collaborate with end-clients to be confident that a contractor’s IR35 status has been set accurately is absolutely paramount. If the fact that IR35 liability can amount to well over £1m for just one contractor isn’t enough to persuade agencies to prepare, the threat that contractors would much prefer to source work through recruiters who are able to help end-clients make well-informed IR35 decisions should be. Therefore, the message to recruiters is a clear one: it’s time to get ready for next April’s changes now - not at the turn of the year when reform is only a few months away. And certainly not when the changes have been enforced. Do this and you’re left to play catch up - not what’s needed in the bigger and more diverse private sector. Communication is key Despite the need for agencies to start the preparation process now, it seems many contractors are yet to hear from them about the incoming changes. Justreleased Qdos research suggests that as many as 92% of contractors have not been contacted by their agency or end-client. To avoid the mistakes that were - and to a certain extent continue to be - made in the public sector, recruiters must take the initiative. It’s why Qdos is advising agencies
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to contact contractors and reassure them that they’ll be collaborating with end-clients to assist with betterinformed IR35 decisions. Recruiters should also reach out to the medium and large end-clients that will soon be making IR35 decisions. There’s a very strong chance that these businesses will welcome any support on the IR35 front. Reviewing on average, around 1,000 contracts per month, Qdos firmly believes that joined-up thinking and input from each party of the supply chain is needed to set IR35 status accurately. Steer clear of blanket determinations When working with end-clients, recruiters would be wise to highlight the dangers of making blanket IR35 decisions. Placing all contractors inside IR35 - either to protect liability or simply because the business doesn’t understand the rules - is not only non-compliant, but it will also deter contractors. Any agency that encourages end-clients to make caseby-case IR35 determinations will be better placed to win contractors’ support. Independent workers aren’t asking for much - just a shot at having their tax status assessed fairly by the businesses they work with. Fears remain over CEST’s accuracy Concerns about the reliability of HMRC’s IR35 technology, CEST, remain. The tool was introduced over two years ago now, but still ignores fundamentally important aspects of the IR35 legislation. From where we stand (and Qdos is not alone in thinking this), the tool simply isn’t capable of delivering accurate answers regarding a contractor’s IR35 status. Therefore, it’s worth bearing in mind that independent IR35 assessments are perfectly allowed. Time to get to work Now is the time for recruiters to act. IR35 reform is less than a year away and the agencies ready to assist endclients will not only protect the liability they may carry, but also win the trust of the contractors they place. Get in touch with Qdos on 0116 2690992 or email@example.com
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