How Do New Off-payroll Working Rules Affect Recruiters?
Published: 03/03/2020
Free trial
See for yourself how you can save time and money. Enter your details below for a free 30 day no-obligation trial.
The changes in the IR35 legislation have placed a major strain on contractors right from the start. The recruiters, on the other hand, were given a year to adjust. However, at the time this article, aimed at recruitment agencies, was written, the adjustment period is just days away from concluding. Moving forward, 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 the IR35 reforms come into full effect. Affecting contractors, organisations, and intermediaries since the day of their announcement, the changes in the legislation have become a highly controversial topic. However, despite calls to revoke these drastic adjustments, the government has refused to budge from its decision to implement them. On the other hand, it has offered an adjustment period for recruitment agencies.
It has announced that it will take a ‘light touch’ approach to extending off-payroll working rules in the sector, which should provide some reassurance to recruiters. However, recruitment firms were still strongly urged to carry out the preparations as planned. 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.
For recruitment agencies, the IR35 changes mean they will need to adjust their approach to contractors. Namely, they will need 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 gone unpunished for a year, allowing agencies to develop processes for determining the IR35 status of their contractors. It was also their opportunity to establish a qualification system moving forward.
The government unveiled a series of changes to address various concerns. It also aims to ensure a smooth and successful transition to the new IR35 rule. Here’s a recap:
There would be no penalties for mistakes related 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 will 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 to suspect criminal behaviour or fraud.
The government reaffirmed that the new legislation will apply only to services conducted from 6 April 2020.
The government will legally require clients to respond to requests for information regarding their size from the worker or agency. They will also be responsible for updating legislation to address concerns related to rules as they apply to offshore companies.
To summarise, this means that unless it is proven that the recruitment firms did not comply with the new IR35 legislation maliciously, they will not be punished.
The IR35 adjustment period granted to recruitment firms ends on the exact anniversary of the off-payroll legislation changes that were implemented on 6 April 2022. This means that from that date forward, intermediaries will be held accountable and penalised for non-compliance, just like the contractors. So, let’s discuss some of the key challenges that the IR35 changes present to the contractor recruitment market.
The main threat for contractor recruiters is that changes to IR35 legislation will result in a loss of candidates. Simply put, contractors who fall within the regulations will see a reduction in their pay. This might lead them to consider leaving 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 aware that this is an uncomfortable and stress-inducing situation for them. There is a chance they may not fully understand the changes and could be anxious about how to proceed. When discussing the legislation, focus on the positive aspects it brings, such as eligibility for holidays, pensions, and other benefits 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 that you create a list of contractors affected by the IR35 changes and develop a personalised approach for each one. If done correctly, not only will you retain the contractors, but you are also likely to strengthen your relationships and enhance future collaborations.
For the first year, the full responsibility for non-compliance had to be taken on by the contractors. Starting in April, the recruitment firms will also be held accountable. An accidental inaccuracy will result in a cost of 30% of the owed task. If it is proven that the agency knowingly supplied a contractor who falls within the IR35 as an off-payroll employee, the percentage will increase to 70%.
Not only will the fines be hefty, but they will also affect the agency's reputation with both contractors and clients. This brings us back to the previously discussed issue: the negative effects on contractor retention, resulting in lower income for the firm. It is important to remember that the contractor community has already established a database where companies are rated for their IR35 compliance processes.
Needless to say, recruiters desperately need to review their processes, especially regarding how to determine the status of contractors and how to proceed from there. We are not an IR35 advisor and therefore cannot provide legal advice on ensuring compliance. However, we are happy to discuss measures you can take to enhance communication with contractors and clients.
We’ve already discussed the necessity of communicating changes in procedures to the contractors and highlighting the positives that come with them. Your clients will also need education on this topic. The key issue with the IR35 isn’t the rules established by the legislation but rather the complex manner in which they are presented. Confusion breeds non-compliance. Furthermore, after the ‘light-touch’ period ends, employers are not free from penalties.
When addressing clients, you won’t need an approach as deeply personalised as the one you’d use for contractors. Unless the client has previously faced issues with off-payroll working rules, you will only require a brief explanation. Cover what the changes in legislation mean, how to proceed, and the consequences of non-compliance. Additionally, introduce them to the main factors that determine whether a contractor falls within IR35. Although these are largely the criteria your firm needs to consider, it’s wise to give your clients pointers on what your future decisions may be based upon. You will need a more individual and strategised approach for clients with prior IR35 violations. If that fails, you should consider dropping them as clients.
Since IR35 isn’t going away anytime soon, a logical step is to consider a partnership with an umbrella company. This would provide easy access to risk mitigation, lifting the concerns regarding payroll processing off your shoulders. Essentially, you would pay the umbrella company as you would a service provider, similar to how you pay a software vendor. The umbrella company would then pay the contractor under PAYE, taking an agreed percentage as their fee.
This approach frees the contractor from the IR35 since they would have an official employment contract with the umbrella company. However, this decision may also harm your contractor retention efforts if made too hastily. As previously mentioned, the umbrella company will charge a fee for having the workforce on payroll, affecting your margins. Similar to the situation with IR35, this means that the contractor will lose some money either on taxes or the aforementioned fee. Which of these 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 likely to lose money by partnering with an umbrella company, that may not be the best approach for your agency.
In conclusion, there’s a lot to consider regarding IR35. Even if you have been preparing diligently for when the changes come into full effect, we understand it can still be anxiety-inducing. Fortunately, many IR35 consultants are available. They can help alleviate some of that anxiety by reviewing your IR35 readiness for a fee. Additionally, most recruitment-focused software has also been adjusted according to the changes and can serve as a reliable companion in ensuring you stay out of trouble.
We have launched several features for Timesheet Portal to assist your agency following the IR35 reform. This includes the ability to record and approve work based on deliverables rather than time, addressing a key factor in determining whether a contractor falls under or outside of the legislation. This function will also be linked to the usual features that Timesheet Portal provides for time tracking, including consultant margin reports, invoicing, and self-billing.
We have also incorporated a module for income tax and national insurance deductions on contractor invoices, specifically for situations where a contractor is considered to fall within the IR35 rules. Your placements can be divided into smaller deliverables, or milestones, which your contractors will subsequently submit for approval. In other words, our solution has been updated in accordance with the IR35 regulations, and we’ve achieved this during the ‘light touch’ period. Therefore, it is a tested and reliable solution for when the new rules come into full effect.
The year 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 escape penalties for accidental non-compliance with the off-payroll rules. The fees imposed are intended to deliver a heavy financial blow. However, the damage to trust and reputation caused by breaking the rules is even greater.
There are still many uncertainties surrounding the change in off-payroll legislation. However, this doesn’t mean you have to navigate them alone. Numerous knowledgeable consultants can assist you in optimising your recruitment agency in line with the rules. Additionally, there are many excellent software solutions to help you stay on the right path.
We are not legal IR35 consultants, but we offer a business solution that supports IR35. Reach out to us 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.