Since the end of February this year, there has been a steep incline in Google searches surrounding the IR35 changes coming into play this spring. Companies across the UK are wondering what the changes are and how they affect their businesses.
Here we help to outline what IR35 is, the rules that are being introduced as of 6 April 2021, and how the changes affect the UK recruitment industry.
IR35 is tax legislation designed to ensure that contractors, who deliver their services to end-user clients in a manner that is akin to an employee, pay broadly the same Income Tax and National Insurance contributions as employees.
New legislation has been introduced, which is called the 'off-payroll working' rules. This is a change that was already introduced into the public sector in 2017 and is now being implemented in the private sector. The changes were due to be implemented in April of 2020 but were delayed due to the pandemic.
The new legislation means that the obligation to assess a contractor’s employment status is moving from the individual contractor to the end-user client and the liability to make PAYE income tax and National Insurance contributions moves to the “fee payer” (usually the agency who pays the contractor).
According to HMRC, the rules apply to:
If the above criteria applies to you, from 6 April 2021, you may have to pay the appropriate employment taxes.
Please note, small end-user clients are exempt from the IR35 changes. This means contractors engaged by small businesses will continue being responsible for determining IR35 — even if the contractor is hired via a recruitment agency.
An end-user client is classified as a small business if you meet two of the following criteria:
The small company exemption does not apply to recruitment agencies, only to end-user clients.
It is down to medium and large businesses to figure out whether or not IR35 applies to any of their current “off-payroll” contractors, i.e. contractors not employed/otherwise engaged via PAYE by the business.
Businesses must provide a status determination statement (“SDS”) to the contractor and other intermediaries, including recruitment agencies. They must include their reasons for the status determination. It is down to the end client to determine the status. A client needs to take reasonable care in making the determination, otherwise they become liable for any underpaid tax and national insurance.
So as a recruitment agency, even if you're in charge of paying contractors, the responsibility for determining their IR35 status remains with the end client, as they're better placed to establish the employment status.
Suppose the contractor is determined to be inside IR35 (and by 'inside', we mean the service the contract provides is classed as employed rather than self-employed). In that case, your recruitment agency will be required to deduct and pay over to HMRC PAYE income tax and National Insurance contributions from the contractor’s pay, along with employer National Insurance contributions and possibly, apprenticeship levy on the contractor’s gross pay. You'll pay the remainder, the net amount to the contractor's limited company.
What happens if the contractor is found to be ‘outside’ IR35? ‘Outside’ means the contractor is operating as a genuine business, meaning they’re not classed as an employee. They continue as before; they’re responsible for paying their own tax.
If your recruitment agency is the fee payer for a contractor found to be ‘inside’ IR35, you will need to work alongside the contractor to decide whether to appeal the status determination. It is then up to the end client to respond to any status appeals.
This new legislation exists to put a stop to contractors reaping tax benefits where they are operating as “disguised” employees. It was reported by BDO that only around 10% of PSC owners were assessing their status as employed and operating PAYE/NIC on fees received according to HMRC.
The most obvious benefit for recruitment agencies is knowing you're compliant. Being compliant means, you're reducing your risk of HMRC enquiries, and the risk of significant tax and national insurance assessments for underpaid liabilities, along with interest and penalties on top.
You will have known the changes to IR35 were coming since last year, but now that it's just around the corner, you'll have to start thinking about how it will affect your recruitment agency processes and your contractors. Our Onshore Advisor, Tony Bolger, has listed down a few steps recruitment agencies should take to get ready for IR35 in his recent blog.
IMS Decimal provides Outsourced Accounting and Financial Services to clients across a multitude of industries. We are a part of IMS Group, a Global Workforce Solutions company working with more than 180 clients over the past 15 years. We are specialists in supporting Accounting and Finance processes for clients in the USA, UK, Australia and New Zealand.
Hopefully, this blog has given you a bit of insight into the new IR35 rules coming into effect from April 6th 2021. If you have any questions, don't hesitate to Get in touch.
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