Social care Levy impact on recruitment supply

The government proposal to levy additional national insurance contributions (‘NICs’)  to address social care and NHS shortfalls will negatively impact recruitment supply businesses and care is needed to avoid risk, says the recruitment and employment law firm Lawspeed.

“The overall impact should be the same for all businesses and individuals subject to the NICs scheme but there are particular risk points that recruitment supply businesses should take care to cover off. Profit margin rates will invariably be agreed with hirers supplied with workers by these businesses. These rates are often presented as inclusive of certain overhead costs including employer NICs on monies paid to the worker, and it is not always the case in every contract with a hirer that these rates can be adjusted because of an increase in NICs. AS the NIC hike will add 1.25% to the agency’s employer’s liability bill it is important that recruitment businesses check the terms they have in place if they are due to run over the new rule start date in April 2022. If fixed rates have been agreed with no adjustment allowed for, for example rate cards set for 3 years, best advice would be to negotiate the required NICs increased amount as soon as possible to avoid risk of breach of contract. Otherwise businesses should ideally alert their hirer clients to the increase in rates.”

This advice will also be relevant to recruitment businesses that supply workers via a master vendor or RPO that will be operating on its own or the hirers recruitment supply terms. Here agreement to new rates may require agreement from both the RPO and in turn, the hirer.

In any case the increase may bring into play the relative cost of hiring agency staff but, as with the apprenticeship levy which also attaches to payroll, will apply across the board. The increase of 1.25% is planned to also attach to dividends, by way of an increase in dividend tax. Regardless finance directors who have set a long term budget may seek savings in order to meet the additional budget requirement, with a potential knock on effect on both employed and temporary staff.

Few will escape the new levy and indeed it may cause confusion in the contractor market. Contractors subject to the IR35 tax rules but under arrangements that are outside the tax requirement may have to increase their company invoice rate to take into account the employer NIC increase. This will make contractor supply more expensive. Where arrangements are in fact inside the IR35 tax requirement the contractor will likely find their gross rate, and thus their overall net rate, reduced accordingly due to the NIC increase in the agency overhead cost.

Employer NICs whether paid by an agency or an umbrella company, are a liability of the employer for all purposes and are invariably treated as an overhead cost of the employer business. It is not correct to characterise an overhead increase of these NICs as a tax on workers, although there is no doubt that lower pay rates will follow as the government extracts more from the workforce.

As with all change the key is to check and amend contracts and processes compliantly wherever necessary to avoid misunderstanding or conflict. This need not be painful and whilst the politicians can argue about how the charge is applied, recruitment businesses and all hirers can prepare for the inevitable and arguably necessary levy (albeit that the jury is out on the means).

The author of this article Theresa Mimnagh is associate director of Lawspeed. Group corporate clients benefit from immediate up to date advice on any recruitment sector or employment matter, contract review/negotiation, terms of business templates, trade membership, government representation, accreditation services and an advanced digital contract platform.

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