Emergency Budget spells tough times ahead for recruiters

By Ann Swain, Chief Executive, Association of Professional Staffing Companies

The doomsayers have been forecasting for months that the ‘emergency’ Budget would be apocalyptic in its consequences, heralding savage spending cuts and sharp tax rises. For once the doomsayers may be right. The reality of the Budget will be deeply unpleasant and the recruitment sector will share in the pain.

The burning question leading up to the Budget was: how much will the Chancellor cut public spending by? The £32 billion of spending cuts announced is eye-watering in its scale and will have a direct impact on recruiters who transact a lot of business with the public sector.

Just over 5% of the public sector workers are temporary workers. It’s logical to assume that temporary workers will be first for the chop, but what of the medium/long term use of temporary workers in the public sector? There is justification to be reasonably optimistic, however, rather than excessively gloomy.

The leaner public sector will inevitably experience spikes in workload, and with permanent hiring freezes in place, we could see greater use of contingent workers to cover lack of capacity when it arises. This could potentially benefit the staffing sector.

Apart from public sector spending cuts, the most headline-grabbing announcement at the Budget was the increase in VAT from 17.5% to 20%. This will have a significant impact on the recruitment sector.

Many of you will remember that the VAT staff hire concession was withdrawn in April 2009. Since then end users have had to pay VAT on the wages they pay their temporary workers in addition to the margin they pay recruiters. The application of VAT to temps’ wages has imposed a very significant additional cost on end users of temporary workers - £270 million in the first three years to be precise.

The further VAT rise at this Budget will add even more to the cost of using temporary workers. Many APSCo members supply candidates to the financial services sector, where businesses cannot recover VAT, so for those clients the VAT hike will hit particularly hard and may reduce demand for temporary staff.

For recruitment businesses themselves, the VAT increase will also be unwelcome news. Whilst recruiters can reclaim VAT, the rise will of course eat into cashflow. Coming at a time when many recruiters are finding it difficult to obtain finance, any further tightening in cashflow could put the survival of more recruiters in doubt.

One encouraging note for the recruitment sector was the announcement on National Insurance (NI). The rate at which employers have to start to pay NI will rise by £21 per week and 600,000 employees will be lifted out of the tax altogether. NI has with some justification been called a ‘tax on jobs’, so steps to mitigate its impact on employers should provide a boost to the jobs market, and by extension the temporary worker market.

The Budget has also reaffirmed the Coalition’s commitment to undertaking a review of IR35 - the test which is used to determine contractors’ employment status. IR35 has been notoriously problematic for recruiters to apply due to the difficulty in making a decision on employment status without being fully aware of working conditions on end user sites. We will know more about what the Government is proposing shortly, but APSCo’s will be aiming for an employment status test which is simpler and less costly to the recruitment sector.

This was a real curate’s egg of a Budget. The overall implications for the recruitment sector - specifically the cuts in public sector spending and the VAT rise - are negative. With the health of the recruitment sector enormously dependent on the jobs market, we must hope that the private sector recovery offsets the probable decline in demand for temporary staff in the public sector. At least with the increase in the NI threshold, the cost of taking on staff will fall, and with IR35 in line for the axe, recruiters do have something to rejoice about – even if the overall impression is a bad taste left in the mouth!