In April 2021, owners, MDs and managers of recruitment agencies were served a new challenge - changes in the IR35 legislation. In this article, we will be diving into things that became crucial to consider post tax reform.
The changes in UK’s IR35 tax legislation have caused a massive uproar before it even came to in April 2021. The controversy arose from the fact that responsibility for determining whether the contractor falls under IR35 or not now lies on the private sector employers.
Since the recruitment agencies act on behalf of the client, this reform means that they are now responsible for implementing procedures that identify contractors who fall under the legislation. In this article, we will guide you through these procedures, highlighting the most critical moments.
What is IR35?
IR35 is a UK tax legislation, the purpose of which is to identify contractors operating as private limited companies (PSCs), but in reality, working as a standard employees. In the past, these contractors would often have an unfair tax advantage over employees as they were able to reduce their total taxable pay by not paying standard income tax, and instead paying corporation tax and dividend tax.
IR35 was created to ensure that a contractor who is working for long periods for a single client will still pay the same amount of tax that a standard employee would pay.
1. The Essential Checklist
In order to comply, you must educate yourself on the major and minor details of the bill to understand how each affects your agency.
The actions that are absolutely mandatory when working with contract roles:
- An immediate determination of whether a contractor falls under IR35
- Informing the contractor and the employer of the decision as well as the reasoning behind it
- Accommodating and addressing appeals and disputes the contractor may have with regard to the decision
- Informing the employers that having contractors under an incorrect employment status may lead to them being held responsible for full repayment of the debt to the government
2. Umbrella Companies
Partnering with an umbrella company is an easy way to mitigate your risks and allow you to avoid processing payroll. You pay the umbrella company as you would pay any standard company supplier, and the umbrella company will pay the contractor on PAYE.
Since the worker is therefore on an employment contract with the umbrella agency, IR35 no longer applies. The downside however is unless the contractor’s gross pay is increased, they will end up less pay after-tax, and there will be further cuts from your margins as the umbrella will be charging a fee for your workforce payroll.
3. IR35 Exemptions
An important thing to know is that IR35 is not absolute and some of your clients may still be exempt from it. There are two major IR35 exemptions: the small business exemption and the non-UK client exemption. While the latter is pretty self-explanatory, the small business exemption calls for further detailing as it has sparked many questions.
Small private companies are not required to make any IR35 determinations to continue normal operations, nor will they be penalised for reform-related mistakes. While the HRMC gave clear pointers as to what the requirements for this exemption are, there was a specific clause causing confusion:
“The conditions about size only apply to clients. If you are a small-sized fee-payer you will still be responsible for applying off-payroll working rules.”
This in essence means that it’s the size of the client’s business that determines who's responsible for IR35 and not the agency size.
4. Communication is Crucial
A contractor falling within the IR35 regulations will likely find it as unpleasant and stress-inducing as your organisation, as it is likely to result in reduced pay. As a recruiter, you should aim to help them to prepare for these changes.
First of all, they are likely confused and anxious about what the future hold. Therefore, your number 1 priority should be preparing them for moving forward by letting them know what should be expected. You should also ease their mind by focusing on the benefits the IR35 offers: eligibility for holidays, pension and other perks they couldn’t have had before.
It’s best you prepare to determine in advance which of your contacts will go under the IR35 regulations, so you can tailor an individualised approach to each. We strongly recommend investing in centralised digital storage containing the contractor’s information and contact details, for smoother and quicker sorting.
Summary
Understandably, changes that would make recruiters liable for contractor-related tax issues raise many concerns. While they’re slightly alleviated by a Finance Bill that followed soon after, it still doesn’t mean that recruitment agencies won’t be affected by the most recent changes of IR35.
There is still a lot of discussion going on with regards to the grey areas and contradictions posed by the reform of the legislation, therefore agencies must remain vigilant and keep an eye on reform changes and clarifications posted by HMRC.
Would you like more clarity on IR35 and how can your agency adjust to it? Let’s talk.
Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal / financial expert in this area before acting on any of our advice.
