Crystal Umbrella

Contractors working for umbrella companies could become the beneficiaries of the austerity measures currently hitting the public sector, according to a prominent recruitment expert. Steve Huxham, who is Chairman of the Recruitment Society, believes that public sector Human Resources Departments are finding it increasingly difficult to administer the rising number of job hunters and are beginning to outsource to external recruiters as a result.

Mr Huxham added that no employing organisation should become “overwhelmed” by increasing volumes of jobseekers as practical solutions were readily available. If companies or public sector departments begin to feel overstretched by the rising number of applicants, the problem “can be easily prepared for.” He went on to urge public sector HR Departments to outsource if they were beginning to fail with recruitment, as the necessary roles could be successfully undertaken by PAYE umbrella contractors.

His comments coincide with the latest REC/KPMG Index on jobs, which contained further promising news for umbrella companies; contract staff billings reached a seventh high during January and permanent posts reached a six month peak, indicating that business confidence may once again be on the rise. The study, which surveyed 400 companies, reveals that the temporary placements index, which includes contractor posts, rose from 52.8 points in December to 56.5 in January. KPMG’s Partner and Head of Business Services, Bernard brown, advised a degree of caution, however, saying that whilst the figures were encouraging, the effects of public sector job josses, the January VAT rise and slowing economic growth could lead to a “volatile” jobs market in the coming months.

Only two days after urging employees, businesses and umbrella companies not to be unduly pessimistic about the recent shock announcement from the Office of National Statistics that the UK economy shrank by 0.5 per cent in Q4 last year, the Recruitment and Employment Confederation (REC) has sounded a distinctly more critical note. The Chair of REC Drivers, Rod Harris, has issued a thinly veiled admonishment to the government for having “crossed the line” in its efforts to rebalance the UK’s finances.

Conceding that a programme of spending cuts was necessary to “help the UK economy stand on its feet again,” Mr Harris nonetheless warned that there was “only so much shock the economy can absorb.” He went on to underline the triple influence of the VAT rise, increased taxation and increased fuel prices, which he believes have gone too far and are now acting to impede growth. Instead, he invited the Government to consider a reduction in the fuel duty which, he maintained “would have no implication for the money the Government earns.” It would, however, deliver a much-need helping hand to struggling small businesses in the UK by “easing their tax burden.”

A recent poll conducted by the Professional Contractors Group (PCG) found that more than half of its members, who include PAYE Umbrella contractors as well as freelancers with their own limited companies, do not believe that the recent VAT rise is a progressive policy. Prime Minister David Cameron, perhaps unexpectedly, has been bullish in his defence of the increase, claiming in a recent interview for BBC TV that it was but one part of an economic policy which is forecast to generate increased employment over the coming five years.

Contractors working for limited companies and umbrella companies should by now be aware that VAT is set to rise next week from its present rate of 17.5 per cent to 20 per cent. The change comes into effect on midnight on the 4^th January.

It’s as well to be clear, though, about exactly which items will be affected. Only those items which are charged at the standard rate of VAT will be subject to the increase. Goods and services which had hitherto been rated at zero, reduce rated or exempt from VAT will continue to be unaffected.

This might seem relatively straightforward on the face of it but a small business group has recently issued a warning to smaller enterprises that matters can easily become more complicated when the distinction is put into practise. The Forum of Private Business (FPB) has drawn attention to the way in which the VAT rise may affect accounting systems. Accounting systems will need to be altered in line with the VAT change so that invoices, sales records and transactions will be issued at the new rate from 4^th January onwards.

The FPB’s Chief Executive, Phil Orford, explained that outstanding invoices for work or services genuinely carried out before the deadline can till be charged at the 17.5 per cent rate after 4^th January, but for most small businesses, a new standard VAT code will need to be created for the 20 per cent rate. The previous code may also need to be retained for the outstanding invoices.

Freelancers working for umbrella companies should find that these adjustments will have been made by their firm, but those working for limited companies may be pleased to hear that HMRC will be taking a “light touch” approach with any errors in the first VAT return after the change.

The rate of VAT in the UK is set to increase to 20% on the 4th January 2011. In these months preceding the rise, VAT-registered businesses are planning for the change. They have to change their accounting systems to deal with the increase but they also have to plan how their business will cope.

As a result, most businesses are actually increasing their prices now as they are worried about the effect of rising inflation. Therefore, they aim for the increase to be absorbed by their customers. A poll was conducted by Kraeb Gavin Anderson on this very issue. They found that around 20% of their respondents said they were planning to pass on some of the increase to customers.

However, all businesses have to be very careful of what action they take due to the anti-forestalling legislation which will be enforced by HM Revenue & Customs. This legislation will effectively block any attempts at planned pre-payments which are against ordinary commercial practices. They will be paying close attention to any firms who charge VAT at 17.5% now for orders or services which will be delivered from 4th January onwards.

Speaking to Contractor UK, accountancy firm MMH partnership commented: “Special scheme [users on the] annual accounting and flat rate schemes must ensure they are aware of how the rate change affects them.” They continued by acknowledging that there were special rules applicable to sales that straddle the change on 4th January and for any supply of services which is continuous. Obviously any business with concerns should seek accountancy advice.

New guidance from HM Revenue and Customs states that payments made by cheque will require to have cleared by the due date in order to avoid penalties being charged. This policy will come into effect on 1^st April. This now means that irrespective of the date that the cheque is actually received by HMRC, the payment will only be considered to be on time if it clears on time.

In a press release, chartered accountants Kingston Smith said: “If you are posting a cheque to HMRC, you should allow enough time for the post to arrive and for the cheque to clear. With businesses now relying on HMRC’s efficiency to bank their cheques promptly, electronic payment methods are likely to look much more attractive.”

Kingston Smith’s VAT partner, Adrian Houston, actually pointed out the inequity between the processes for electronic payments and cheque payments as those paying electronically usually have a grace period of seven days following the due date whereas those paying by cheque will now have to make the payment seven days in advance.

Another change due to be implemented on 1^st April requires any businesses who have an annual turnover of £100,000 or more to file and pay their VAT return online from now on. This rule will exist even if the business’s turnover drops below this threshold.

Houston concluded: “Most of the traders paying by cheque after April 1st will be small in size and number [so] this new measure is likely to go unchallenged and HMRC will get its wish i.e payment by cheque will become a rarity.”

As we reach the end of the year, we are faced with the return of the 17.5% VAT rate. However, the Chartered Institute of Taxation (CioT) has issued a warning to all contractors and businesses that the VAT increase is not the only taxation change which will come into effect in 2010. The EU VAT package will also come into force on New Years Day and, according to CioT this will result in “big changes” to the taxation rules governing services provided across countries.

At present, for tax purposes, services are considered to be supplies wherever the supplier is based. However, from next year the services will be classed as having been supplied wherever the client’s customer is based.

The purpose of these changes is to put an end to businesses relocating with the sole aim of cutting their VAT bill.

Chairman of the CIOT’s VAT and indirect taxes sub-committee, Douglas Gordon said: “Any business which supplies or receives cross-border services needs to be ready for these changes. Most will be already have been contacted by their advisers but any that haven’t should seek advice straight away. The introduction of a general rule that the place of supply of services is where consumption takes place is sensible. In the process we have lost a number of areas of uncertainty, which will deliver significant benefits.

He concluded: “However, I fear that the changes will add to the administrative burden on many businesses. This is because the shift in the general rule means that national governments need statistical data on cross-border transactions in order to police them.”

The Forum of Private Businesses (FPB) is lobbying the government to include specified tax cuts within their pre-budget report on 9^th December. The FPB have recently surveyed all of their members and more than twenty per cent believe that the government should be focussing policies to relieve tax burdens on SMEs.

A number of changes have been suggested by FPB in their proposals to government. These include the creation of a national insurance holiday for businesses with less than ten employees alongside a delay in the implementation of the planned 0.5% NIC rise. They would also like to see corporation tax cut to 20%. They see this as a small concession by the government which could really benefit businesses.

VAT is another major taxation issue and the FPB would like the return of the 17.5% rate should be postponed to a more reasonable timescale. They also believe that VAT should be reduced permanently within labour-intensive sectors to just 5%.

Finally, they are asking that all small businesses are automatically enrolled for the Small Business Rate Relief as figures show that less than half of the businesses who qualify for this relief have actually applied for it.

Phil Orford, FPB’s Chief Executive, said: “There is still a long and difficult road ahead of us, but small businesses are key drivers of the economy and the Government must create a tax environment in which they can thrive. That means tax relief in specific areas that would help to foster cash flow, innovation and employment opportunities so that small businesses are able to seize the opportunities that will emerge as the economy emerges from recession.”

The rate of VAT was reduced to 15% at the height of the country’s economic downturn. At the time, the chancellor warned that it would revert back to 17.5% as soon as the economy showed signs of recovery. HMRC have now confirmed that this will happen on 1^st January 2010. This will affect the majority of businesses from the stroke of midnight at New Year. The only exception will be pubs and clubs who operate through the night. However, tax experts have said that such businesses can only expect a few hours grace period from HMRC before they will have to apply the full rate.

HMRC have issued guidance to support businesses through the transition of reverting back to the original VAT rate. It is expected that the change will cost businesses in the region of £125m.

Choosing to increase VAT on New Years’ Day has been met with criticism from business groups and economists alike.

George Bull, from accountancy group Baker Tilly, spoke to the Financial Times about the impending increase. He said that he believed that the VAT cut had failed to achieve an increase in consumer spending as had been hoped. He believes this is the reason why the reduction looks set to be cancelled at the turn of the year.

For many, it’s hardly surprising as recent indications suggest that the decrease barely impacted upon consumer spending. Although for campaigners wanting to postpone the imminent VAT rise, the refusal to prolong the period is seen as a significant disappointment.