Recruiter's guide to IR35 - what agencies need to know​

IR35 is a set of rules implemented by HMRC that are designed to reduce tax avoidance by contractors. Previously employees could operate through intermediaries, such as Limited Companies, while still working full time for a business thereby paying less tax and National Insurance. IR35 aims to crack down on contractors doing this.​

​It was first introduced to the public sector in 2000 with contractors taking on the responsibility of declaring their IR35 status. In 2017 further measures 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 2021, shifting responsibility onto recruitment agencies who are liable for determining contractors’ IR35 status.​

From the 6th April 2021, recruitment agencies have had to take on the responsibility for determining which contractors fall within IR35. This applies to medium and large businesses only, with small businesses exempt from the new legislation.​

PAYE and NI contributions from workers within IR35 will have to be deducted at source from the ‘fee payer’, i.e. the recruitment agency or client.​

The responsibility of complying with IR35 ultimately lies with the end client, meaning they must make the ‘Status Determination Statement’ (SDS); however, many employment businesses are finding that clients are turning to them for assistance.​

Employment businesses, therefore, are already reporting an increase of administration work required, while some are also stating this to be an opportunity to add value and a brand-new revenue stream. For any company offering SDS services to their client, appropriate training for their staff must be initiated to ensure reasonable care is taken.​

The current challenges faced by employment businesses:​

• Knowing your client​
• Increased cost of business​
• Commercial pressure​
• Contractual pressure and risk​

IR35 reform has created a range of challenges for contractors, most notably that contractors will suffer from less take home pay.​

​The financial benefits of working under a Personal Service Company (PSC) will become limited and might not even be worthwhile for many contractors. Many contractors have moved towards umbrella companies and/or ceased to operate their own companies altogether.​

​If a contractor is working through a PSC and moves to a permanent employee, how does IR35 work with regards to temp to perm contracts?​

​If the contractor regarded the company as a client and vice versa, and then, when recruited as an employee, the relationship changed, and they received all the benefits of permanent employment then this is acceptable.

Let’s keep this simple:​

Inside IR35 are contractors who should be paying employed levels of tax.​

​Outside IR35 are contractors who can pay themselves a combination of salary and dividends which can be more tax efficient.​

To qualify (does not include public sector bodies) clients must meet two or more of the following criteria:​

• Annual Turnover not more than £10.2 million​
• Balance sheet total not more than £5.1 million​
• Number of employees not more than 50​

The small company has no obligation to tell the next party in the chain that it is a small business.​