The introduction of IR35 Chapter 10 on 6th April 2021 under Chapter 10 Part 2 ITEPA 2003 has significantly impacted the recruitment industry, particularly in terms of ensuring tax compliance. Recruitment agencies must stay alert to the changes and adapt to keep their businesses strong.
It is important for recruitment companies to understand IR35 legislation and its implications in order to fully appreciate how the new legislation affects them.
The IR35 legislation, also known as the "off-payroll working rules," aims to ensure that individuals working through intermediaries, otherwise known as personal service companies (PSCs) are paying the appropriate amount of tax and National Insurance contributions (NICs) when providing services to an end-client directly, or via recruitment agencies.
IR35 was introduced in April 2000 to tackle tax avoidance by individuals who provided their services through a personal service company (PSC). The legislation aimed to ensure the PSC’s were correctly determining IR35, for a specific contract, and paid the appropriate amount of tax and NICs.
New definitions and shifting responsibilities
Historically, the responsibility for determining IR35 and the tax liability rested with the individual contractors operating through a PSC. Fast forward to April 2021, and the new legislation introduced two new definitions:
- Decision maker – which affects any public sector body or medium/large sized business in the private sector that engages PSCs, either directly or indirectly, for the provision of services
- Fee-payer – this term refers to the party responsible for paying the PSC in accordance with the end client's IR35 assessment of the relevant engagement
The legislation has now shifted responsibility to the ‘decision makers’ engaging directly with contractors and those deemed ‘fee payers’ in the chain which are usually the recruitment companies.
This change has placed a significant burden on recruitment agencies, as they are now required to assess the IR35 position for contractors to ensure compliance.
Challenges faced by recruitment agencies
The off-payroll working rules apply on a contract-by-contract basis and there are some contracts which may fall within the off-payroll working rules and some which do not.
Medium to large end clients (the party receiving the services which do not fall within the definition of a small company as defined by s382(2) of CA2006), are responsible for deciding whether the position is inside or outside IR35 for tax purposes and must provide recruitment agencies with a Status Declaration Statement (SDS) detailing whether the role is inside or outside IR35.
This means the recruitment agencies now have the added responsibility of ensuring the PSC is subject to the correct tax and NICs treatment. This has switched the onus of responsibility from a PSC to whoever is engaging them, which has changed the state of play significantly.
Recruitment agencies could face a large tax liability if they pay a PSC gross, but HMRC successfully argue they should have been paid net of tax. An added worry for recruitment agencies is even if the end client met their legislative requirements and took reasonable care in deciding, but just came to the wrong decision, it is the agency as the fee payer that is liable for the tax bill. It will not matter that the decision was taken by the end client.
When an SDS is received from an end client, the recruitment agency in the chain is expected to always consider the IR35 determination reached before paying the contractor/PSC. If the end client has determined a role to be inside IR35 the agency must ensure the necessary PAYE deductions are made. If the end client has determined the role to be outside IR35 it is important to be sure they have undertaken a correct assessment before paying them gross.
What recruitment agencies can do
The new off payroll rules have definitely placed an additional administrative as well as financial burden on agencies.
It is essential for agencies to invest time and resources in checking contracts and working practices align and to maintain accurate records to ensure the correct tax and NICs are paid. Many agencies are now using online tools such as HMRC’s CEST and other expert IR35 tools which have emerged since the new legislation was introduced.
While it appears that some recruitment agencies are investing in training of their staff and introducing online assessments to understand IR35 legislation, others are still burying their heads in the sand.
To ensure compliance and avoid hefty tax bills it is crucial for all recruitment agencies to implement robust assessment processes such as:
- Carrying out comprehensive employment status due diligence
- Implementing an online tool to ensure the right decision has been reached before paying the PSCs
- Contracts and working practices should be considered in much greater detail taking into account factors such as control, substitution, and mutuality of obligation to ensure the correct IR35 determination has been reached
"It is essential for agencies to invest time and resources in checking contracts and working practices align and to maintain accurate records to ensure the correct tax and NICs are paid"
Keeping relationships sweet
One of the biggest challenges faced by recruitment companies is managing relationships with end clients who are affected by IR35.
Since the introduction of the off payroll legislation, many end clients have been reluctant to engage contractors due to the increased costs and administrative burden. This resulted in a decrease in demand for certain types of contractors and subsequently impacted the revenue and growth of some recruitment companies. One of the critical roles of a recruitment company now is to educate clients about the implications of IR35 and building strong relationships with clients is essential in ensuring IR35 compliance.
Some recruitment agencies are working more closely with clients to ensure they understand their responsibilities under IR35 legislation by providing clear and concise information about the legislation, its impact on their workforce, and the steps required for compliance. This has given some recruitment companies the opportunity to position themselves as trusted agencies and this proactive approach has helped to build stronger client relationships.
Contractors are also essential stakeholders in the recruitment world and even though it became more challenging for recruitment agencies to engage contractors which in turn reduced the flexibility and options available to end clients. Some recruitment agencies were quick to foster strong relationships with contractors by offering support and assistance. By doing this they have positioned themselves as trusted partners for both end client and contractors in turn and were able to attract the top talent and continue to win end clients.
The impact on recruitment agencies has been vast and many recruitment agencies have had to consider diversifying their service offerings. They are working more closely with end clients and IR35 specialists and providing consultancy services, offering advice on IR35 compliance, or exploring alternative engagement models such as umbrella companies, PEO’s and outsource providers. Diversification has helped these agencies remain competitive and provide added value to clients.
For more information
The introduction of IR35 legislation has undoubtedly impacted recruitment agencies, requiring them to adapt to the evolving tax landscape of IR35. With HMRC activity growing in this area it is essential for recruitment companies to get their house in order and ensure proper systems are implemented to ensure compliance.Contact us for expert advice