New compliance requirements are often heralded as the dawn of a new era in which end clients would flock to the largest staffing companies because of their economies of scale and better compliance processes.
But when the dust settles, market newcomers end up outperforming their larger peers. Have users turned a blind eye to the new requirements or does it have more to do with the youthful zest of start-ups in the sector?
Perhaps neither. This contentment with cheaper, smaller staffing companies may be because end clients in the UK have not, historically, needed to worry about their staffing suppliers’ compliance — and for good reason. They usually had little to lose because most UK legislation relating to the use of contingent workers had very little real liability risk for end clients — nearly all tax, employment law and other regulation in the UK in this area targets intermediaries such as staffing companies, and (where relevant) personal service companies and umbrella companies, and not the end client.
Turning tide? While globalisation has helped larger staffing companies gain market share just by the virtue of being able to service the client in all countries they require, something else seems likely to push end clients toward “reassuringly large” suppliers: recent UK employment law proposals focusing on exploitation of vulnerable jobseekers. Sir David Metcalf (head of Labour Market Enforcement for the UK government) and others are now consistently arguing that the only way to clear up the UK staffing supply chain is to make end clients liable for what goes on in their labour supply chain — even if they are not aware of what is going on. This mirrors the approach in the Bribery Act and the Modern Slavery Act, but it could go much further.
Moving the burden. But more concerning for end clients are recent efforts to move tax noncompliance liability up the supply chain. After years of relatively ineffectual legislation against tax avoidance in the staffing supply chain, the UK has started getting its act together with the 2014 Intermediaries Legislation, which introduced chain liability where offshore or sole trader arrangements involving an intermediary were involved.
They went one step further with the April 2017 changes to the IR35 regime in the public sector, making end clients liable in certain circumstances where independent contractors operating through their personal service companies fail the so-called IR35 self-employment test. On top of that, the September 2017 Criminal Finance Act has made end clients criminally liable for failing to prevent tax evasion by key suppliers in their supply chain. Then there’s the November 2017 Enabling Legislation, which makes anyone who “enables” what turns out to be tax avoidance in their supply chain liable to the value of their share in resulting benefits.
On top of all this, it looks like the new IR35 regime will be extended to the private sector in April 2019.
Not just talk. The UK tax authorities have just issued a series of Regulation 80 determinations (i.e., tax claims) against end clients who have — usually completely unbeknownst to them — engaged contingent workers via what turn out to be offshore structures.
Further, GDPR now places obligations on end clients to make sure, on pain of huge potential penalties, that their recruitment partners are handling personal data lawfully.
Predictions. End clients will rate compliance more highly when selecting suppliers, and perhaps (fairly or unfairly) deciding larger suppliers are more likely to invest in the compliance steps. This will lead to market share growth for those suppliers. Further, I expect to see many end clients turning to independent auditors to check out their supply chains — tax indemnities may not be sufficient to cover liabilities under the new legislation. At some stage technology, including blockchain, will start helping with this burden.
I also suspect a reduction in tax-efficient supply models will lead to larger suppliers (who have generally avoided more aggressive schemes) appearing relatively more cost-effective, further pushing up their market share.
Finally, I think many suppliers will try to offset the loss of tax efficiency by offering (still tax-efficient) statement-of work-style supplies.
