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Is HMRC about to lose patience with recruiters?

Is HMRC about to lose patience with recruiters?

Asks Blake Lapthorn.

HM Revenue and Customs (HMRC) have tried to help businesses affected by the recession by introducing the Business Payment Support Service (BPSS). This enables businesses, with the agreement of HMRC, to defer payment of VAT liabilities, PAYE and national insurance (NI) contributions where HMRC consider the underlying business to be viable.

Of course, the reality may be that HMRC has little choice but to agree such proposals as the alternative is that the business may fail and then everyone loses.

The promise of a decision in ten minutes and a fairly extensive range of deferral options means that BPSS has been used by many recruitment companies.

A number of questions on BPSS remain, including how long will HMRC continue to allow deferral? What happens when the deferral period expires and the recruitment company is still unable to pay? And where a recruitment company goes into administration after stringing HMRC along, will HMRC be as tolerant of pre-pack administration sales straight back to the management as they have been in the past?

Latest news is that HMRC are not necessarily allowing repeat deferrals. They will ask: "has anything changed since the last deferral such that the taxpayer is becoming more likely to be able to pay the deferred tax?" They will also not allow deferral where there is no attempt made to improve the company's ability to pay deferred and further tax. These factors suggest that the winter may see insolvencies in the recruitment sector, with HMRC possibly not allowing cosy pre pack administration sales back to managers who have already deferred tax. Slow issue of VAT registration numbers to phoenix companies may also become a HMRC tactic.

This may have a knock on effect of allowing third party buyers a better opportunity than hitherto of buying third party contract books.

cashflow problems and MSP 'pay when paid' arrangements
The relatively poor credit ratings of some MSP/RPO companies and the increasing use by them of 'pay when paid' (PWP) clauses is causing problems for staffing companies: their factors and invoice discounters are beginning to refuse to lend against invoices where the debt is due from a MSP, especially where the relevant contract is subject to PWP.

All involved in the staffing industry need to find a solution to this problem fast. If staffing companies cannot get payroll funding they will often not be able to afford to supply to MSPs. Ultimately MSPs will end up in monopolistic master vendor roles (with no second tier suppliers) which may lead to reduced choice for end users, creeping increases in rates and possible competition law issues for MSPs by the OFT.

Blake Lapthorn is working with leading banks and staffing groups, and has developed a solution to this problem, but many 'older' MSP arrangements are still causing problems for staffing companies.

proposals to amend the Insolvency Rules
The Government has issued a consultation about revising the insolvency rules. The proposals centre around the giving of absolute priority to lenders of new money to the company after it has got into difficulties. This would mean that existing lenders would have their security interest limited to assets arising before the formal insolvency event. It should promote lending to companies which otherwise (eg because they are in administration) would not receive such finance.

On first review the impact of changes to the insolvency rules does not sound like something that should particularly excite the Recruitment sector. However, as an industry which is heavily reliant on invoice discounting and factoring the proposed changes may well have a significant influence on the ability of businesses experiencing cash flow problems to obtain new finance.
It remains to be seen whether factors and invoice discounters will object to the proposals on the basis that they will potentially allow the dilution of existing security.

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