Agency social workers who operate as their own companies could see their earnings hit under proposals to reform tax rules for public sector contractors, experts have warned.
Changes to so-called ‘IR35’ tax rules look likely to see more agency staff paying full PAYE and National Insurance, the same as permanent employees, rather than using their companies to pay corporation tax, a cheaper option that boosts their take-home earnings.
Recruitment agencies claim the changes could worsen the recruitment crisis in social work, with one telling the Treasury that staff who already feel “undervalued and underpaid” could quit the profession. Councils argue the proposals could “level the playing field” between permanent and agency social work, by removing a tax advantage they feel was unjustified.
Under the proposals, due to come into force in April 2017, HMRC will make whoever pays the contractors, in the case of agency social workers this will usually be recruitment agencies, responsible for ensuring workers operating as their own companies are paying enough tax. Contractors can currently make assurances that their companies fall outside of PAYE and NI rules and instead pay corporation tax.
If the changes go-ahead, recruitment agencies are likely to err on the side of caution in fear of falling foul of HMRC. This means most agency social workers would be taxed at source like employees, paying full PAYE and NI, and being left with less from their pay packets than they would under the corporation tax arrangements.
Jamie Trick, managing director of recruitment firm Sheldon Phillips, has written to chancellor Philip Hammond expressing concerns over the proposals after discussions with agency social workers.
In the letter, seen by Community Care, Trick wrote: “Contractors were adamant that this move forward being proposed by HMRC would push them to leave the sector.
“When asked why, the response was simple – social services are under such dramatic pressure, thanks to budget cuts and pressures in the sector, that they feel they are already undervalued and underpaid in some cases.”
Trick told Community Care he also feared that if firms such as his begin taxing social workers at source, some may be tempted away by less scrupulous recruiters offering to help them pay less tax. However, the “biggest issue” currently is that most locums simply don’t know about the changes planned, he added.
Tania Bowers, general counsel at recruitment firm industry body APSCo, echoed Trick’s concern that the changes could make it harder for authorities to recruit staff and said they could also lead to pressure on councils to increase fees for agency placements.
“In most placements, there isn’t that 13% National Insurance cost [factored] in there, so either the contractor will have to get a reduction in pay or the rates will rise to meet that,” Bowers said. “I don’t think it will be the agencies pushing it; I see it as a demand coming up from social workers.”
Local authority views
Nick Hollier, deputy director HR at Bexley council, said locums were a valued part of the workforce. But he questioned why, in addition to attracting higher basic rates than permanent staff to make up for the loss of benefits such as holidays and pensions, agency workers should also enjoy advantageous tax positions over permanent staff.
“Discussions around the IR35 proposals are ongoing,” he said. “We know we need to get into the detail of this, and discuss with agencies and staff themselves. But we think there’s an opportunity here to talk to our locum staff about the playing field becoming more level – and to communicate the advantages of being permanent.
“One challenge for all local authorities is to look at some of the reasons people went into the agency market in the first place. We’re working hard, as are other boroughs, to improve caseloads, management and supervision and to offer real benefits in terms of training and development [for permanent staff].”
In February, councils across London, including Bexley, announced an agreement between them to cap rates for agency children’s social workers in response to concerns over spiralling bills. Councils in other regions have made similar arrangements.
Rachael Wardell, chair of the Association of Directors of Children’s Services (ACDS) workforce development policy committee, noted that these memorandums of cooperation had already had some effect in improving workforce stability.
She said: “Each local authority faces its own challenges with recruitment and retention. The flexibility provided by the agency workforce can be useful. However the market needs to be effectively managed to ensure it provides a quality workforce which is good value for money and which does not destabilise existing services.
“Changes in taxation policy are driven by central government. We hope that committed social workers would remain in the profession despite these changes.”
‘A wake-up call’
One tax expert warned that whether agency social workers choose to stay on as contractors or move back to permanent roles, HMRC’s renewed focus in this area could have implications for professionals who have – for years in some cases – chosen to treat their companies as outside of the IR35 rules.
Tax consultant Kate Cottrell said: “What’s coming in April is potentially the biggest wake-up call they’ve ever had. If they haven’t considered their IR35 position properly, they need to be very concerned regarding what they’ve done in the past.”
Earlier this year, Community Care broke the news that hundreds of locum health and social care workers are being pursued for huge sums by the taxman after falling foul of managed service company legislation, another set of rules that govern how personal service companies can behave.
Cottrell warned that few social workers could consider themselves to be “categorically” outside IR35. With agencies now having to report to HMRC details of limited companies they pay gross earnings to, she said, the taxman will be likely to take an interest in companies that are subsequently deemed to fall inside IR35 as and when the rules change.
Contractors attempting to close down their companies had already been attracting HMRC’s attention, she said.
A more detailed picture as to exactly how and when the proposed IR35 changes will take effect should emerge after the Autumn Statement in November, she added.