Driver Require outlines IR35 legislation and its potential impact on the temporary LGV driving sector
April 2020 will see new IR35 regulations applied to the temporary LGV driving sector, which are set to have a drastic impact on the agency sector and the road haulage industry specifically. The gradually increasing shortage of LGV drivers is also set to become exacerbated by these events.
Kieran Smith, CEO of specialist driver recruitment agency Driver Require, discusses the effects that the implementation of IR35 will have on the temporary LGV driver sector and offers a tailored plan of action to ensure businesses are fully prepared for its rollout.
Although chancellor Sajid Javid announced in December that April’s scheduled IR35 rollout would be “reviewed”, Smith has called for the industry to continue planning for the rollout to go ahead as scheduled.
IR35 regulations define a list of criteria, which are then used to determine a worker’s employment status. Under the current rules for the Private Sector, the contractor is responsible for determining their own employment status and for paying the relevant tax and NI.
Should HMRC suspect that a contractor is avoiding tax through “false self-employment”, for example by working as a Ltd Company contractor, it must pursue the company director through court action to recover underpaid or unpaid tax.
Smith believes that such pursuits are not only “laborious”, but offer relatively little return. Furthermore, HMRC lacks the resources to pursue the large numbers of Ltd Company contractors that are active, with real action being non existent and unlawful Ltd Company workers continuing to avoid tax.
Under the new IR35 legislation, this is set to change. The end client will become directly responsible for determining the employment status of their agency workers. Should they wrongly determine the status of a worker, they then become liable for any underpayment of tax by the worker.
If the client correctly determines the agency worker to be within the scope of IR35, then the “Fee Payer” becomes responsible for deducting the relevant tax and NI contributions at source.
The change in legislation should, therefore, render it far easier for HMRC to take legal action against Fee Payers or end clients if necessary, preventing tax avoidance through the improper use of Ltd Company arrangements.
Small businesses will notably be exempt from from IR35 legislation when it is applied to the private sector.
However, while making tax avoidance for unscrupulous workers more difficult, Smith stresses that there will be a wider impact on the industry that businesses must prepare for.
Smith believes that the government permitting the use of Ltd Companies by agency workers for tax avoidance purposes has effectively subsidised agency labour costs by around 20 per cent over the last decade, meaning agency workers have become disproportionately cheap compared to full-time employees.
Smith told The Parliamentary Review: “This use has especially affected blue-collar workers earning between £25,000 - £40,000 per annum, as the cost of agency workers in this bracket has dropped below the cost of employing them full-time.
“These savings on direct employment costs, alongside lower Industrial and Human Relations administration and reduced reputation risks, has led to employers replacing their full-time staff with agency workers. Larger employers have outsourced not only the variable element of their workforce but also their ‘standard operations’, while the agencies they use have taken on a large quantity of stable work.”
In turn, as Smith explains, large-volume agencies have been able to decrease their margins.
“Large-volume agencies have been able to drop their margins by up to ten per cent by subsidising their variable work with the revenue gained from this easier, repetitive & stable work. This has further reduced the labour cost, per worker, to the end client.”
However, the rollout of IR35 is set to change this.
“IR35 will effectively raise agency labour costs by up to 25 per cent, which will raise the cost to the end client by around 20 per cent.”
This, Smith believes, will force employers who have outsourced their operations to agencies to rethink their agency policies and likely have to bring their standard operations back in-house.
Smith explains: “This hike in costs means employers who have outsourced their standard operations to agencies will reconsider their agency policy and, most likely, bring their "standard operations" labour needs back in-house — reducing their agency workforce to just what's needed to cover variability.
“Large-volume agencies affected by these worker movements will retain most of their costs, but for a much-reduced and more variable revenue base, so they'll have to increase their margins.”
Driver Require’s research suggests that this increase in margin could go up to an extra ten per cent of revenues, bringing large-volume agencies back in line with most small to medium-sized agencies.
“The result of this”, Smith explains “is that professional blue-collar agencies will be forced to raise their charge rates by up to 20 per cent and large volume agencies by up to 30 per cent.
“This effectively constitutes a government tax on Private Enterprises with none of this extra cost benefitting the workers or agencies. We expect to see reduced numbers of agency LGV drivers, with large volume, low-margin agencies returning to the traditional model of catering for clients’ variable and seasonal requirements, but at a higher margin.
“We also expect most professional blue-collar agency workers will migrate to PAYE, resulting in a level playing field where ethical & specialist agencies can compete fairly, growing their market share by providing superior services.”
The concern for Smith and for Driver Require, however, is that IR35 legislation will not be enforced stringently enough.
Smith said: “Should regulators, HMRC and the government not rigorously enforce IR35, it will tempt all parties to exploit tax avoidance methods to suppress costs. We could find ourselves in a marketplace where the unethical and unscrupulous operators have a competitive advantage over professional, ethical agencies — ultimately damaging the entire sector and the haulage industry as a whole.”
What Driver Require recommends is strict enforcement of the legislation to ensure swift transition a stable and fair marketplace, which will ultimately benefit the industry as a whole.
The firm has also put together its own tailored action plan, with steps that it recommends businesses operating within the sector take in order to prepare for IR35 rollout.
Outlining the plan, Smith said: “Firstly, hauliers must determine if they are a ‘small company’. If so, they will be exempt from the IR35 legislation, but they will still be impacted by the repeal of AWR Swedish Derogation and the need to determine Parity Pay Rates.
“We recommend, therefore, that hauliers work with their company accountants to formally determine their company size. The haulier is obliged under the IR35 Regulations to formally communicate their Company Size status to their agencies so that they are officially made aware of whether the haulier falls within or outside of the scope of the IR35 Regulations.
“If a haulier is a larger company, they will be subject to the IR35 legislation. In this case they must work with their HR team and employment law advisers to determine the employment status of each category of agency temporary worker they engage. Furthermore, for each category of agency worker, they must produce a Status Determination Statement, which is a formal and legally enforceable declaration.”
Smith adds that while IR35 is under review, businesses should not only plan for its implementation as scheduled, but also recommends that hauliers, regardless of company size status, should ensure they are prepared for the repeal of AWR Swedish Derogation, which will enforce Parity Pay Rates for all PAYE agency workers after 12 weeks on assignment.
Smith said: “The agency and the haulier need to work together to agree the Parity Pay Rates for parity agency workers. There is no clear-cut way of doing this, as most agencies use pay rate schemes that differ from those used by their customers.
“The objective is to ensure that, for a typical bundle of shifts in a given week, the agency worker will earn approximately the same income, inclusive of holiday pay, as a permanent worker for the same shifts.”
Once this is agreed, the agency can establish the cost of employment for its temporary workers, and then the haulier and agency can negotiate charge rates.
Smith explains: “Charge rates will be a compromise between the agency's need to generate enough margin over the total cost of employment of their temporary workers and the amount the haulier is willing to pay.
“If the result is increased charge rates, it is reasonable to expect the haulier to review and optimise its agency requirements, probably looking to reduce the size of its agency worker pool. This is likely to trigger the haulier to request the transfer of agency drivers to permanent roles.
“The agency should be prepared for this eventuality and have relevant terms agreed.”
There will undoubtedly be much to do for businesses to prepare for every eventuality when IR35 comes into force, but should the government take and enforce the legislation strictly, then it will do good for both them and the industry’s reputation and wellbeing in the long-term.