Does new HMRC legislation mean the end of traditional agencies?
Co-founder of the DX, George Campbell-Collins shares his views on the traditonal agencies in the light of recent HMRC legislation.
Ok, so you might think that I have a vested interest in saying that they are (as the Driver Exchange is in competition with most of them) - and I guess I do. But my question is more objective than you might think and I'd welcome comment and feedback.
We've recently seen the introduction of new legislation by HMRC, which has broadened their interest in how temporary labour pays its taxes. The death knell for old school umbrella companies, operating travel and subsistence schemes, seems to have sounded, and the haven of a Personal Service Company (PSC) now appears more elusive. The tests of Supervision, Direction and Control have been widened, and if a worker in a PSC fails these then HMRC think they should be an employee and pay tax accordingly. Where are HMRC going to look for the money? Up the chain of course, with the intermediary first and, especially if MSC conditions apply, eventually with the end user of the labour.
So how does this affect traditional agencies and in my case driver recruitment agencies? Well, to set some context, it's the worst kept secret in the industry that around 70% of agency drivers operate either through an umbrella or via a PSC. (Why? It means more margin for agencies and better take home pay for drivers.) Shut the umbrellas and it's likely the drivers will flock to create PSCs (no doubt chivied by the agencies). From the end users point of view, agencies have traditionally been viewed as a buffer between them and the tax man - a sort of invisible force field that meant that they could switch off their risk radar. And here's the rub (and where the debate starts). It seems that this force field is weakening. Unless an agency can argue (with evidence) that a PSC driver is not under Supervision, Direction and Control then HMRC says they're an employee (cue the hunt for unpaid taxes). I have to admit that at first glance, it seems a pretty hard argument for the agency to make (some might disagree and I may well be wrong). If it is, and I push the point a little further, then will HMRC see the old school agency as an obvious target to focus their efforts on - a fluttering flag saying come look at me? Contrary to historic opinion, it could be argued that not only does the agency no longer protect their clients from scrutiny, in fact it is in danger of attracting the very interest it's supposed to be preventing. Even if its drivers can pass the SDC tests, there's enough grey to still make them a nice juicy target for the tax man. If that's the case, will customers start looking at other options for temporary labour?
In and of themselves, of course, there's nothing wrong with PSCs. If the driver is a legitimate company, looking for work, supplying work on their terms, then they should be entitled to carry out their business. What is needed is a way to strengthen the business to business relationship between the client and the driver to move them out of the danger zone. If it's clearly two businesses operating together (client and supplier) then the SDC tests would be passed. (Of course, we think the Driver Exchange is the perfect solution for this and I would say that! Every interaction that the Driver and Client have via the DX has been designed to reinforce the supplier/client business relationship and, what's more, we're a technology company, not an agency.)
You might have noticed that I haven't touched on the PAYE alternative. If customers and agencies look for a safer alternative to PSC's or Umbrellas, then, of course this is there. However, I've excluded it because operating PAYE labour will drive down an agency's margins, which it'll need to address by bumping up its costs, or reducing driver pay. Few agencies in today's market will be able to support their operations on current PAYE margins, especially if they're being asked for the levels of service that they currently are being. The likely outcome of this model, then, is higher costs for the end user, (drivers are too precious a resource to mean lower pay for them) which of course they won't like, especially if the end user is a 3PL, itself operating at 3% margins (according to the FTA's latest report), and being pressured by it's own customer.
I'm sure there are lots of views on this out there, which I'd be very happy to hear.
If you would like to share your opinion, feel free to email us at email@example.com or leave your feedback here.