When Chancellor Rishi Sunak stepped out of Number 10 with his red briefcase yesterday we were all waiting with bated breath to see what changes were coming and how these will affect our livelihoods.
The Good: Extended relief
There’s been some good news for FMCG businesses - the extension of the freeze on wine and spirits duty for another year is a very welcome announcement for alcoholic drinks manufacturers: continued support for the pubs and restaurants they supply will help to guarantee those revenues. Another positive outcome from yesterday’s budget is the extension of the business rates retail discount until the autumn - this will be welcomed by store-focused retailers. Similarly, extensions to the furlough scheme, the freeze on income tax contributions, etc... of course all help to guarantee more businesses can stay afloat in general which has positive outcomes for FMCG companies as both buyers and suppliers of their products can stay in business and equally, the consumer, too, can still afford to be spending on these products.
The Bad: Corporation tax to increase
Unfortunately it’s not all good news. The glaring bad news for FMCG companies (and all industries) is the 6% increase in corporation tax, from 19% to 25%, to be introduced in 2023. This is, unequivocally, a blow for all large organisations. Some are going to benefit from the ‘super deduction’ tax relief to spur investment... but whilst this reduction of 130 percent of companies’ tax bills may appear to be a sexy little loophole to offset some of this increase, it will only apply to those that invest in their businesses over the next two years. More specifically, that relief will only apply to "companies investing in qualifying new plant and machinery assets", rather than intangible assets. So it’s significant, yes, particularly if an FMCG company’s manufacturing machinery has been due an upgrade, for example… but when it comes to those businesses, like my own, in the recruitment sector - whose assets are their people and are therefore definitely ‘intangible’ - there’s no relief there for us. This is particularly disappointing for small businesses like us that, granted, may well be over the £250K profit threshold, but will be significantly impacted by a 6% increase in their corp tax bills and may struggle to make up for this elsewhere.
The big question that arises out of an increase in corporation tax is, where is that saving going to be made? Where should businesses recoup this lost 6% of profits? If we ignore the ‘super deduction’ and take a simple example of what that means in real terms, it throws back some scary figures. For instance, Reckitt Benckiser made a net profit of £1.19 billion in 2020, 6% of this equates to an effective tax hit of £71.4 million… So what has to give? Could this impact recruitment and hiring across these businesses?
One thing seems to be clear from previous data: that we see a negative change in wage growth in the subsequent year/s. Employees don’t see the expected increases in salaries or benefits and the rate of new employment is negatively impacted, too.
Of course a tax rise like this has the potential to affect a variety of corporate decisions for our clients. According to the National Bureau of Economic Research in the US, these range from how much to invest in R&D, property, plant and equipment, to the mix of debt and equity with which firms fund operations, down to the amount and structure of compensation paid to managers and employees, their pensions and the dividends offered to shareholders. To overcome the negative impacts of increasing taxes one area of focus can be the capital structure of the organisation - a company’s debt can confer a tax benefit if interest payments are to be deducted from taxable income, for example.
Whatever methods of restructuring, or otherwise, organisations employ to mitigate a tax increase, one thing seems to be clear from previous data: that we see a negative change in wage growth in the subsequent year/s. Employees don’t see the expected increases in salaries or benefits and the rate of new employment is negatively impacted, too. This is bad news for recruitment firms, which will see increased competition for existing vacancies and fewer to go around overall between their clients’ preferred suppliers. For the workers themselves - the Institute for Fiscal Studies (IFS) in the UK has said that an increase in corporation tax would lead to lower wages for employees and higher prices for consumers.
Of course this is all against the backdrop of the success of the company as a whole, if it is thriving and profits are healthy and increasing, the impact will be less keenly felt within the workforce. One thing is certain - it will be a very interesting and challenging time to be working in accounting within any large business as firms reconsider many aspects of their spending - commodity prices, distribution and marketing costs, their competition, borrowing costs, and so on... in an attempt to alleviate the burden of a 6% increase in corporation tax.
The Ugly: What news of IR35?
There was no mention in yesterday’s budget… but as the year’s delay in its implementation draws to a close, the pressure is on Rishi Sunak to treat any changes with caution and, according to Contractor Weekly, professional bodies are urging the Chancellor to avoid any drastic tax changes. They suggest instead that freelancers and contractors should be protected, and businesses given help to “rescale and rehire” through a long-term strategy.
Recruitment
IR35 has the potential to deliver a devastating blow to recruitment business contractor revenues and there remains great uncertainty and nervousness around how this is going to impact business after April 6th this year. In a bid to add pressure to calls to delay the reforms, Hays UK and Ireland Managing Director Simon Winfield delivered a letter to HM Treasury in advance of yesterday’s budget to urge IR35 private sector reforms be postponed for another year, citing that recruitment has already been struggling to cope with the ongoing fallout from the Covid-19 pandemic. The letter asks that the financial secretary Jesse Norman “urgently consider” delaying the April 2021 start date by another year on the basis that the pandemic is continuing to have a “material impact on the country’s workforce and companies need further support” in what remain challenging times.
The concern is that the economy just hasn’t reached the position we’d hoped for and so, as recruitment firms, we fear we won’t be as resilient to such changes as we would be if given more time to recover from the effects of the past year. Bringing in these changes too soon could be damaging. For firms like us, who recruit exclusively into FMCG and Consumer Healthcare, the buoyancy of the sector has buffered us from some of the effects that have been felt by larger firms that recruit into a variety of sectors, but the reform to IR35 will still likely bring about decreased revenues from contractor recruitment and increase the administrative burden, which in turn will have associated cost implications.
Contractors
According to Simon Winfield’s letter to HM Treasury “It is more important than ever that the UK’s temporary workforce is supported and that businesses don’t have the additional burden of IR35. Currently, companies are being distracted preparing for the IR35 reforms, rather than focusing on either sustaining their businesses or looking at how they can accelerate their growth.”
It’s true that a further delay for contractors would give a boost to the contracting workforce and it’s certainly what contractors would like to see. The added complications of having to operate inside of IR35, and the negative impacts on contractors' take home pay means that it's a dark cloud over a way of working that, for so many, has been a lucrative career choice - contractor take home pay outside IR35 is significantly higher than contractor take home pay inside IR35. As a contractor outside IR35, the benefits of being able to pay yourself a salary and withdraw further income as dividends (currently up to £2,000 tax free allowance), and have your limited company only pay the 19% corporation tax on its profits have been one of the big lures for working in this way.
If the proposed changes come into effect sooner rather than later, the opportunities to able to operate as an off-payroll worker, outside IR35, will be drastically reduced and being a self-employed contractor working through a limited company - who can benefit from a more tax-efficient set-up than they would working via an umbrella company, for example, or as an employee of a company - will be much harder to achieve. This is because the responsibility for determining whether an employee is inside or outside IR35 will shift from the employee to the employer and the framework to determine this will necessarily be more rigorously adhered to, with more contractors being classified as working inside IR35.
To be working ‘inside IR35’ means the contractor is considered to be an employee for tax purposes, and so must pay the same income tax and National Insurance contributions as a permanent employee. The downside is that, despite being treated as a permanent employee for tax purposes, workplace benefits such as paid holiday and sick leave remain off-limits, though contractors could be entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination). In addition, the need to recoup the losses due to increased costs to the contractor of operating inside IR35 from increasing contractor day rates, for instance, is likely to impact on the number of opportunities available if hiring organisations have to pay more for services provided by contractors.
Clients
Many of our FMCG clients have already made the necessary preparations for IR35 and, whilst there has been a huge administrative burden to doing so, especially in the wake of all the added Brexit admin, they are ready to set the ball rolling once they receive the instruction. IR35 means that they must assume responsibility for determining how the contractors they engage with should be taxed, based on the work they do and how it is performed, rather than this being down to the contractors. The idea being that, from the perspective of HMRC, shifting responsibility away from contractors for determining their tax status will prevent them from seeking to deliberately misclassify their engagements as outside IR35 and will ensure they pay the same tax and National Insurance as an employee to crack down on tax avoidance.
Although it sounds like the fallout is largely all on the contractor here, in fact it has negative impacts for the employer, too, if contractors are deterred by the reforms or raise their rates when classified as inside IR35. Being able to use contractors in an ‘outside IR35’ sense confers significant benefits to the organisation: the overheads for contractors are lower - there are no PAYE or National Insurance contributions to administer nor holiday, benefits, pensions, etc.; there is greater flexibility - organisations can specify the type and duration of working hours of the job and contractors can be of benefit for specific, time-limited projects.
The extent to which reforms will impact the contractor workforce is as yet unclear, and how much increased contractor day-rates for those who fall inside IR35 will impact the volume of contractor hires is unknown, for now.
In any case, it won’t be long before we have a definitive answer on whether there will be a delay in the IR35 reform, but for contractors and recruiters it’s still an agonising wait.
Unfortunately, clawing back the UK’s great deficit is high priority and it may be self-employed contractors who suffer here, particularly as we’ve seen that, across the board, a freeze on the income tax thresholds does provide some short-term comfort and relief to employees. Sadly, not everyone can be a winner when our country is trying to recover from recession… and for recruitment companies that do a significant proportion of their business in the contracting space, this is a worrying time - we are on the edge of our seats.
For info on the budget see:
For guidance on the IR35 changes see:
https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries