4 Things a Recruitment Agency Must Be Aware of Post Tax Reform

In April 2021, owners, MDs, and managers of recruitment agencies faced a new challenge: changes in the IR35 legislation. In this article, we will explore the essential considerations following the tax reform.

The changes to the UK’s IR35 tax legislation sparked significant uproar even before its implementation in April 2021. The controversy stemmed from the fact that responsibility for determining whether a contractor falls under IR35 now rests with private sector employers.

As recruitment agencies operate on behalf of the client, this reform denotes that they are now accountable for executing procedures that identify contractors who fall under the legislation. In this article, we will guide you through these procedures, emphasising the most critical aspects. 

What is IR35? 

IR35 is UK tax legislation aimed at identifying contractors who operate through private limited companies (PSCs) but are essentially functioning as standard employees. Previously, these contractors often enjoyed an unfair tax advantage over employees, as they could reduce their overall taxable income by avoiding standard income tax and instead opting to pay corporation tax and dividend tax.

IR35 was established to ensure that a contractor working for extended periods for a single client pays the same amount of tax as a standard employee. 

1. The Essential Checklist 

To comply, you must educate yourself on both the major and minor details of the bill to understand how each affects your agency.

The actions that are essential when working with contract roles: 

• An immediate assessment of whether a contractor is subject to IR35; 
• Notifying the contractor and the employer of the decision, along with the rationale behind it; 
• Accommodating and resolving appeals and disputes that the contractor may have concerning the decision; 
• Informing employers that having contractors under an incorrect employment status may result in their being held responsible for the full repayment of the debt to the government. 

2. Umbrella Companies 

Partnering with an umbrella company is a straightforward way to mitigate your risks and avoid processing payroll. You pay the umbrella company as you would any standard supplier, and the umbrella company will pay the contractor under PAYE.

Since the worker is therefore on an employment contract with the umbrella agency, IR35 no longer applies. The downside, however, is that unless the contractor’s gross pay is increased, they will end up with less pay after tax, and there will be further cuts to your margins as the umbrella will charge a fee for your workforce payroll. 

3. IR35 Exemptions 

An important thing to know is that IR35 is not absolute, and some of your clients may still be exempt from it. There are two major IR35 exemptions: the small business exemption and the non-UK client exemption. While the latter is quite self-explanatory, the small business exemption requires further clarification, as it has raised many questions.

Small private companies are not required to make any IR35 determinations to continue normal operations, nor will they be penalised for reform-related mistakes. While HMRC gave clear pointers regarding the requirements for this exemption, a specific clause caused confusion:  

“The conditions about size only apply to clients. If you are a small-sized fee-payer you will still be responsible for applying off-payroll working rules.”  

Essentially, this means that the size of the client’s business determines who is responsible for IR35, rather than the size of the agency. 

4. Communication is Crucial 

A contractor subject to the IR35 regulations is likely to find the situation as unpleasant and stress-inducing as your organisation, as it will probably result in reduced pay. As a recruiter, you should aim to assist them in preparing for these changes.

First of all, they are likely confused and anxious about what the future holds. Therefore, your number one priority should be preparing them for moving forward by letting them know what to expect. You should also ease their minds by focusing on the benefits that IR35 offers: eligibility for holidays, pension, and other perks they couldn’t have accessed before.

It’s advisable to prepare in advance to determine which of your contacts will be subject to the IR35 regulations, enabling you to tailor a personalised approach for each. We strongly recommend investing in centralised digital storage that contains the contractor’s information and contact details, facilitating smoother and quicker sorting. 

Summary 

Understandably, concerns arise regarding the changes that would make recruiters liable for contractor-related tax issues. Although a Finance Bill that followed soon after slightly mitigates these worries, it does not mean that recruitment agencies will be unaffected by the recent changes to IR35.

There is still considerable discussion regarding the grey areas and contradictions posed by the reform of the legislation; therefore, agencies must remain vigilant and monitor any changes and clarifications posted by HMRC.

Would you like greater clarity on IR35 and how your agency can adapt to it? Let’s talk. 

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.