The Recruitment FDs network hosted a live event where Amy Davies, MD at PGC Group, talked about how to enter the US market. As experts in this field, the PGC Group has a lot of valuable insight and data to help recruitment firms to successfully grow their businesses into the US. We were lucky enough to be provided with some of this insight, which we're happy to share in this article.
2024 is going to be an exciting year here at Skipton Business Finance. Last year, we made over £100m of working capital available to businesses within the recruitment sector to support their funding requirements and business goals. This year, we aim to make even more working capital available to recruitment businesses and are looking forward to continuing our strong relationship with Recruitment FDs.
Businesses make share plan awards available to their employees as a key strategy in retaining people in the business. Leaver provisions are a key part of any share plan; if employees could always keep their share awards with no consequences arising from leaving employment, then the retention impact of a share plan would be minimal. But how should these be structured, and how should a company deal with the situation when they do have a leaver?
What happens when an employee leaves the business?
When an employee leaves, there are three main possibilities on what might happen to their share awards:
they could lapse, either in full or in part, resulting in the employee losing their award and receiving no value for it;
they could become immediately exercisable (in the case of options) or immediately vest (in the case of other types of awards). This could apply to the whole award, or just a part of it; and
they could remain in existence, continuing to be subject to any performance conditions (for example they might have to be held until there is a future sale of the business).
For those employees entitled to retain some or all their award; commercial and tax factors will impact whether, for example, they are required to exercise their option within a certain period or hold it until a future date. For some tax-advantaged awards such as EMI, an employee who leaves the business needs to exercise their option within a certain period to ensure that the full tax benefits are retained. Although some companies will prefer an employee who is retaining their award to remain only as an option holder rather than becoming a shareholder at that point.
Does it matter why an employee leaves?
In many share plans, the treatment of a leaver will depend on the reason for the termination of their employment. Plans often distinguish between “good leavers” who might be treated generously, and 'bad leavers' who might lose their award entirely or be treated less favourably.
What constitutes a good and a bad leaver varies greatly between different companies and different share plans. In some cases, the definition of a good leaver will be very narrow, perhaps just encompassing death and being unable to work due to serious illness, injury or disability. In other share plans, the definition will be significantly wider, including reasons such as retirement and redundancy.
One of the most significant decisions is how to treat an employee who simply hands in their notice to take an alternative job with a different company. In the majority of UK share plans this would be treated as being a bad leaver. However, some share plans will allow such an individual to keep some element of their entitlement, often based on a vesting schedule. For example, 25% of an award might vest a year after it is granted, and the remaining 75% might vest over the next three years, with the award becoming fully vested after four years.
In some types of tax-advantaged plans, the reason for leaving employment can have an impact on the tax treatment of the award.
Should our leaver provisions be generous or strict?
There is no single right answer to this question. It depends in part on what the purpose of the share plan is, and also on what the expectations and demands of a particular company’s workforce are in order for a share plan to be motivating and attractive.
Share plans in private companies are often designed to encourage employees to stay with the business until a sale or IPO is achieved. In that case, a person who leaves the business before that event can often expect to lose their award entirely unless their reason for leaving falls within a very narrow category of a good leaver.
In some industries, particularly the technology sector which is heavily influenced by US practice, employees might expect more generous treatment and demand that they can keep their vested awards unless they leave due to a narrow category of bad leaver reasons such as misconduct.
From an employee’s perspective, ‘too generous’ leaver provisions may not have the intended impact of encouraging them to remain with the business. ‘Too strict’ provisions may be demotivating and even cause an employee to reject an offer of employment or leave the business to join a competitor with a more attractive share plan.
Can we have discretion on how to treat leavers?
Sometimes, the Board or Remuneration Committee of a company might have partial or complete discretion on what happens to a share award. Discretion can be useful, particularly for dealing with unusual or unexpected circumstances, but caution should be exercised for two main reasons:
having entirely discretionary leaver provisions may undermine the incentivising impact a share plan should be designed to have. Employees may feel uncomfortable if they don’t have certainty on how they would be treated if, for example, they had to leave the business due serious illness; and
for UK share plans operating under HMRC’s tax-advantaged share plan rules (for example EMI, CSOP, SIP or SAYE), the use of discretion can in some circumstances cause an award to lose its tax-advantaged status. This is not always the case, but expert advice should be taken when drafting the rules at the outset and any time a company is considering using a discretion that it has under those rules.
Can an employee claim compensation for a loss of their share award?
Share plans will almost invariably contain a provision stating that no compensation will be payable for the loss of any rights under a share plan on termination of employment. Successful claims for the loss of share awards are therefore rare. However, in some circumstances where there has been an unfair dismissal, or a breach of contract caused by the way in which the employer exercised its discretion to permit the exercise of a share option after termination, an employee could successfully bring a claim. While there is a cap on the compensation award for unfair dismissal, there is no such cap on damages for breach of contract. Expert advice from an employment lawyer should be sought where there are any concerns in this area.
Do we need to take action when someone leaves?
The first port of call is always to consult the rules of your share plan.
In some cases, particularly where a share award takes the form of a share option, the award may lapse automatically when an individual leaves employment and no action may be required by the company. In other situations, the company needs to take particular steps. This is almost always the case where the share award involves the employee actually holding shares, as if they are to forfeit their shares this will usually require some particular legal steps.
Acting quickly can sometimes be critical. For example, the terms of a share option might state that the award will lapse 90 days after termination of employment unless the board determine that it will not lapse. If the decision is not taken within that specified period, and any required steps completed, then any later decision to allow the individual to keep their award may be too late to protect any tax-advantaged status of the option.
If you would like more advice and guidance on share plans, please contact Martin Cooper, Partner or Charlie Barnes, Director Head of Employment Legal Services at RSM.
Recruitment FDs has partnered with Kingsbridge to provide comprehensive insurance packages for both you and your clients and their award-winning IR35 solution. Kingsbridge product offering allows you’ll be able to confidently and compliantly maintain those in your flexible workforce who are ‘outside’ IR35.
A recent survey of middle market businesses undertaken by RSM found that only 18% of companies offer employee share plans to incentivise and reward employees.
It appears that this is in part due to some misconceptions about share plans and how they operate, as well as perceived complexities for businesses who offer these arrangements.
Amidst announcements of cost-saving measures, could equity plans offer a solution for more recruitment businesses seeking to attract, incentivise and retain their top talent?
How share plans can help
Offering targeted incentives to key employees
There are a number of HMRC tax-advantaged share plans that can be offered to key employees allowing for bespoke performance and vesting conditions. Retaining and motivating employees in a recruitment business can present different challenges from many other sectors, and the ability to tailor these share plans to the particular needs of a business and its people is a key strength.
This includes the Enterprise Management Incentive (EMI), a share option plan offering qualifying companies the ability to grant options worth up to £250,000 per person (measured at the date of grant). Gains in value from grant can benefit from capital gains tax treatment.
Whilst already popular, HMRC have made a number of administrative changes to the EMI which can simplify its operation and also address a number of common issues we see arising on corporate transactions.
For businesses that have either outgrown, or otherwise do qualify for, EMI, HMRC’s alternative Company Share Option Plan (CSOP) also offers the potential for qualifying businesses to incentivise key employees with share options and capital growth.
The CSOP has benefited from even more significant changes, with the limit on the value of shares that can be granted increasing from £30,000 to £60,000 (also measured at grant), and widening the scope for the classes of share that can be used, making it possible to use non-voting shares or special classes ‘growth’ shares.
Some companies may not qualify for any of the HMRC tax-advantaged plans, however there are a number of alternatives that can be considered that also offer similar outcomes in terms of rewarding employees and driving behaviour. For example, non tax-advantaged share options, nil or partly-paid shares, growth shares, & joint share ownership plans can all offer recruitment companies a way of implementing an effective and tax-efficient share incentive plan.
As part of all-employee remuneration packages
Many employers offer a form of HMRC all-employee equity plan, such as a Save As You Earn (SAYE, also known as Sharesave), or a Share Incentive Plan (SIP). These must be offered on an equitable basis to all eligible employees.
The SAYE is a longer-term retention tool that provides employees with an opportunity to contribute savings on a monthly basis which can be used at the end of a three- or five-year savings period to purchase shares. Income tax relief is generally available provided the shares are acquired at least three years from the initial grant. The price employees pay to purchase shares can be discounted by up to 20% of the market value at the start of the savings period. It also allows for tax-free bonuses, based on bonus rates set by HMRC.
The SIP offers the ability acquire up to £9,000 shares per share, via:
· Free Shares: Free shares worth to £3,600 per tax year;
· Partnership Shares: Shares worth up to £1,800 per tax year can be purchased from pre-tax pay. Employers therefore can save on employers’ National Insurance.
· Matching Shares: Employers can offer up to 2:1 additional shares for each Partnership Share acquires.
Dividends paid on the shares can also be reinvested.
SIP shares are held in a SIP trust, and the most beneficial tax treatment (including, for example, capital gains tax free disposals) typically applies when shares are held in the trust for at least five years, again encouraging long-term retention.
Succession planning
Employee equity plans can be used as an effective means of succession planning.
This could include developing a new generation of leadership through targeted performance conditions, encouraging behavioural change as ownership is transferred.
Alternatively, an increasing number of companies now choose to adopt an employee-ownership model, via a HMRC Employee Ownership Trust (EOT). The most famous example of this ownership model is likely John Lewis, but ‘people businesses’ such as those in the recruitment sector have been behind a significant proportion of the growth in EOTs in recent years.
EOTs offer shareholders wishing to exit the business (whether in full or in part) a way to sell a controlling stake in the business to a trust, which holds shares on behalf of employees, free of any capital gains tax. Employees can benefit from income tax free (though not NIC free) bonus payments of up to £3,600 per year.
How can RSM help?
When structured and communicated effectively to employees, share plans can form an important part of the overall benefits and remuneration package in any recruitment business, encouraging long term retention and aligning employee and shareholder interests. They can be particularly effective in the recruitment space where commission-based short-term reward can be complemented with a share plan to align key employees with long-term value generation.
At RSM, our specialist Share Plans and Reward team can assist with all aspects of your share plan needs, including design, implementation, employee communications, and ongoing advice and compliance.
For more information, please contact Kerrie Willis or Martin Cooper.
So far this year, Skipton Business Finance has made over £100m of working capital available to businesses within the recruitment sector to support their funding requirements and business goals. This means that the recruitment sector is by far the largest sector that we support and has been for over 20 years. The availability of this £100m of funding has given many of our clients the ability to utilise that working capital in various ways, such as investing into expansion plans, increasing their marketing, recruiting the best talent for their business, and has even supported management buyouts and acquisitions.
The amount of funding that we have made available to the recruitment industry has increased year-on-year and we do not anticipate that this is going change anytime soon.
An example of where one of our recruitment clients has benefited from this funding availability is a £1.5m Invoice Discounting facility for a London-based recruitment firm, who were looking to hugely improve their inconsistent cashflow cycle, which was hindering them from developing the business. We’ve been supporting this business for over 6 months now and have developed a very strong partnership between the business’s financial director and his respective dedicated relationship manager.
How does Invoice Finance help recruitment businesses?
Getting immediate access to up to 90% of invoices the day a recruitment agency completes the work can give them the working capital and improved cashflow they need to take their business to the next level. This supports recruitment businesses by helping fund weekly temporary staff, taking advantage of early payment discounts from suppliers, keeping on top on HMRC payments and the ability to take advantage of opportunities in their marketplace.
The flexibility of our Invoice Finance facilities mean that they grow in-line with each business, meaning that no matter what size the recruitment agency is, their Invoice Finance facility will grow as their business does, allowing them the time to focus on delivering a world-class product or service to their own clients.
It is also particularly useful for businesses within the recruitment industry because generating working capital can support a range of business transactions common in the industry, such as business acquisitions and management buyouts.
With overpayments available to help with the smooth running of their business and fast decision-making due to close relationships with their dedicated Relationship Manager, we really do help accelerate a business owner’s strategic aims.
If you’d like to find out more about our Invoice Finance solutions and how we could help your business, please get in touch at info@skiptonbf.co.uk or visit our website.
Many companies talk about their culture, claim to invest in their people, and aspire to be a great place to work. But how do business leaders shape culture, to ensure this is a reality, rather than a checkbox activity?
Developing a great workplace culture takes effort, time and dedication to the cause. Changing behaviours that may once have been accepted as the norm is a task that requires careful consideration, usually some type of remedial action, and the adoption and embedding of new ways of working.
One example of how culture impacts is around setting expectations around performance. It is common practice and often necessary for managers to outline concerns if performance falls below the expected standard. However, as with all things, the reasonableness of the expectation and how that message is communicated is important.
If expectations are communicated well and areas for improvement are detailed and followed up, the experience and outcomes are likely to be more effective, both for the individual and the organisation. Even if this leads to more formal action, managers can be confident that they have taken a best practice approach.
For business leaders, reviewing company culture can be a daunting task. We list a few important starting points below.
Mind the ‘culture gap’: understanding what is currently contributing to a positive or negative culture is important so that areas for change can be identified. A good first step is to create a listening platform that provides the opportunity for people to speak up.
Data and insights: who better to highlight this to you than the people who are living it every day? Consider ‘stay interviews’ as a useful information gathering exercise, as well as exit interviews. However, remember that, if a culture is toxic, employees will be concerned about voicing their opinions. Information may need to be gathered independently or as part of a review possibly using surveys or other listening platforms
Effective information sharing: does one part of the business have a higher sickness absence or staff turnover rate than another? Identifying such patterns in management information can provide red flags and starting points for businesses to review their practices.
Root-level review: sometimes it is necessary to dig deeper and look for the root causes of issues. For some troubled organisations, culture change can take several years to stick. This often involves business leaders getting comfortable with feeling uncomfortable.
A thorough review of your company’s culture is essential to ensuring your values are represented in every aspect of the business and at every level. Businesses that are open to having transparent, open and sometimes uncomfortable conversations will see better outcomes.
‘With behaviour, workplace conduct and culture continuing to fill our newsfeeds, now is an excellent time for organisations to determine whether their culture properly represents their values’
Kerri Constable
If you would like to hear about how our experienced teams can help with shaping your organisation’s culture for the future, including a review of current practices, get in touch with Kerri Constable. Contact us | RSM UK
At Skipton Business Finance, we have been working with businesses in the recruitment industry for over 20 years, supporting their journeys and visions. In our venture to further support the recruitment sector, we joined up with Recruitment FDs as their first strategic partner in November 2022 and are proud to be working closely together to offer our support to recruitment businesses across the country.
Currently funding businesses of a combined turnover of £500m in the recruitment sector, we always felt that we understood the sector to an exceptional level and can see the challenges facing the sector in the coming years - from legislation to the emergence and development of technology such as AI. And because there is alignment of these challenges to that of the finance sector, we feel very much in a great position to not just empathise, but also to add value to the discussions that the Recruitment FDs Network facilitate.
Not only do we understand the importance and value that Recruitment FDs holds for us in improving how we communicate and support recruitment businesses, but we are also proud to give value back by being able to assist members of the network with making finance decisions.
We have also supported the network by offering advice and support on how to approach the finance needs of businesses in the sector and, in some instances, have been able to provide working capital for some members of the network, assisting those businesses to convert their unpaid invoices into cash which, in turn, provides them with a consistent and reliable source of working capital. In some cases, we have even been able to offer streamlined operations such as credit control to help reduce administrative burden and helping them focus on their core activities, such as sourcing talent and nurturing client relationships. We are proud to offer these services to the rest of the network.
Looking to the future, we are passionate about developing this relationship further and want to carry on supporting the network, along with other partners. Working closely with Paul, we are committed to building out the network across the UK. We see infinite possibilities for the network and are looking forward to seeing where this develops. Being a truly national operation is a more than achievable goal and we are proud to be a partner in that journey to support the recruitment sector.
Being responsible for the financial running of a recruitment firm means that you are heavily dependent on data to give you the trusted information you need to ensure company financial success. However, this isn’t always possible due to data challenges that are easy to spot, but hard to pin-down and resolve. Here are 3 common data issues encountered by Recruitment FD’s, and how to resolve them.
Spreadsheets are commonplace within Finance teams everywhere, and rightly so as a trusted operational tool. However, often they become the answer regardless of the question, which is especially true for reporting. Just because spreadsheets are good at holding data does not mean that they are ideally placed to handle your reporting requirements, for the following reasons:
· Reports within spreadsheets are often dependent on data from different sources that either has to be imported and then manipulated, or manually keyed in.
· These processes are often dependent on a small number of individuals who exclusively possess the knowledge
· The whole process must be repeated each week or month, for the latest version of the report
· Spreadsheet-based reports produced by multiple teams but from the same data sources can often lead to differences and unintentional discrepancies between these reports. This results in the need for reconciliation and explanations, underpinned by a general lack of trust
· Spreadsheets may only hold data for a given month or year, making historic year-on-year trend analysis very difficult
· Reports within spreadsheets are by their nature two-dimensional – rows and columns. This makes reports quite inflexible in that there are only two choices for how you want to report your metrics (with one of these commonly being time). It is difficult to ‘pivot’ this data easily without a lot of prior preparation
Whilst there is no single quick-fix to addressing all of these challenges, there are various steps you can take to significantly reduce the amount of manual reporting intervention needed:
· Consider automation tools
There are lots of tools that can automate a manual technical activity, performing it instantaneously and as frequently or repeatedly as required. This frees up time for other activities and eliminates any likelihood of human error. Automation tools include Zapier, Make (formerly Integromat), Power Automate and other RPA (Robotic Process Automation) tools like UI Path.
· Data-based extracts, not report-based extracts
If you’re running data extracts from your source applications to build a specific report, instead consider building data extracts based on subject areas (client, candidates, placements) – and use these as the single basis for multiple different reports. This reduces overall effort, provides more reporting flexibility and ensures that multiple reports consistently use the same underlying data.
· Spreadsheet-equivalent tools
Rather than assuming you have to use spreadsheets, there are other similar tools that can be used that offer additional tools and functionality not easily found in spreadsheets. Online database platforms like Airtable are a great way to build tables of inter-connected data, which you can also supplement with alerts, triggers, online forms and email automations. Also, powerful reporting tools such as Microsoft Power BI or Tableau can be used to provide a powerful dedicated reporting capability separate to your spreadsheets
Linked to the prior issue is the common mistake where you hear people asking or talking about the data that they think they want, rather than the actionable insight they need to support the business outcomes that they’re responsible for.
If you hear a business conversation where someone is asking about the mechanics of how they get data (for example, “have you got this month’s sales data”), then there is a fundamental problem.
In an ideal world, the delivery of timely, accurate and actionable data should be given, and would prevent such requests. The types of question you should be hearing is “Who are our best clients that give us profitable repeat business?”. Sounds easy, but how do you deliver this? There are 4 simple steps:
· You start at the end with these ideal questions as they are referring to the business outcomes that you’re trying to achieve. Any report or data extract that isn’t ultimately supporting a business outcome is a waste of time and effort
· For each desired outcome, state what is the actionable insight that you would need to produce this (using the example above: the ability to interrogate a list of all clients, by consultant, including placement details, activities, revenues, and associated costs for the last 5 years). Sketch out the story of what screens or reports you’d ideally need, and how you’d need to move and flow between them (such as “drilling down” into more detail of a selected client)
· Break this down into the individually related information domains that you need to query (client, placement, staff etc.)
· Finally, build data extracts with all the detailed columns of data needed, that support each of these specific information domains – so that you can query, join and manipulate the data together
Another common issue is the unnecessary limitation of financially based reporting that does not include non-financial (operational) data. Many finance reports come directly (and only) from your financial application platform (e.g. Xero, Sage etc.). There is a goldmine of additional, useful data that exists in other application data systems such as your CRM or candidate management system. Including data from these other sources would help unlock a deeper understanding of your financial performance:
· Staff performance. Staff / consultant details (HR data including grade, experience / time within the business, L&D activities, recent performance/review scores and so on)
· Placement complexity to fulfil. Additional placement details (CMS data either based on the type of placement, the seniority or niche specialism of the role, or salary expectations and working arrangements)
· Client cost to serve. Additional client details such as how much effort does it take to work with theme, do we have payment challenges with them, and what’s the likelihood of additional work?
· Candidate quality, supply and demand. What types of viable candidates are you able to source for these placements? What type of candidates are more likely to apply for and succeed in which types of placements?
From this type of analysis, you may find that only certain types of senior contract niche placements are profitable in the long-term, or that staff who haven’t taken a particular training course often take longer to convert roles. These types of conclusions are only possible by combining both financial and operational data together to provide the actionable insight needed.
Use the recommendations from these three topics to identify the data and actionable insight that you actually need, irrespective of where the data comes from, and automate the underlying processes as much as possible. The result is higher quality actionable insight that adds business value, which is efficiently and automatically produced on a repetitive basis.
Dave Sheppard is the founder of POB Enterprises and specialises in providing Data Strategy services and solutions, including a recruitment-specific Data Audit offering
David Williams-Richardson, employment solutions expert, highlights the details behind the government’s proposals to tackle non-compliance in the umbrella company market and what practical steps businesses in the recruitment sector can take to prepare.
On 6 June 2023, the government issued a new consultation titled ‘Tackling non-compliance in the umbrella company market’. But it would be a mistake to assume this is only of interest to umbrella companies as it could impact any organisation that supplies or hires temporary staff or is in a chain with contingent or off-payroll labour.
The document sets out options for future regulation in the supply chain, covering both employment rights and tax. The closing date for responding is 29 August 2023. The document is a hefty 54 pages in total and includes 52 questions, plus a summary of responses to the November 2021 call for evidence, which closed in February 2022.
Background
Umbrella companies remain a very popular payroll service for temporary workers, contractors and staffing agencies in the UK. Estimates suggest that more than 500,000 people, ranging from nurses and teachers to care workers and consultants, now work through umbrella companies, with some reports suggesting that there are around 800 operational umbrella companies in the UK.
Why regulate?
While most operators in the sector are compliant, umbrella companies have received bad press over recent years around issues including disguised remuneration schemes (such as the contractor loan arrangements), national insurance contributions evasion, denying of holiday pay and abuse of the VAT flat rate scheme. The consultation document also refers to misuse of VAT reliefs and joint employment schemes, which the government see as on the increase.
HMRC’s Fraud Investigation Service is actively using both its civil and criminal powers to challenge those involved in mini umbrella company fraud and has deregistered hundreds of mini umbrella companies who it believed were involved in one or both of the following:
exploiting the VAT flat rate scheme; or
exploiting the employment allowance.
When issuing the consultation document, the government explained that they, ‘want to encourage a flexible, dynamic labour market, but this aim should not be achieved at the expense of workers. New ways of working must lead to fair outcomes for workers while guarding against abuse of the new systems by fraudulent participants.’
The objectives of the consultation are therefore focused on delivering improved outcomes for workers, to protect against loss of tax and NIC revenue and to ensure that there is a level playing field for those involved in the labour supply chain.
The key proposals in the consultation document cover:
regulation of umbrella companies for employment rights purposes, including enforcement standards and models;
mandating due diligence, a requirement for recruiters or their clients to undertake mandatory due diligence on umbrella companies, with penalties if they fail to do so;
transfer of tax debt that cannot be collected from an umbrella company to another business in the labour supply chain, including potentially the end client; and
deeming the employment business to be the employer, treating recruiters as the employer for tax purposes and holding them responsible for any irregularities in payroll, even if they used an umbrella company to perform.
While no specific dates for change are mentioned in the consultation document, in view of the level of concerns raised it is feasible that draft legislation could be issued towards the end of 2023, with legislation introduced in the Finance Bill 2024 with an April 2024 start. Any delay beyond this could be impacted by the pending general election and a potential change of government.
Most umbrella companies are unregulated, unless their activities bring them under the scope of the regulations which apply to employment agencies and recruitment businesses. Concerns were raised following the government’s call for evidence, that a minority of umbrella companies are actively non-compliant with employment rights obligations (for example, withholding holiday pay entitlement) and that workers do not have the means to enforce their rights.
The government is therefore proposing to tackle this non-compliance by introducing regulations containing the minimum requirements that umbrella companies must comply with. The initial areas of focus would be handling of pay and holiday pay, removing the practice of additional services being a condition of engagement with the umbrella company, and a positive duty to pass on the Key Information Document provided by the employment business.
The consultation sets out three key proposals for tackling tax non-compliance.
The government is considering the introduction of a mandatory due diligence requirement, which would be the obligation of either an employment business or the end client using the services, with penalties applying to those that do not comply. The document states that the government would support businesses by providing guidance, setting out due diligence principles and how to demonstrate compliance. However, there is a lack of detail around many features including what checks would be included and how frequently these would need to be undertaken.
The second option is to legislate to give HMRC the power to collect an umbrella company tax debt from another business in the labour supply chain, in specified circumstances. It is expected that this would be similar to the arrangements already in place in relation to the off payroll working (IR35) legislation. However, the scope could be extended to cover additional tax such as VAT.
Introducing debt transfer provisions would likely encourage employment businesses and end users to be more selective about the umbrella companies they contract with. The question is to whom the debt would be transferred; the employment business which supplies the worker to the end user or someone else?
The third option would deem the employment business that supplies the worker to the end client to be the employer for tax purposes. This option would require a party further up the labour supply chain, for example the agency contracting with the end client, to operate PAYE on payments to contingent workers.
Whilst this option would likely have a substantial impact on much of the non-compliant tax behaviour in the umbrella company market, it would undoubtedly result in considerable disruption and additional administrative and financial burden in the temporary labour market.
As an inadvertent consequence, this option could encourage a lack of VAT compliance by removing VAT charged by umbrellas to employment businesses. This will need careful consideration, with perhaps implementation of a new domestic reverse (self) charge, as was recently introduced across the construction sector.
Recruitment agencies and end-users who engage contingent labour, should ensure that they fully understand the proposals and should consider responding to the questions in the consultation document before the deadline of 29 August 2023.
Agencies should also consider proactively approaching end clients to discuss the proposals in the document now and to seek their views. It is likely that many end clients will look to change their approach to sourcing contingent labour to minimise their own risk and administrative burden based on these proposals. Agencies who start dialogue early will be best placed to adapt to changing client needs and requirements.
Finally, agencies should discuss the potential implications of these proposals internally across all departments. For example, if a mandatory due diligence obligation is introduced who will be responsible for this and will additional resource be required? If the employment business is deemed to be the employer for tax and NIC purposes, will your existing payroll team be able to manage and how will such an obligation impact margins?
In summary, it is likely that change is coming soon and those in the recruitment sector who start to plan now and discuss the proposals with end clients will have a distinct advantage.
To discuss the potential impact for your recruitment business, please contact David Williams-Richardson.
Based on publicly disclosed deals, 2022 was an exceptional year for merger and acquisition (M&A) activity in the recruitment sector. Continued strong performance from the second half of 2021 led to a surge in seller appetite and a return of buyer confidence in the sector.
We take a closer look at the key trends witnessed in 2022, including the growing influence of private equity with record amounts of ‘dry powder’, the importance of overseas buyers, and which sub-sectors are proving attractive to buyers.
Looking to the year ahead, we consider how the market is already shifting and what recruitment businesses can do to prepare for future market conditions. Our corporate finance partners, Jonathan Wade and Clodagh Tunney, specialists in the recruitment sector, give their guidance for 2023.
We also highlight the economic backdrop behind these changing market conditions and the outlook for 2023. Our UK Economist, Tom Pugh, analyses fluctuations in the macro economy that are influencing market conditions and impacting M&A activity in the sector.
For further information and to discuss how this may impact your recruitment business, please contact Neil Thomas, Jonathan Wade, or Clodagh Tunney.
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With the recruitment sector buzzing with new technology, it can be easy to get distracted by shiny bells and whistles. In reality, many tools are just that; a distraction.
Whilst some innovations can add real value, they also have the potential to overwhelm consultants and hinder productivity and creativity.
So, how can recruitment leaders navigate this tech overload?
Here are some strategies to streamline your tech stack and boost operational efficiency.
Take out the trash: It goes without saying that before you purchase new tech, it makes sense to assess the tools you currently have in your stack and cut the ones that you aren’t using. When I did this, I was amazed to see just how many different technologies we had acquired over the years, and more shockingly, just how many weren’t being used!
Embrace a Unified Tech Stack: Most systems act more like a dysfunctional circus than a well-oiled machine! One tool is as helpful as a banana peel on a slippery floor, whilst another seems to enjoy playing pranks more than actually getting the job done. When products don’t integrate effectively it’s no surprise that consultants don’t engage with them in the way you’d want. Search for a product that is multifaceted and fixes more than one problem.
Chase the value, not the price: While it may be tempting to opt for cheaper tools in an attempt to save costs, you should also consider the long-term value they provide. A tool with a lower price tag might seem like a bargain, but if it doesn't deliver the desired functionality or integrate well with existing systems, it could end up costing you more in the form of lost productivity and frustrated employees. Instead, focus on the value a tool brings to your recruitment process in its ability to streamline operations, enhance productivity, and drive positive outcomes.
It’s not a beauty contest, but looks do count: These days, users have come to expect a certain standard when it comes to the look and feel of a tool. Whilst functionality is, of course, super important, you shouldn’t underestimate the power that a well-thought-out and well-designed system can have on user engagement. If you want to drive usage from consultants, invest in something that they will want to engage with.
In the fast-paced world of recruitment tech, it can be easy to feel overwhelmed but remembering these golden rules will hopefully make the process a little less painful.
Cut the clutter, prioritise worth over wallet, and invest in unified tools that consultants genuinely want to use.
Hire Genius is a unified recruitment platform designed by recruitment leaders, bridging the gap between powerful tech and keeping things simple.
Contact Matt Cope, Founding Sales Executive at Hire Genius.
We spoke to a North-East based recruitment business, about their experience with us and how the flexibility of their Invoice Finance facility has supported their business journey. Andrew, Head of Finance at the business, was happy to talk to us about their experience with their Invoice Finance facility over the last two years.
Established since 1998, the business provides temporary, permanent and bespoke managed service solutions to business across the UK. The business provides services to industries such as warehouse distribution, e-commerce and automotive and has seven offices across the UK, from Aberdeen, all the way down to Bristol.
The start of the journey…
The business started their journey with Skipton Business Finance in 2020, when they were looking for a new funding partner during the pandemic.
Andrew said: “When the opportunity was presented in front of Skipton, they acted really quickly and the onboarding was really straight forward.”
The business initially started with an £6m Invoice Discounting facility, which enabled a steady cashflow so the business could navigate as usual, without the burden of late payments. As they were already a very established and growing business, Invoice Discounting was perfect for them as they did not require external credit control.
The perfect stepping stone…
After going from strength to strength and requiring less need for funding, the business left the Invoice Discounting facility and moved onto a £2.5m LedgerLite facility.
LedgerLite is an Invoice Finance solution from Skipton Business Finance which allows businesses to gain access to a larger proportion of up to 50% of their sales ledger upfront each month.
Andrew told us why LedgerLite was the perfect solution for them as they look towards the future of self-funding:
“LedgerLite is an ideal solution for businesses moving towards becoming self-funding. LedgerLite provide a contingency funding facility which can be utilised as and when required,”
“It provides a business with a funding option to exit Invoice Discounting in a controlled fashion.”
The SBF Experience…
The business has been with us since December 2020. On reflection of the partnership, Andrew tells us about their experience with us, from their initial meeting, up to now.
“I can’t praise Skipton highly enough,”
“They have been like a breath of fresh air from the first moment that we met them, to the point we’re at now,”
“The initial expectation at the time was that Skipton may be a bit small for a deal of that size, but I think it’s important for people to realise that, actually, Skipton can compete against anybody, and the real beauty of Skipton is the experience and expertise of the people at Skipton.” Andrew added.
Looking towards the future…
The business continues to grow from strength to strength, offering their excellent service to businesses across the UK. With their sights set on the future and becoming self-funding, Skipton Business Finance is proud to support this journey.
This is one of many businesses we have been able to support in a crucial part of their journey and, in doing so, have helped them get one step closer to self-funding. We are always proud to see businesses grow in strength with us by their side.
If you would like to find out more about how our solutions could support your business or your clients, please contact us at 0800 085 150. Alternatively, you can drop us an email at info@skiptonbf.co.uk.
SMEs are showing an appetite to become more sustainable and adopt CSR, but face barriers due to economic uncertainties - does this show signs of more selective criteria for SMEs when a choosing a lender?
For the last few years, the focus of business owners has non-surprisingly been on surviving the ever-changing economic climate. Although the state of the economy is still uncertain, more and more businesses are beginning to return to pre-covid practices and seeing more and more normality return to their sectors. With priorities now being less focused on survival and more on growth and development, SMEs are beginning to prioritise sustainability and ESG as part of their business model but are being held back by economic uncertainties.
In a recent survey by the British Business Bank, results showed that a third (33%) of SMEs said they were making their business more environmentally sustainable, with a further 15% stating that it is something they want to improve. In a recent survey conducted by Skipton Business Finance on their client base, which covered UK-based businesses from a range of sectors, including recruitment. The results also showed that a third of businesses had already made or were currently making changes to be more sustainable.
Although SMEs are trying to prioritise ESG, 67% of those surveyed by British Business Bank said that current economic conditions were the top obstacle for them becoming more sustainable. Other reasons included ability to make changes to premises, access to external finance and availability or relevant advice. Similarly, in the research conducted by Skipton Business Finance, results showed that although 77% are feeling optimistic about 2023, many cited their concerns, including the uncertainty and lack of confidence in the current economic climate.
Influence on lending criteria
Of the SMEs that are prioritising sustainability as part of their business plan, 60% of these stated their main reason for this approach was to fulfil Corporate Social Responsibility (CSR), according to the British Business Bank. This suggests that it is not only a preference to be more sustainable as a business, but a policy which many are aiming to adopt.
With this in mind, it opens up the question of whether SMEs are being more selective with their lenders when looking for a finance product. More specifically, are they looking for a sustainable lender? What are the top priorities of businesses when looking for a lender and how highly does ESG rank?
We all know that there are numerous incentives and grants available to support a business’s own transition to, for example, zero and ultra-low emission vehicles. According to research by the British Business Bank, 11% of SMEs – roughly 700,000 smaller businesses – have accessed external finance to support net zero actions and 22% are prepared to access external finance to do so within the next five years.
But the specific question we are asking is: do businesses categorise ESG when choosing their financial partners in terms of how sustainable those lenders are?
For example, in 2022, the Skipton Group (which includes SBF) successfully cumulatively reduced single use plastic waste by 83% versus 2019 levels and in that very year accelerated several plans put in place that transitions the Group to net zero.
Would facts like this persuade a recruitment business to be more inclined, or more comfortable, to choose a lender knowing that they have an ESG strategy in place?
Skipton Business Finance also formed a charitable partnership strategy with charities Menfulness and The Pink Ribbon Foundation in addition to a donating a sizeable pledge to the Disasters Emergency Committee’s Turkey-Syria Earthquake Appeal to support urgent relief efforts. In fact, the Skipton Group’s charitable donations in 2022 was £1.2m.
Analytics would suggest that more and more businesses care about their own businesses becoming sustainable – to help protect the world we live and to be more charitable to those less fortunate than ourselves – but also more trends are emerging to suggest that those very businesses also care about the sustainability credentials of their supply chain.
Therefore, the question is: do recruitment businesses consider these increasing ESG frameworks when choosing an appropriate lender? When does this become a key requisite?
Governments and competition authorities are increasingly focusing on employment practices which can potentially have negative impacts both on employees and the labour market generally.
This article considers the importance for employers to continue to ensure that they not only comply with employment laws but that they also remain vigilant in relation to competition law at the same time.
At the beginning of this year, the FTC issued a proposal for a new rule banning non-compete clauses in employment contracts across the United States on the basis that they harm workers and inhibit competition. The new rule would apply both prospectively and retroactively and would: (1) prevent employers from entering into non-compete clauses in employment contracts; and (2) require employers to inform current and former employees that existing non-competes are invalid. The rule is currently in a consultation period and, if passed, is not expected to go into effect until the end of 2023, at the earliest.
The FTC suggested that the proposed rule is necessary because “non-compete clauses reduce competition in labour markets” resulting in the suppression of “earnings and opportunity even for workers who are not directly subject to a non-compete.”
The FTC's proposal has come against the backdrop of concern from federal government in the United States for many years, including in 2021 when President Biden signed an Executive Order encouraging the FTC to ban or limit non-compete agreements. Some states, such as California, North Dakota and Oklahoma, already prohibit the enforcement of non-compete clauses and agreements against their residents, irrespective of where the employer is based.
In the United Kingdom, post-termination restrictions, including non-compete clauses, have to date been governed by common law, meaning the principles of enforceability have been developed through case law over many years. Broadly, case law provides that a non-compete will not be an unjustifiable restraint of trade and will be enforceable so long as it goes no wider than is reasonably necessary to protect the employer’s 'legitimate business interests' (for example, trade secrets or client connections).
However, in a similar vein to the United States, there are indications that there may be some change on the horizon regarding the enforceability of non-competes over recent years. At the end of 2021, the UK Government launched a consultation on reforms to non-compete clauses in employment contracts, seeking responses to two alternative measures on reform, being: (i) banning non-competes; or (ii) requiring employers to pay employees for non-competes. In doing this, the Government explained that they were "exploring avenues to unleash innovation, create the conditions for new jobs and increase competition" following the pandemic. The consultation also asked whether similar reform should be applied to other types of post-termination restrictions, such as non-solicitation and non-dealing clauses.
While we are still waiting on the outcome of the consultation, it does at least indicate that the Government may be contemplating a broad overhaul on the law on restrictive covenants. This marks a shift from how the law on restrictive covenants has historically developed.
In February this year, the CMA published guidance materials to remind employers of their legal obligation to avoid collusion and to comply with competition law. The guidance reiterates that there are three main types of anti-competitive behaviour to consider:
no-poaching agreements, where competitors agree not to approach or hire each other’s employees, including where the consent of the other company is required;
wage-fixing or benefit-fixing agreements, where competitors agree to fix employees’ pay or other employee benefits, such as agreeing the same wages or setting maximum caps on pay; and
sharing sensitive information about employee terms and conditions between competitors, which can reduce competition in terms of recruitment and retention.
Businesses that are found to have infringed competition law can be fined up to 10% of a group's annual worldwide turnover. Individuals participating in anti-competitive behaviour can also face disqualification as a director for up to 15 years and, in extreme cases, criminal sanctions.
In its guidance, the CMA emphasised the following key recommendations for businesses:
understand how competition law applies to no-poaching and wage-fixing agreements;
don’t agree with a competitor to fix wages;
don’t agree with a competitor not to approach or hire each other’s employees;
don’t share sensitive information about your business or employees with a competitor;
provide recruitment staff with training on competition law and how it applies in the recruitment context; and
ensure solid internal reporting processes are in place, and that staff are aware of these and how they can use them.
It is likely that the scrutiny of employment practices by competition authorities will continue to increase.
understand how competition law applies to no-poaching and wage-fixing agreements;
don’t agree with a competitor to fix wages;
don’t agree with a competitor not to approach or hire each other’s employees;
don’t share sensitive information about your business or employees with a competitor;
provide recruitment staff with training on competition law and how it applies in the recruitment context; and
ensure solid internal reporting processes are in place, and that staff are aware of these and how they can use them.
Mishcon de Reya LLP is a law firm servicing an international community of clients and providing advice in situations where the constraints of geography often do not apply. The work they undertake is cross-border, multi-jurisdictional and complex. In times of such far-reaching and profound change they want to be the law firm that enables their clients - and their own people - to shape the world’s possibilities.
In the digital age, data is often referred to as the new oil - a valuable resource that, when utilized effectively, can drive significant growth, innovation, and competitive advantage for businesses. Yet, just like oil, raw data in itself is not particularly useful. It must be refined, processed, and presented in a useful manner. In the context of data, this transformation is facilitated by the practice of data centralization, an essential step in leveraging the power of Artificial Intelligence (AI).
Data centralization involves collecting and consolidating data from various sources into a single, accessible location. This data unification makes it easier to maintain, manage, and utilize the data effectively. For businesses looking to leverage AI, data centralization is critical. It forms the backbone of AI systems, enabling them to 'learn' from this data and make intelligent predictions and recommendations. Without centralization, valuable data may be left siloed in different departments, severely hampering the effectiveness of AI applications.
Non-technical leaders play a crucial role in driving data centralization within their organizations, even if they are not directly involved in the technical aspects. Let's examine three to five immediate steps that non-technical leaders can take to harness the power of data centralization for AI:
Step 1: Recognize and Advocate for the Importance of Data Centralization
The first step is for leaders to understand the value of data centralization and its impact on AI capabilities. By learning about its benefits, leaders can become effective advocates for data centralization in their organizations. Encourage team members to break down data silos and share knowledge across departments. This doesn't require technical expertise, just a recognition of the importance of data and a willingness to facilitate collaboration.
Step 2: Encourage a Data-Driven Culture
Create a company culture that values data-driven decision-making. This can be achieved by regularly communicating the importance of data, setting key performance indicators (KPIs) that emphasize data usage, and recognizing individuals or teams that use data effectively. As a result, employees at all levels will be more likely to support data centralization efforts, and the use of AI will be more readily accepted.
Step 3: Define Clear Data Governance Policies
Clear data governance policies are essential for successful data centralization. These policies should clarify who is responsible for data management, how data is collected and stored, and how privacy and security concerns are addressed. By setting these policies, non-technical leaders can ensure that their data is managed effectively and ethically.
Step 4: Invest in the Right Infrastructure
Investing in the right data infrastructure is a crucial step toward data centralization. This could involve transitioning to cloud storage, investing in a data warehouse, or purchasing data management software. While non-technical leaders may not make these decisions themselves, they can work with their technical teams to identify their data needs and allocate the necessary resources.
Step 5: Provide Training and Support
Even with the right infrastructure in place, data centralization can only be achieved if all employees know how to properly collect, store, and use data. Non-technical leaders can support their employees by providing the necessary training and resources, and by encouraging ongoing learning and development in this area.
The road to data centralization can be complex, especially for organizations that have traditionally operated with data silos. However, by recognizing the importance of data centralization, fostering a data-driven culture, defining clear data governance policies, investing in the right infrastructure, and providing necessary training and support, non-technical leaders can play a crucial role in unlocking the power of AI in their organizations.
If you're a leader striving to make these changes, it's crucial to remember that you're not alone in this endeavour. It is important to recognise where your organisational capabilities are lacking and work to plug these gaps in this digital and AI age with the expertise to help guide you.
At Intercor, we specialize in providing insights and solutions for CFOs of recruitment businesses looking to increase their valuation multiple through technology.
As CFOs of recruitment businesses, you're always looking for ways to increase your business's valuation multiple. One often-overlooked area that can have a significant impact on valuation is your technology landscape. A well-managed and modernized technology landscape can not only improve your operational efficiency but also increase your business's overall value.
Here are some things to consider when looking at your technology landscape and its potential impact on your valuation multiple:
1. Modernization and Integration
One of the most significant factors that investors and acquirers consider when evaluating a business's value is its technology infrastructure. Outdated or poorly integrated technology can be a red flag, while modernized and well-integrated systems can be a significant advantage.
Investors and acquirers look for businesses with streamlined workflows, automated processes, and well-integrated systems. By modernizing your technology landscape and ensuring that your systems are properly integrated, you can increase your business's valuation multiple.
2. Cloud Migration
Cloud migration is another area to consider when looking at your technology landscape's potential impact on valuation. Cloud technology offers significant advantages, including scalability, flexibility, and cost-effectiveness. Businesses that have migrated to the cloud have seen significant increases in efficiency and operational effectiveness, which can translate into a higher valuation multiple.
3. Data Analytics
Data analytics is another critical area that can have a significant impact on your business's value. Having access to real-time data and analytics can help you make informed business decisions, improve operational efficiency, and identify opportunities for growth. By leveraging data analytics, you can demonstrate to investors and acquirers that your business is well-positioned for success, increasing your valuation multiple.
“With the age of AI upon us, many businesses do not have the relevant data quality to avail of this game-changing technology” - Brad Dowden - Founder of Intercor and The CIO Circle.com
4. Cybersecurity
Cybersecurity is becoming an increasingly important consideration for investors and acquirers, particularly as cyber threats continue to grow. Having a well-implemented and comprehensive cybersecurity strategy can be a significant advantage when looking to increase your valuation multiple. By demonstrating that your business is well-protected against cyber threats, you can increase investor and acquirer confidence in your business's overall value.
If any of these points resonate with you and you’d like to explore how we can help you feel free to book a call with us.
At Intercor, we specialize in providing insights and solutions for CFOs of recruitment businesses looking to increase their valuation multiple through technology.
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Diageo's 110-page 2022 ESG report is an informative illustration of the importance of environmental and social governance (ESG) considerations in today's world of business. In the post-pandemic world of extreme weather events and political and civil unrest, these issues have never been more prominent, which is evident in the mergers and acquisitions (M&A) market. This should be of great significance to any business considering their future M&A prospects. In 2021, PwC's Private Equity Responsible Investment Survey concluded that 72% of respondents reported that they always screen target companies for ESG risks and opportunities at the pre-acquisition stage. It is therefore imperative that business leaders take ESG and their business' purpose strategy seriously.
Putting ESG considerations at the heart of your business planning could not only be beneficial in the context of M&A transactions, but has many other associated benefits. This article looks at the benefits of taking ESG seriously at the outset and how it can impact the value of a company.
Creating value and managing costs
ESG strategies can create opportunity which could attract short-term investors such as private equity funds looking to identify opportunity to realise value. For example, a company with better ESG credentials may be less likely to experience work-related incidents or environmental claims which could materially reduce its insurance premiums and legal costs.
It can also create substantial value in the long term. For example, since global consumer conglomerate 3M introduced its 'Pollution Prevention Pays' programme in 1975, it has stated that the programme has saved the company nearly $1.5 billion USD and eliminated more than 3.5 billion pounds of pollutants. Substantial cost savings have also been seen in the water utility industry where companies have reduced water waste significantly by improving preventative maintenance along their pipelines.
Raising capital
The rise in popularity of the ESG agenda has had an impact on raising capital. As credit ratings agencies such as S&P and Moody's have incorporated ESG and climate considerations into their credit analysis and ratings, aiding investment decision-making, we have witnessed a rise in sustainability-linked finance. The associated financial instruments, such as sustainability-linked loans, incentivise borrowers by tying pricing, such as interest rates, to meeting certain sustainability targets. Since its entry into the market in 2017, it has been reported that the sustainability-linked finance market has grown to over $1.6 trillion globally.
In the context of M&A transactions, positive ESG credentials could therefore also result in cheaper financing options for prospective buyers. On the other hand, selling underperforming ESG companies may become increasingly difficult as funding options become more burdensome and costly.
Mitigating legal risk and regulatory considerations
The legal risks associated with poor ESG management are far-reaching and potentially very costly and time consuming for a business. According to a Grantham Research Institute et al.'s policy paper, the number of climate-related legal cases has more than doubled since 2015 with the total number of cases in their database reaching 2,002 as at June 2022. Although these larger climate-related group lawsuits are more likely targeted at governments and global market leaders, this trend could trickle down to companies of all sizes. It is also important to bear in mind that ESG issues might not always respect corporate boundaries, with cases such as Okpabi v Royal Dutch Shell Plc suggesting that parent companies may owe a duty of care to those negatively impacted by the actions of a subsidiary.
In addition, regulators in the UK and globally are cracking down on ESG issues, with Germany's new Supply Chain Due Diligence Act imposing obligations on companies to adequately understand human rights issues along their supply chain. The UK's Competition and Markets Authority has also been investigating brands such as ASOS and Boohoo for greenwashing. Any potential buyer will want to ensure that a business has avoided legal action historically and has suitable processes in place to avoid it in the future.
These legal risks will be highlighted during a buyer's due diligence process and could materially impact a buyer's appetite for a particular business. It could also lead a potential buyer to demand other contractual protections such as extensive ESG warranties or specific indemnities.
Modern trends and reputation
The constant media interest in the activities of climate activists – and their targets – means it is increasingly difficult for decision makers in businesses to ignore ESG considerations. Grant Thornton demonstrated in an Event study that regulatory fines levelled at 24 UK-based PLCs in the financial industry equalled 0.045% of market cap on average when compared to the reputational losses of 5.49%. This is likely to be equally relevant to private companies as consumers increasingly pay closer attention to their ESG credentials and update their shopping habits accordingly.
Investor and other stakeholder engagement
Investors are increasingly focusing on ESG metrics when considering where and how to invest their money and time. Other stakeholders, such as employees, customers and suppliers, are also putting pressure on companies to formulate and implement successful ESG strategies. Increased support and engagement from these stakeholders can lead to a positive change in the culture of a company and may drive value from an M&A perspective as buyers consider how the completion of a merger will impact their own ESG efforts.
For example, ensuring a company has creditable ESG measures in place can assist with attracting and retaining talent. EY recently reported that 74% of Gen Z, 72% of Millennials and 62% of Gen X are 'very likely' or 'likely' to leave their current employment for an organisation whose reason to exist has more meaning to them.
In practice we are witnessing a shift towards non-financial as well as traditional financial metrics being taken into account in business valuations. The findings of the 2022 Edelman Trust Barometer suggest that 88% of institutional investors subject ESG criteria to the same scrutiny as operational and financial considerations. Therefore, to maximise value, it is therefore important for businesses to utilise and harness this fact in the lead up to and throughout the M&A process.
Mishcon de Reya LLP is a law firm servicing an international community of clients and providing advice in situations where the constraints of geography often do not apply. The work they undertake is cross-border, multi-jurisdictional and complex. In times of such far-reaching and profound change they want to be the law firm that enables their clients - and their own people - to shape the world’s possibilities.
RSM UK’s economist, Tom Pugh, examines the economic trends behind market conditions impacting the recruitment sector.
CPI Inflation
We anticipate inflation will continue to fall over the rest of this year. It will likely reach 9% in March – as the fall in commodity prices and shipping costs over the last six months works its way through to prices for food and core goods – and reach around 2% by the end of the year.
Wholesale prices suggest that the CPI inflation rates for electricity and natural gas will slump to about -10% by the end of the year, from their 65% and 129% rates in January. The stabilisation of global agricultural commodity prices over the last six months suggests that food CPI inflation will fall to about 2.5% by the end of this year, from 16.7% in January.
UK recession
The UK has avoided falling into recession by the skin of its teeth, but the worst is yet to come. There are clear signs that the economy has deteriorated over the last few months; GDP fell by 0.5% in December after growing by 0.1% in November. The combination of double-digit inflation, the huge rises in interest rates over the last year and less fiscal support means households real disposable incomes are set to shrink sharply in the first half of this year. That will lead to falling consumer spending and a shrinking economy. As a result, we think the recession has just been delayed, rather than totally avoided.
Of course, narrowly avoiding a recession doesn’t change much on the ground. But a milder recession would mean that unemployment rises more slowly, wage growth stays strong and domestically generated inflation falls at a slower pace than expected. This could result in the Bank of England (BoE) raising rates by more than expected.
We continue to think that GDP will drop substantially in Q1 and Q2. The Government has temporarily stopped paying cost of living grants to low-income households in Q1 and will substantially reduce its energy price support in Q2. What’s more, consumer confidence is still near record lows, which will prevent households from lowering their still high saving ratio.
Meanwhile, the Monetary Policy Committee’s rapid rate hikes have dramatically increased the cost of external finance for corporates, who mainly have floating rate loans.
However, the recession we expect in the first half of 2023 will be mild by historical standards. We expect this recession to see a peak-to-trough drop in GDP of roughly 1%. That would be roughly half the size of the early 1990s recession, significantly smaller than the Global Financial Crisis (which had a peak-to-trough drop in GDP of around 6%), and a fraction of the pandemic, when GDP fell by a massive 22%.
Admittedly, the recent collapse in wholesale energy prices suggests that households’ real expenditure will be picking up in the second half of this year and dragging GDP up with it. But the big picture is that the economy could be no larger in 2025 than it was in 2019, before the pandemic.
Vacancies and unemployment rate
There are now some reasonably clear signs that demand for labour is starting to weaken. Vacancies continued to fall, dropping by another 76,000 on the quarter in December, the seventh consecutive fall. Most surveys of employment intentions suggest that vacancies will fall rapidly over the next few months.
However, at just over one million last month, job openings remain well above their pre-pandemic average. For now, it appears most firms are adjusting to weaker economic activity by putting hiring plans on ice, rather than making redundancies.
We expect vacancies to continue to fall sharply over the next year as firms reduce their demand for labour. The recession will also raise unemployment levels but, given the surge in the number of people on long-term sick leave significantly reducing the workforce, the unemployment rate is likely only to rise around 5%, a historically low figure, especially during a recession.
Employment
However, the big issue is still the huge number of inactive eligible workers –- those who have removed themselves from the workforce. Admittedly, inactivity levels have fallen slightly recently. But the inactivity rate was still near its recent high and the shortfall of workers compared with pre-pandemic levels remains sizable, at 280,000. What’s more, there were 843,000 working days lost because of labour disputes in December 2022, which is the highest since November 2011. It will be extremely difficult for economic growth to rebound strongly without getting more people into work.
Pay growth and inflation
The tight labour market means growth in regular pay (excluding bonuses) was 6.7% among employees in the three months to December 2022, up from 6.4% in November. This is the strongest growth in regular pay seen outside of the pandemic period – that is, miles above the 3% - 3.5% that’s consistent with the 2% inflation target.
However, it’s not quite as bad as it looks. Average regular pay growth, which the MPC cares more about, was stable at 7.3% and the single month measure dropped sharply in December, suggesting that momentum is waning. Pay growth has probably peaked now. The slowdown in hiring will lead to less churn in the job market, easing the pressure on businesses to pay more to retain staff. However, the Bank of England will want to see concrete signs of easing wage growth before they consider pausing the tightening cycle. That probably won’t be until Q2 this year as the labour market lags the real economy significantly. As a result, the MPC is likely to hike rates by another 25 bps in March, taking rates to 4.25%, where it will probably press pause.
Given soaring inflation, in real terms over the course of the year, regular pay fell by 2.5%, a near-record drop.
For further information and to discuss how this may impact your recruitment business, please contact: Neil Thomas
RSM provides unique insights to the UK’s Middle Market: Home Page - MMBI (rsmuk.com)
For any queries contact: members@recruitmentfds.co.uk | 01483 338 320
