Managing IR35 Reform for Recruitment Agencies
Published: 21/01/2020
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The final IR35 legislation has now been released and is in full force for all parties involved. We are offering this article to owners and managing directors of the recruitment agencies as a piece of guidance on managing IR35 reform. To start off on a positive note, let us say that things are not as grim as they may seem.
Last year, contractors got understandably disgruntled by the changes in the IR35 legislation being made. The reason is that many of them have already been victims of IR35 errors made in the public sector. Naturally, most were therefore outraged that the policy is now spreading to the private sector as well. One of the popular and widely discussed solutions for getting around the changes is forming or working through ‘consultancies’ and creating a Statement of Work (SoW). At the same time, the news stories are filled with contradicting blanket-inside IR35 decision stories, cases of outright bans and ‘go PAYE or go home’ ultimatums.
Yet, there were and still are many end-clients that are prepared to accurately assess the IR35 status. The final legislation has now come into power, also signalling that private sector businesses and recruitment agencies are no longer protected by the ‘light touch policy’. In other words, the year in which recruitment firms would not get punished for non-compliance has expired. This calls for a review of how well-adjusted your company is to be compliant.
The change, despite often being seen as a positive thing, isn’t always welcomed. The announcement of the IR35 changes has signalled a major change for recruitment agencies. It requires them to address their previous operational processes. With uncertainties such as concerns in regard to contractor retention, stemming from the new off-payroll rules, this is clearly not being perceived as a positive change.
The IR35 changes are also not grounds for panic or dismay. The novelty and its difference from what we are used to may appear threatening and unfavourable at the first glance. However, further exploration may reveal it to be an opportunity for the recruitment sector to evolve into something better. This is why you need to keep your cool and do what has to be done, observing the outcomes and planning your next steps based on them.
The best way for recruitment agencies to adjust to IR35 is to understand it in the first place. It entails understanding the correct terminology, criteria and implications of non-compliance for all parties involved. It is easy to optimise for the change once its essence is understood.
Another way to speed the process up is relying on tools that are accommodating the new regulations. We would also recommend inviting a specialist consultant to hold a training session for your teams.
Due to the controversy and the ‘light touch’ policy for the first year of the reform, many recruiters are in denial. They have been acting as if the changes in the IR35 legislation won’t be implemented or won’t be permanent. While we cannot guarantee there won’t be additional tweaks added in years to come, we are certain that the main rules added in April 2021 won’t be changing. Recruitment agencies need to accept that and react accordingly.
IR35-ready companies are being realistic about the situation. Similarly to contractors, they didn’t want the reform to happen. It’s not in their interest to accept the added risk nor to have to deal with the increase in admin that came with the changes. However, the companies that will cope best with the changes are the ones that accept the situation. They’re giving IR35 the time and resources it needs because they appreciate the value of compliantly engaging contractors outside IR35.
As suggested in the intro, no matter what recruitment firms may think of the IR35, it will not go away anytime soon. The only thing you can do is adapt. The quicker you understand that and kickstart the process, the lesser will be the risk of getting penalised in the future. In other words, don’t delay or have a light-hearted approach to IR35 compliance because you disagree with it. In the end, it’s your business and reputation that will suffer.
We cannot highlight and emphasise enough the importance of communication in regards to the legislation. The companies that are ready to engage contractors compliantly outside IR35 have started a dialogue with the contractors on their books months ago. It’s important that every involved party understands the position of the other, nurturing a relationship-forging, collaborative decision-making.
Clients consulting with contractors and agencies in relation to IR35 status naturally have a better chance of making the correct IR35 decisions, potentially saving themselves from possible fines. Collaboration is therefore key and is something firms adopting a measured approach to reform have a firm grasp of.
The government isn’t oblivious to the implications changes in the IR35 are causing to the contractors, the employers and the recruitment agencies. It reflects in the willingness to give the private sector a year to adjust, as well as introduce it to some legal tools such as CEST to support the transition. However, how effective are the solutions offered by the officials in aiding compliance?
Answering the previously raised question: the IR35 tool offered by HMRC isn’t – and never has been – up to the job. As a result, many companies have stopped relying on it altogether. A refusal to use the revenue tool means engagements passed through CEST are double-checked with a full review of IR35 status.
Since the IR35 liability has now shifted from contractor to either the agency or company, this leads to many of the fee-paying parties safeguarding themselves with IR35 insurance for assessments outside of the legislation. Essentially, contractors get their tax status set accurately and carefully, regardless of what the assessment results provided by CEST suggest. Ultimately, this insurance gives companies the confidence to make outside IR35 determinations and protects fee-paying recruitment agencies.
There’s been discussion around private sector engagers agreeing on an SoW with recruitment agencies and sometimes contractors. An SoW, usually put in place between a consultancy and client to determine deliverables, timeframes, activities and costs, negates the requirement for an IR35 assessment from the end client. This is because it will fall to the consultant or provider of the service to decide the contractor’s status.
But it’s vital the services provided by the consultancy are genuinely outsourced. An SoW can’t be a provision of labour covered up as a consultancy agreement in order to dodge the rules. HMRC will be hot on what seem to be ‘hastily cobbled together consultancy arrangements’. There are also a number of financial compliance implications for contractors looking to form a consultancy. It’s certainly not a straightforward process.
That said, companies are open to the concept of an SoW. Though for it to be above board, there need to be significant changes to the way a contractor provides a service to that business.
The short answer is yes. While there is no solution (at least not yet) that would determine whether the contractor falls within the IR35 regulations or not, there’s a plethora of software aimed to aid you with the process. In fact, ever since the announcement of the legislation changes, most recruitment-oriented solutions, be they CRM, ATS, pay and bill or others, have started adjusting their systems to help their users to be compliant. Depending on their key functionality, platforms already offer different IR35-related features. If unsure what your software vendor offer in that regard - reach out to them for clarification.
Having always worked extensively with clients across the industry, we understand the implications of the IR35 reform of recruitment agencies. This is why our software has undergone a series of changes to accommodate IR35-compliant practices. For example, our approval module has been tailored to function on the deliverables rate as opposed to time, which is among the key factors separating a ‘hidden employee; from a contractor. This doesn’t mean the time-based approval is now gone - rather that we’ve taken steps to accommodate all types of clients across the board.
Since a large chunk of our software is the generation and distribution of invoices, for the contractor recruiters we’ve added automatic income tax and national insurance deductions, in case they fall within the regulation changes. As always, we pride ourselves on a plethora of customisation options. This means you can still build a tool that’s unique to your business needs. However, it is also now upgraded to stay compliant with the latest IR35 changes.
The ‘light touch’ period is now over and the responsibility for non-compliance shifted from the contractors to the recruitment agencies and companies. While this is certainly not a welcomed reform to any of the involved parties, it should also not be viewed as something you cannot adapt to. However, viewing the IR35 legislation changes as a temporary inconvenience is not the right approach either.
The changes are forecasted to stay for years to come and thus the best thing a recruitment agency can do is accept that and adjust its operations to stay compliant. While the initial period may not be easy (the change almost never is), further down the line we may learn that these changes bring new opportunities that would otherwise not have been available to your firm. It all depends on the angle.
The IR35 reform is not the end of the world. Let’s explore how can we make it work for you.
Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal / financial expert in this area before acting on any of our advice.