What is IR35?
IR35 is a set of rules implemented by HMRC that are designed to reduce tax avoidance by contractors. Previously employees could operate through intermediaries (like limited companies) while still working full time for a business, therefore paying less tax and national insurance. IR35 aims to crack down on employees and contractors doing this.
It was first introduced to the public sector in 2000 and contractors had the responsibility of declaring their IR35 status. In 2017 further crackdowns were introduced meaning the onus fell on both the contractor and the employer. IR35 is now due to be rolled out to the private sector in April 2021.
What does it mean for my recruitment agency?
Since the new rules have shifted the responsibility of determining IR35 status from contractor to end client, recruitment agencies will be greatly affected and will need to comply with the new rules. In short, whoever pays the fee to the contractor will be responsible for deducting the relevant tax and NI contributions. Since you as the recruitment agency will now carry liability, it’s important to communicate with your contractors regarding the upcoming changes, as well as to your consultants and employees. The new rules will change your processes so it’s important to make sure everyone in your business understands what’s happening.
What are people saying about IR35?
‘Contractors and interim managers play an essential role within our economy, especially in periods of transition and uncertainty. The planned changes to taxation could significantly impede labour market agility at a time when UK businesses need it most.’
(Tom Hadley, Director of policy and campaigns, REC)
‘The chancellor’s smash-and-grab approach to taxing the smallest businesses is short-termism on steroids. It is a short-term tax grab that will do lasting damage to the economy by taxing out of existence the smallest and most agile businesses.’
(Chris Bryce, CEO, Association of Independent Professionals and the Self-Employed)
‘For all the government’s promises to support independent workers, by announcing private sector IR35 reform this administration has shown, yet again, that it is more focused on squeezing the highest amount of tax out of contractors, not necessarily the right amount.’
(Seb Maley, CEO, Qdos Contractor)
‘Organisations should begin by reviewing their existing contingent workforces to determine which employment models are being deployed.’ In addition, Samantha Hurley also advised employers to engage with the recruitment supply chain to discuss which roles are likely to be affected and to determine if workers with those skills were thin on the ground or easily replaced. She also recommended ensuring IT systems and internal processes were in order to cope with the new rules, stating that ‘to be forewarned is to be forearmed.’
(Samantha Hurley, Director of Operations, APSCo and co-chair of HMRC’s IR35 forum)
‘The government's decision to delay the introduction of the new IR35 rules to the private sector until 2020 shows that they've listened to the warnings of experts and industry leaders. IR35, in its current state, will hurt innovation, productivity and ultimately the economy. We hope HMRC will take this period to reflect upon the deeply flawed regulation and make the necessary adjustments to support, not hinder, the UK's business and contractor communities.’
(Colin Morley, professional services director, Harvey Nash Recruitment Solutions)
How can I prepare for the changes?
1. Identify, research and discover
As with any big change it’s important to understand what the current situation is, so take the time to conduct an audit on your workforce. Review your staff and contractors you’re currently working with to identify who will be affected by the new rules. Take a look at your contingent workforce to find out how many PSCs you have and if they can be grouped into similar services.
2. Use tools to help you out
With changing legislation comes changing processes, which in turn tends to bring lots more admin hours, so use the tools and services available to you to make this easier. For example, you can use the Check Employment Status for Tax (CEST) service available via HMRC. Talk to your recruitment software providers also to see how they’re updating their systems to reflect the change.
Get prepared for the next significant IR35 report in April 2021
3. Get the conversation started
Begin having conversations with your contractors about whether the off-payroll rules apply to their role. You will inevitably have some workers who are already being paid through your recruitment firm and so come April, your firm will have to change the way in which they work with those contractors. The quicker you can start communicating any changes, the more seamless the switch will be.
4. Redefine your processes
As the change rolls in, some of your old processes will have to roll out, so start looking at how you change the way you engage with contractors. This will also include changing your hiring cycle processes to ensure that advertising reflects the role, hiring managers and recruiters are communicating openly and that the status of each role and whether it’s IR35 is clearly defined.
5. Look at your systems
Ensure that your software, technology and systems are able to deal with the changing legislation. For example, can your payroll operations handle deducting the relevant tax and NI contributions? Ensuring your business is equipped and has the right infrastructure in place to support issuing payslips and managing a contingent workforce is incredibly important and will eradicate future bottlenecks in your business.
Find out how to take control and stay compliant amidst new IR35 rules in April 2021