Staffing businesses and umbrella companies face a potential triple whammy of difficulties in the coming months, according to accountants and tax experts

Martin Holden, partner at accountants Saffery Champness, and head of its professional and consultancy services group, told Recruiter that a worst case scenario of a tougher HM Revenue & Customs regime, and a VAT increase, could see a growing numbers of insolvencies.

Holden warned of serious consequences for temporary agencies should VAT increase to 20%.

“Where an agency bills a client for £300, a 2.5% rise in VAT, has a negative impact on the agency’s cash flow, because this is an extra £7.50 that the agency has to pay over to the government,” he warned.

Holden said that recruiters who have taken advantage of HM Revenue Customs’ ’time to pay’ scheme, which allows companies additional time to pay, could be doubly hit. According to Holden, “the Revenue is revisiting all those arrangements, asking if it is necessary to continue with them.

“If you are a temporary recruiter, who is already using ’time to pay’ and there is a VAT increase, you could have to find a lot of cash.”

An HMRC spokesperson told Recruiter there had been “no change” in its policy of offering time to pay to new applicants, or on the criteria against which requests are considered. Reviewing existing agreements had always been a feature of the scheme’s operation, the spokesperson added. According to HMRC, there are 300,000 agreements in place.

Anthony Cork, director at accountants Wilkins Kennedy, told Recruiter that HMRC was taking a tougher line when specific companies had breached a time-to-pay agreement.

“They give you a month to pay 50% of the arrears and another month to pay the remainder. If you default on your payment plan, they will usually end up petitioning to wind up the company,” said Cork.

HMRC said: “There is no ’clamp down’ as such” on those who breach the terms of a time to pay agreement. “But HMRC “takes a very dim view” of such debtors, and “they should expect HMRC to take firm action to recover debt”.

Brian White, a tax partner at accountants Deloitte, told Recruiter that HMRC was also taking a harder line with travel and subsistence.

HMRC was enforcing existing rules, compliance testing, and carrying out in-depth reviews of members of the mobile workforce (contractors), umbrella companies, and staffing businesses, said White.

Umbrella companies, where they have “done a sort of phoenix owing a lot of money”, dispensations, and receipts were also under the spotlight. “If you are not properly advised you will get crushed by the general storm that is coming,” White warned.