How Do New Off-payroll Working Rules Affect Recruiters?

Author: Eugenija Steponkute
Published: 03/03/2020
off-payroll working rules

The changes in the IR35 legislation have put a major strain on the contractors right off the bat. The recruiters, on the other hand, were given a year to adjust. But at the time this article, aimed at recruitment agencies, was written - the adjustment period is days away from running out. From here on, you need to have a firm grasp of off payroll working rules and how to comply with them.

It’s now a matter of days until IR35 reforms rolled come into full power. Affecting contractors, organisations and intermediaries from the day of their announcement, the changes in the legislation became a highly controversial topic. However, despite calls for revoking the drastic touch-ups, the government wouldn’t budge in its decision of implementing them. On the other hand, it has offered an adjustment period for recruitment agencies.

It has then announced that it will be taking a ‘light touch’ approach to extending off-payroll working rules in the sector. Which should at least provide some reassurance to recruiters. However, the recruitment firms were still strongly urged to carry the preparations out as per plan. If your agency isn’t fully IR35-compliant yet - now is your last chance. In this article, we’ll help you understand the key off-payroll working rules and how to continue working within them.

How Does IR35 Affect Recruitment Agencies?

For Recruitment Agencies, the IR35 changes mean they will be needing to change their approach to contractors. Namely, they will be needed to implement correct taxation on candidates who fall under the legislation. Unlike before, the penalty will now be shared between the two parties.

Non-compliance from the recruiter’s side has been left unpunished for a year, allowing agencies to come up with the processes to determine the IR35 status of their contractors. It was also their chance to establish a qualification system moving forward.

What Does a ‘Light Touch’ Approach Mean?

The government unveiled a string of changes in a bid to address any concerns. It’s also aimed to ensure a smooth and successful transition to the new IR35 rule. Here’s a recap: 

  • There would be no penalties for mistakes relating to off payroll rules within the first year of the reform. Except in cases of deliberate non-compliance;

  • HMRC has reasserted that information resulting from changes to the rules would not be used to launch new investigations into personal service companies (PSCs) for tax years prior to 6 April 2020. Unless there is a valid reason for suspecting criminal behaviour or fraud;

  • The government reasserted that the new legislation will only apply to services conducted from 6 April 2020;

  • The government will legally require clients to respond to a request for information regarding their size from the worker or agency. They will also be responsible to update legislation to address concerns regarding rules as they apply to offshore companies.

To summarise, this means that unless it’s been proven that the recruitment firms did not comply with the new IR35 legislation maliciously, they would not be punished.

‘Light Touch’ Ends in April 2022

The IR35 adjustment period granted to recruitment firms runs out at the exact year mark of off-payroll legislation changes rolled out - 6 April 2022. This means that from that date onwards the intermediaries will be held accountable and be penalised for non-compliance. Just like the contractors. So, let’s talk about some of the key challenges the IR35 changes pose to the contractor recruitment market. 

Potential Talent Retention Issues

The main threat for contractor recruiters is that the IR35 legislation changes will cause a loss of candidates. Simply put, a contractor that falls within the regulations will have their pay reduced. And this may make them want to quit working with the agency that has adjusted its operations to be IR35 compliant.

The way to prevent this is through communication. You need to be empathetic towards the contractors and mindful of this being an uncomfortable and stress-inducing situation for them. There is a chance they don’t fully understand the changes and are anxious about how to proceed further. When speaking to them on a topic of the legislation, focus on the positives it brings. For example, eligibility for holidays, pension and other perks that would otherwise be unavailable. Ensure the contractors know you are on their side. And that you will do your best to help them adapt as quickly as possible.

We strongly recommend you make a list of the contractors who fall within the IR35 changes and build a personal approach to each. If done correctly, not only will you retain the contractors, but are likely to strengthen your relationship and better future collaborations.

Agencies Share Responsibility for Violations

For the first year, the full responsibility for non-compliance had to be shouldered by the contractors. Starting in April, the recruitment firms are going to be held accountable too. An accidental inaccuracy will cost 30% of the owed task. If proven the agency had knowingly supplied a contractor that falls within the IR35 as an off-payroll employee, the percentage will amount to 70%.

Not only will the fines be hefty, but also affect the reputation of the agency with both the contractors and the clients. That leads us back to the above-discussed issue - the negative effects of contractor retention. Therefore lesser income for the firm. It is worth keeping in mind that the contractor community has already launched a database in which companies are being rated for their IR35 compliance processes. 

Adjusting the Recruitment Agency to IR35

Needless to say that recruiters are in desperate need to review their processes. Especially when it comes to determining the status of contractors and how to proceed from thereon. We are not an IR35 advisor and therefore cannot give legal advice in terms of ensuring compliance. However, we are happy to talk about measures you can take to smoothen further communication with contractors and clients.

Notify and Educate 

We’ve already covered the need to communicate the change in procedures to the contractors, as well as introduce them to the positives it brings. Your clients will also need to be educated on the topic. The key problem with the IR35 isn’t the rules themselves the legislation imposes. It’s rather the complex way in which it’s laid out. Confusion is the breeding ground for non-compliance. And from the end of the ‘light-touch’ period, it does not free the employer from the penalty.

When addressing the clients, you won’t need an approach that’s as deeply personalised as the one you’d have for the contractors. Unless the client has had issues with off-payroll working rules before, you will only need a brief explanation. Cover what the changes in the legislation mean, how to proceed and what are the consequences of non-compliance. Additionally, introduce them to the main factors determining whether the contractor falls within the IR35 or not. Although these are largely the criteria for your firm to take into account, it’s a good idea to give your clients pointers on what your future decisions may be based on. You will need a more individual and strategised approach for clients that are guilty of previous IR35 violations. If that fails you should consider dropping them as a client.  

Consider Working with Umbrella Companies

Since IR35 isn’t going away anytime soon, a logical step for adjustment is considering a partnership with an umbrella company. This would be easy access to risk mitigation, additionally lifting the concerns regarding payroll processing off your shoulders. In essence, you would pay the umbrella company as you would pay a service provider. Similar to how you, for example, pay a software vendor. The umbrella company would then pay the contractor on PAYE, taking an agreed percentage off as their fee.

This approach frees the contractor from the IR35, as they would have an official employment contract with the umbrella company. However, this decision may also harm your contractor retention efforts if taken too hastily. As already mentioned, the umbrella company will charge a fee for having the workforce on payroll off your margins. Similarly to how it would happen with the IR35, this means that the contractor will be losing some money on either tax or the said fee. Whichever is more financially damaging will depend on the contractor’s gross pay. This is another reason why you should review your contractors individually. If the majority are bound to lose money if you partner with an umbrella company, that may not be the best approach for your agency. 

Adapting to the Change

All in all, there’s quite a lot to take into account when it comes to IR35. Even if you were diligently preparing for when the changes come into the full-throttle, we understand it can still be uncertainty-inducing. Thankfully, there are a lot of IR35 consultants available. They can alleviate some of that anxiety by reviewing your IR35-readiness for a fee. Additionally, most of the recruitment-aimed software has also been adjusted in accordance with the changes and can become a trustworthy companion in ensuring you stay out of trouble. 

IR35 and Timesheet Portal  

We have launched a number of features to Timesheet Portal that will help to support your agency post-IR35 reform. The list includes having the ability to record and approve work based on deliverables rather than time. It addresses one of the telling factors of whether the contractor falls in or out of the legislation. This function will also be linked to all the usual features that Timesheet Portal currently provides for time tracking. Namely functionality such as consultant margin reports, invoicing and self-billing.

We have also incorporated a module for income tax and national insurance deductions on contractor invoices. It is for cases when a contractor is deemed to fall within the IR35 rules.  Your placements can be split up into smaller deliverables, or milestones, which your contractors will then submit for approval. In other words, our solution has been updated in accordance with the IR35 regulations. And we’ve done it during the ‘light touch’ period. It is therefore a tested and trustworthy solution for when the new rules come into full power. 


The year given for the private sector to adjust its operations and processes to comply with the changes in the IR35 legislation has come and gone. From April 6, 2022 businesses and recruitment agencies will no longer be unpunished for accidentally non-compliance with the off payroll rules. The fees imposed are designed to land a heavy financial blow. However, the damage to trust and reputation breaking the rules causes are even greater.

There are still a lot of uncertainties surrounding the change of the off-payroll legislation. But this doesn’t mean you have to try and figure them out alone. There are plenty of knowledgeable consultants available to help you ensure you’ve optimised your recruitment agency in accordance with the rules. As well as there are many great software solutions to ensure you stay on the right path.

We are not legal IR35 consultants. But we have an IR35-supporting business solution.  Reach out today.

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.

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