Increased Taxation - how will this affect Recruitment Agencies and their Contractors?

The announcement of enforcing HST to property, services, and goods will be effective July 1^st, 2010 and now the question is how this will affect Recruiting Agencies in Ontario. More specifically, Contractors in Ontario.

My first impression having limited background in this topic is that Agencies will primarily take the burden of increased taxes.

From an Agency perspective, margins aren’t like what they used to be. The Recruitment Industry grew exponentially in the 90’s, driving margins down significantly. Now in 2010, margins are slim and HST has the potential to knock out the “little guy”. As the little guy, they cannot afford to take on the burden and the expectation is that the client won’t absorb these added costs.

Will this then be transferred to the Contractors to absorb? Rates have started to increase after the lull from 2008/2009. Market trends show that rates will eventually increase although with HST in affect, will Contractors now be expected to pay more.

My thought is that Agencies will primarily pay the burden for the first while, and this will then be transferred to the Contractors. Agencies will look to Contractors to pay for the burden and while the market remains competitive for candidates, can they afford not to?

I am very interested in your thoughts.

Thanks,

Neha

Comment by Tom Sweeney on June 2, 2010 at 11:02am: Neha - interesting blog post. I think you've got a good discussion going on here. I think the answers to your questions will depend on the candidates you are speaking about. My firm in particular deals with a range of seniority when it comes to the positions we staff. Our more senior consultants have their own incorporated companies and indeed will be responsible for covering the burden associated with HST. Whether they want to take this into affect when it comes to setting their per diems that is up to them but I would caution consultants from doing so. The more they make the more they will be taxed right? Consultants should also be able to see that while the market is improving and rates are on the rise - there are still a lot of people on the street looking for work that are willing to take a lower rate to get back in the game.

In terms of the younger consultants out there who get processed as a temporary employee, the company will indeed be accepting the HST burden. I can invision a scenario where some firms simply won't work with temp employees in the future as the tax implications are going to increase. They will look to work with sole proprietors or incorporated resources to avoid paying these burdens....