We’ve pulled together these IR35 FAQs in order to provide the facts upfront and give guidance for your recruitment business
We’ve been running a series of blogs on IR35 (see our IR35 blogs here) in the lead up to the changes coming in from 6 April 2021. In addition to this, we’ve pulled together these FAQs in order to provide the facts upfront and give guidance for your recruitment business. If you have any other questions, or would like to discuss your situation, please contact Marie Pegram.
What is IR35?
IR35 is the tax legislation in the Income Tax Earnings and Pensions Act, and applies to individuals (contractors) who supply their services through an intermediary, usually a Personal Service Company (PSC).
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
What’s changing in April 2021?
Currently the contractor working via a Personal Service Company is responsible for paying their employment taxes and National Insurance Contributions (NICs), however from 6 April 2021, the legislation is changing and the responsibility for operating the off-payroll legislation will sit with the organisation, agency or third party engaging with the contractor.
Contractors will be assessed by the end client to establish if they are ‘deemed employees’ and the responsibility for deducting any relevant taxes and NICs will need to be accounted for and paid to HMRC by the fee-payer, usually the recruitment company.
How are the changes going to affect my recruitment business?
The financial impact could be significant for your contractors and your clients, as well as your business. From 6 April 2021, you will responsible for deducting tax and NICs on the income of those contractors who fall within the scope of IR35 and you directly engage with. You will also have to absorb additional employment costs such as Employers NIC as well as having the liability of any failures to make these payments.
It’s worthwhile starting to prepare, to understand the potential costs to you and your contractors.
Not all your assignments will fall inside the scope of IR35, so firstly it’s worth checking the criteria.
How can the employment status of a worker be assessed?
You, along with your contractors and clients, can see how the status will be determined by using HMRC’s Check Employment Status for Tax (CEST). It’s a good tool to get an idea of how HMRC would view an assignment, and to begin to work out the type of assignments you currently have.
There’s more information on assessing the situation in this blog. The responsibility for carrying out the employment status assessment falls to the client, if they are a public sector body or a medium to large private company.
What responsibilities will clients have?
The client will be responsible for determining the employment status of the contractor and, once the decision is made, a procedure must be in place to correctly pass the decision and the reasoning down the contractual chain as well as directly to the contractor.
The client should also have a process in place to deal with any potential disagreements with the decided employment status. HMRC will not get involved with resolutions, and without a process in place, your recruitment business may still be liable for tax and NIC.
Starting to prepare yourself will then allow you to have the needed conversations with your clients.
Please note this will not apply to any clients that are classed as a ‘small company’. To be a small company they must meet two of the following criteria:
- An annual turnover of less than £10.2m;
- A balance sheet total of less than £5.1m;
- No more than 50 employees.
How will I know if my client is classed as a small company?
If you are unsure about the size of your client and whether they are classed as a small company then you can formally request confirmation. Your client then has 45 days from the date of receiving the request to confirm its size. If the client does not respond then the requester can apply to the courts for an injunction.
What about overseas clients?
If a client is based wholly outside the UK and has no connection in the form of being UK resident or having a permanent establishment then they are excluded from the off-payroll working rules.
What is a Status Determination Statement (SDS)?
An SDS is the employment status conclusion of whether the contractor is considered to be inside or outside the scope of IR35. It must also include the reason for the status given. Clients are responsible for passing the SDS down the contractual chain and also directly to the contractor.
What happens if the SDS is not passed on?
Responsibility for tax and NICs will stay with the party that has received the SDS until they pass it to the next qualifying person in the chain.
What happens if one party in the contractual chain is off-shore?
The responsibility for passing the SDS down the chain lies with the UK parties either side of the off-shore party in the chain.
What is meant by “reasonable care”?
A client must take reasonable care in making the employment status determination. A blanket decision of all contractors being inside the scope of IR35 to reduce the risk of being liable for unpaid taxes is not considered to be taking “reasonable care”.
Reasonable care is not statutorily defined. Case law has described it as taking steps expected of a prudent and reasonable person. If the client can show reasonable care was taken when making the off-payroll determinations then responsibility for PAYE rests with the deemed employer –even if the determination is wrong.
What responsibilities will my contractors have?
The IR35 employment status decision is out of the contractors’ hands, except if the client is a small business, but they will need to be aware and mindful of the effect this could have on their income. You can share our Net Pay Calculator with them so that they can understand the tax deductions should they fall inside the scope of IR35.
It is important to note that should the contractor continue to operate through their PSC, the PSC will remain their employer, and they will not have employment rights against the fee payer, client, or your recruitment firm.
What about overseas contractors?
Where a worker should be subject to UK tax and NICs then UK domestic legislation applies to the engagement.
Can I just replace our existing contracts with statements of work?
Labelling a contract as a contracted out service or a ‘statement of work’ will not prevent the off-payroll working rules from applying. The reality of the arrangements will always be considered. These being the nature of the businesses, the nature of the service provider’s contract and the relationship between the worker, the service provider and their customer.
What do I do if the contractor disagrees with the status determined?
As part of the new legislation the client is required to put in place a status disagreement process to deal with any disputes. The client should consider the worker’s representation, respond within 45 days and inform the worker and the deemed employer of the outcome. The client is also required to issue a new SDS if the original conclusion is found to be wrong.
Failure to respond to the contractors dispute will result in the client being liable for tax and NICs if due.
What happens if HMRC can’t recover the tax debts from the fee payer?
If the fee-payer fails to settle their HMRC debts and HMRC are unable to recover the amounts due from them, then HMRC will seek repayment from the recruitment agency closest to the client in the contractual chain or the client themselves.
HMRC will not seek to recover from recruitment agency or the client where the failure to account for tax and NICs by the person who should initially have paid it(the deemed employer)is as a result of a genuine business failure on the part of that person
What can I do to prepare?
Begin by assessing the size and scale of the impact on your recruitment firm, clients, and contractors against the criteria laid out here. Then:
There’s more on preparations in this blog post, and if you’d like to discuss this further, please do contact Marie Pegram on 01462 687333 or by email firstname.lastname@example.org.
UHY Hacker Young are recruitment sector specialists and provide expert advice on accounting, finance, taxation and business growth. We understand recruitment and can support you through the ever-changing landscape of this fast-paced industry. With IR35 changes around the corner we can help you build a robust system to tackle this challenge, provide payroll support and review your existing contracts with assistance from our network of other recruitment specialists.
For more information on the key deadlines and guidance ahead of the changes being introduced on 6th April 2021 please download our IR35 Off-Payroll Reform Guide for Recruitment Businesses: