In April 2021, owners, MDs, and managers of recruitment agencies faced a new challenge: the update of the IR35 legislation. In this article, we will examine the main changes following the tax reform.
The changes to the UK’s IR35 tax legislation sparked significant uproar even before its implementation. The controversy was caused by shifting the responsibility for determining whether a contractor falls under IR35 onto the private sector employers.
As recruitment agencies operate on behalf of the client, this reform affects them directly. It indicates that they are now responsible for implementing procedures to identify contractors subject to the legislation. In this article, we will guide you through what it entails, emphasising the most important aspects.
IR35 is UK tax legislation designed to identify contractors who work through private limited companies (PSCs) but are essentially regular employees. Previously, these contractors had an unfair tax advantage over employees. They could reduce their overall taxable income by avoiding standard income tax, instead paying corporation tax and dividends tax.
IR35 was introduced to ensure that a contractor working for a prolonged period for a single client pays the same amount of tax as a regular employee.
The reason IR35 matters for recruitment agencies is their expected role as the party responsible for determining the contractor’s status. This means the recruitment agency will be liable to pay any unpaid taxes, penalties, and interest if the ruling is incorrect. They are also, therefore, accountable for any IR35-related documentation, such as SDS.
There are many essential yet complex aspects for recruitment agencies to consider when managing IR35. The stakes are too high to risk mistakes. But here are some tips to lessen the risks.
To comply, you need to educate yourself on all aspects of the bill. You must understand how each one impacts your agency.
These are the essential actions when working with contract roles:
An immediate assessment of whether a contractor falls under IR35;
Notifying the contractor and the employer of the decision, along with the rationale behind it;
Accommodating and resolving appeals and disputes that the contractor may have regarding the decision;
Informing employers that having contractors under an incorrect employment status may result in their being held responsible for the full repayment of the debt to the government.
Partnering with an umbrella company is an easy way to reduce your risks and avoid handling payroll. You pay the umbrella company like any other supplier, and the umbrella company will pay the contractor under PAYE.
Since the worker is on an employment contract with the umbrella agency, IR35 no longer applies. The downside is that unless the contractor’s gross pay is increased, they will end up with less pay after tax. Then, there will be further reductions to your margins as the umbrella will charge a fee for your workforce payroll.
IR35 is not absolute, and some of your clients may still be exempt from it. There are two main IR35 exemptions: the small business exemption and the non-UK client exemption. While the latter is quite straightforward, the small business exemption requires further clarification.
Small private companies are not obliged to make any IR35 determinations to keep their usual operations running. They will not face penalties for mistakes related to reforms. Although HMRC provided clear guidance on the requirements for this exemption, a specific clause causes 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.”
Essentially, this means that the responsibility for IR35 is determined by the size of the client’s business rather than the size of the agency.
A contractor subjected to IR35 regulations will find the situation unpleasant and stressful, as it will lead to reduced pay. As a recruiter, you should aim to help them prepare for these challenges and changes.
Firstly, they are likely anxious about what the future holds. Therefore, your top priority should be preparing them by informing them of what to expect. You should also reassure them by emphasising the benefits that IR35 offers: eligibility for holidays, pension, and other perks they wouldn’t have accessed before.
It’s advisable to plan ahead to identify which of your contacts will be affected by the IR35 regulations. This allows you to create a personalised approach for each. We strongly recommend investing in centralised digital storage containing the contractor’s information and contact details, enabling a smoother and quicker process of sorting.
Understandably, concerns arise about the changes that could make recruiters liable for contractor-related tax issues. Although a Finance Bill that followed shortly after alleviates some worries, it does not mean that recruitment agencies will remain unaffected by the recent changes to IR35.
There remains significant debate about the grey areas and contradictions caused by the legislative reform. Therefore, agencies must stay alert and closely monitor any updates and clarifications issued by HMRC.
Would you like greater clarity on IR35 and how your agency can adapt 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.