IR35 (also known as the ‘intermediaries legislation’) is an anti-tax avoidance measure introduced by the UK Government in April 2000.
Its purpose was to ensure that an individual who works in a similar capacity to an employee, but through their own ‘intermediary’ or PSC (Private Service Company) such as a limited company, pays broadly the same Income Tax (PAYE) and National Insurance (NI) contributions as regular employees.
From April 2021, a change to the original IR35 legislation will shift the burden of the IR35 assessment onto the private sector end-user, meaning the end-user will now assess whether the worker’s services fall under IR35 instead of the worker himself.
Under the reform proposals, medium and large businesses in the private sector will need to determine whether the IR35 rules apply to the worker’s engagement and formally notify the ultimate fee-payer. This may include a recruitment agency that pays the worker’s intermediary.
In cases where it is concluded that IR35 does apply, the fee-payer will need to withhold PAYE and NI from payments made to the worker’s intermediary. Furthermore, the fee-payer will incur additional costs, such as Employer’s NI (currently up to 13.8%) and the Apprenticeship Levy (currently 0.5%) where appropriate.
Here are some key risks for recruitment agencies:
There are currently around 20,000 recruitment agencies who supply workers through PSCs.
Recruitment businesses should ensure that they are entering into dialogue with clients now to establish how those clients are intending to deal with off-payroll arrangements in the deferred period up to 5 April 2021 and thereafter, particularly in view of the potential impact of coronavirus.
Affected businesses will need to determine whether or not the IR35 rules apply to an engagement. They will need to provide a status determination statement to the worker and to any third party that they contract with, such as a recruitment agency, detailing the reasons for reaching that determination.
The recruitment agency will then be required to pass on the determination to the next party in the labour supply chain, such as a second agency. Failure to pass on the determination will result in the tax and NIC liabilities resting with the party that fails to pass on the determination.
The end-user of the services (the client) will be required to set up a status disagreement process and respond to claims made by off-payroll workers or their fee-payer within 45 days of receipt. In this respect, recruitment agencies will need to establish a process for deciding whether or not to challenge determinations relating to the worker.
Where it is determined that the rules do apply, then the fee-payer ultimately paying the intermediary will need to withhold PAYE income taxes and will incur additional costs, such as employer’s NIC (currently 13.8%) and the Apprenticeship Levy (0.5%) where applicable.
Additional processes and resources may need to be put in place to meet the IR35 compliance requirements and associated PAYE/NIC withholding obligations going forward.
When requested (usually by the recruitment agency or worker), the end-user must also provide a statement as to whether, in their opinion, they qualify as a ‘small’ business for the tax year specified. This should generally be completed within 45 days of receipt of the request. Where the end-user is ‘small’, the recruitment agency will have no fee-payer obligations under the new rules.
Where it is assessed that there has been non-compliance at some point in the labour supply chain, the proposed legislation will allow for the transfer of tax and NIC liabilities back to the end-user or the recruitment agency.
The proposed IR35 reforms for the private sector represent the biggest change to employment tax legislation in decades.
Without a suitable determination process in place, the recruitment agency and its clients will be left with a stark choice between two unacceptable risks;
It is imperative that a recruitment agency supplying staff or managed services ensures that their terms and conditions are up to date so that any contracts into which they enter before April 2021 contain IR35-compliant terms.
Different wording will be needed depending on whether the business is supplying staff or managed services. In some cases, certain recruitment firms run various business models including secondment of staff, supply of staff to clients, and/or managed services while using very similar, or even identical, terms and conditions. It is advisable for such businesses to delineate their business models, create separate terms for each model, and train those who use them to correctly identify which terms to use when.
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