Why the Apprenticeship Levy isn’t just an Umbrella Contractor’s problem
It might not top their list of concerns in light of so much going on this April, but the Apprenticeship Levy is not something that Personal Service Company contractors should simply dismiss as a problem for their Umbrella counterparts.
A bit like the off-on uncertainty over who’s liable for deciding IR35 status under the April 6th off-payroll rules, there appears to be confusion over the responsibilities for tax payments; including Employer’s and Employee’s NICs and income tax.
Why PSCs won’t like the Apprenticeship Levy
The imminent reforms mean that both agencies and end-clients are starting to consider how, and if, it will be feasible to payroll PSC contractors themselves. Where an agency is looking to work with a PSC in the public sector, they must look at how ALL employment taxes are processed if the PSC is deemed inside IR35
So what does this mean for the PSC contractor? There has been much speculation that contractors will be looking for an increase in their rate to cover these additional costs, with the daily contract rate received by the agency now having to account for the Employer’s NIC contribution at 13.8%, the Employee’s NICs at 12% and the income tax – quite a substantial figure if the contractor is looking to try and retain an ‘outside IR35’ take-home amount.
But it doesn’t simply stop there. If the agency decides to process the payments to a PSC via their own payroll, the agency could find themselves caught by yet another tax; the Apprenticeship Levy. If the additional numbers going via their payroll increases the total figure of those on their books to over the £3million mark, what we could see is further negotiations for rate changes to cover this half a percent levy. To clarify — the levy is to be paid on any earnings subject to Class 1 secondary (employer) National Insurance contributions and the responsibility lies with the secondary contributor for this purpose, so this means either the business closest to the PSC in the chain or the umbrella company — as the one deducting the employment taxes.
So to put this into perspective a contractor on £500.00 per day is likely to leave an apprenticeship levy bill of around £50.00 per month. The legislation, as it stands at the time of writing, prohibits the cost from being taken directly from the contractor’s monies.
What the law says
For those interested in the legal basis behind this, Section 109 Finance Act 2016 provides that the client must not:
(a) make from any payment of earnings any deduction in respect of apprenticeship levy for which it is liable;
(b) otherwise recover the cost, or any part of the cost, of its liability to apprenticeship levy from any person who is or has been a relevant earner, or
(c) enter into any agreement with any person to do anything prohibited by paragraph (a) or (b).
However legal experts believe that this provision is drafted extremely widely. So in reality, this may see rates drop for PSC contractors in order to cover this additional tax. For umbrella companies, this means that the contract rate, i.e. the monies received by the umbrella, will be deemed to make this payment in the same way that the Employer’s NI is currently applied.
What officialdom says
There is apparently no need to worry according to the Minister for Apprenticeship and Skills, “Apprenticeships are the cornerstone of the skills systems and provide opportunities for all sectors and at all levels.”
So the knock-on effect is that the additional increase leaves the larger agencies in a similar position to umbrella companies, whereby their payroll bill is artificially inflated because of the sheer nature of the business!.
When questioned about the possibility of creating an exemption for the likes of umbrella companies and recruitment agencies – those parties that are essentially providing a payroll function to enable contractors who don’t want to operate via a PSC — the reply from a representative of Personal Taxation within HM Treasury came:
“Creating exemptions for particular employers; or for the earnings of particular employees, would risk increasing complexity and undermine the simplicity that the government is trying to achieve.”
No exemption, no government understanding
In practical terms a lack of exemption means that the ‘bottom line’ somewhere, for the contractual parties, will have to give. We do not know whether this will be in the form of rate changes, margins having to be amended to take the figures into account or further contract rate deductions.
The government has shown a lack of understanding of the industry and the sheer disregard of the valuable temporary workforce that brings the niche contractor skills to UK businesses and to government departments.