The introduction of the IR35 off-payroll working legislation on the 6 April 2021 under Chapter 10 Part 2 ITEPA 2003 created a new set of challenges and obligations for recruitment agencies and their clients.
Recruitment agencies have had to evolve over the past two years, not only to protect their own businesses by complying with the legislation, but also to meet the needs of their clients and contractors. Add to that the disruption caused by the Covid-19 pandemic, where the number of contractor assignments fell dramatically as clients looked to reduce costs, and it’s clear that the recruitment industry has not had it easy in recent times.
However, even though the legislation has provided and continues to provide challenges, there are clear actions that recruitment agencies can take to adapt and thrive in the world of IR35 off-payroll working.
Understand the legislation
It sounds obvious, but to be compliant with the legislative requirements, recruitment agencies must understand the legislation and how it affects their businesses, their contractors and clients. Even after two years, we are still seeing many recruitment agencies falling short on this. For those larger businesses that may have in-house HR or legal teams, this could be a relatively straightforward task. However, for smaller recruitment agencies this could prove more difficult, even with the available HMRC guidance. However, HMRC will not accept the size of a business as a reasonable excuse for not being compliant, therefore if in doubt seek specialist advice.
"Over the past six months HMRC’s off-payroll team has been writing to medium/large private sector businesses to establish what processes they have in place to comply with the legislation and demonstrate that reasonable care has been taken"
End client support
Often viewed by their clients as the initial reference point for off-payroll support and advice, recruitment agencies have had a vital role to play since the inception of the legislation by educating and supporting their clients. This will no doubt continue to be the case as we start to witness an increase in more visible HMRC compliance activities in this area.
Over the past six months HMRC’s off-payroll team has been writing to medium/large private sector businesses to establish what processes they have in place to comply with the legislation and demonstrate that reasonable care has been taken. The natural progression following these ‘fishing’ letters, is an increase in the number of enquires being opened and we expect this to happen over the next 12 months and beyond.
For recruitment agencies there is a vested interest to make sure their clients are getting things right and are issuing accurate status determination statements. This is on the basis that if they are the fee-payer, then it will be them that HMRC look to for collection of any underpayment of tax and NIC, assuming the client has taken reasonable care but has come to the wrong IR35 decision.
Worryingly, we have heard of instances where clients have been contacted by HMRC but have failed to notify their recruitment agency, not that there is any obligation to do so. However, by not being notified from the outset it could mean that the first thing the recruitment agency hears about any off-payroll enquiry into one of its clients is when they receive a tax bill. Therefore, being in regular contact with clients, making sure they are acting compliantly and building strong relationships is essential so that they are fully aware of their exposure to risk and can take the necessary steps.
The old saying, ‘if in doubt ask about’, is true to an extent, however recruitment agencies should always take care when deciding to seek out third-party advice or services. Leading up to the roll out of the off-payroll legislation, we witnessed an explosion in self-proclaimed ‘IR35 experts’ offering their services and advice on how affected parties could be compliant.
In some cases, this ‘advice’ has left recruitment agencies and their clients exposed to a successful HMRC challenge. Therefore, research and due diligence should always be undertaken on any potential IR35 advisor who they may wish to engage to avoid unnecessary risk, both to their own businesses and also their clients.
So, to stand out from the crowd in a competitive marketplace, recruitment agencies that are well informed on all matters off-payroll, provide valuable support and education to their clients on how to deal with the legislation fairly and compliantly and consequently attract the best contractor talent, will have the upper hand. The next 12 months in the IR35 landscape will no doubt provide more challenges, however with challenges come opportunities and recruitment agencies need to be prepared to take full advantage.
For more information
The Markel Tax Contractor Solutions team has a wealth of experience in advising recruitment agencies, end clients and contactors on how to navigate the off-payroll legislation.
If you would like to discuss any related matters, whether it be specific questions or if you simply require a second opinion, please contact email@example.com and a member of the consultancy team will be pleased to assist.