IR35 Changes for Recruiters

The IR35 legislation which is one of HMRC’s least understood regulations is changing once again.

Since 2000, IR35 has determined how directors who work through their own limited companies are engaged with a business for tax purposes. Independent contractors working through a business, who are treated as truly independent workers may be entitled to receive advantageous tax treatment on their earnings to account for the business risks they are undertaking. Whereas, workers who are considered to be working as “disguised employees” of the end client, are only entitled to receive income which is taxed on a PAYE basis.

However, the IR35 rules have been largely ineffective as up until recently it has been the contractor who has determined their own individual IR35 employment status, which lead HMRC to estimate that there was a widespread non-compliance with the rules.

From April 2017 when the Off Payroll Rules were launched in the public sector, the responsibility of verifying whether a contractor fell within IR35 shifted from the contractor to the end client engaging their services. However, the responsibility of deducting the necessary PAYE and NIC became that of the recruitment business thus, recruitment businesses are now liable for the real-time payment of contributions to HMRC – making it vitally important that they are confident with the end clients determination of the role, as the updated rules make it clear that the entity responsible for paying the contractor will be liable for unpaid PAYE and NIC.

Within a period of 18 months the changes have seen HMRC receive increased amounts of PAYE and NIC to the tune of approximately £410,000,000 which no doubt has encouraged the decision to level the playing field by extending the changes to the private sector from April 2020, with the UK chancellor announcing this in the November 2018 Autumn Statement, and a further consultation paper on the detailed changes to be published in Summer 2019.

Whilst the new private sector rules will only apply to medium and large businesses, the rules will mirror those rolled out in the public sector and the end client will be responsible for determining the IR35 status of the contractor and the agency will be responsible for deducting PAYE and NIC, and although there is over a year before the changes to the private sector take effect in April 2020, recruitment businesses should begin to prepare and familiarise themselves with the changes.

What should recruitment businesses be doing now?

As with the public sector changes, recruitment businesses will need to be involved with the IR35 determination of a contractor who they are placing, whereas previously an agency would have little or no involvement and it would be up to the contractor to seek the opinion and advice of independent employment status experts. Along with the responsibility of deducting the necessary PAYE and NIC, recruitment businesses will need to ensure that contractors are being engaged on relevant terms and conditions which reflect their relationship with the end hirer. The upper level agreement between the agency and the end hirer should also accurately reflect the nature of the relationship.

Every agency using contractors needs to understand how IR35 affects them and whether the contractors they place fall in or out of ‘scope’ of the IR35 legislation.

To guarantee that they are fulfilling their role within the supply chain, recruitment businesses should strongly consider engaging an employment status specialist such as Brookson Legal Services – we have been carrying out employment status assessments for over 18 years and supporting recruitment businesses since the public sector changes where announced in 2016. We are regulated by the Solicitors Regulation Authority, and have team members who have sat on HMRC IR35 forums.

What does a review from Brookson Legal consist of?

The contractors working practices and contract should be consistent with each other.

As part of our IR35 review process, Brookson Legal Services will review both the contract and the contractor’s day to day working practices (as would HMRC and/or the courts). We will advise on any discrepancies, as well as confirming whether the contractor falls inside or outside of IR35 and provide recommendations to help improve their situation.

With the right checks, there is no reason for recruitment businesses to worry about continuing to place contractors.