March 17, 2020 Update: Government have announced a delay in IR35 Off – Payroll reform to April 2021.
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 2020. In addition to this, we’ve pulled together these FAQs in order to provide the facts upfront and give guidance for your recruitment business. They will be updated when required. 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). Currently the contractor working via a PSC is responsible for paying their employment taxes and National Insurance Contributions (NICs), however from 6 April 2020, 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 therefore the tax and NICs will need to be accounted for and paid to HMRC by you, the recruiter.
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 2020, you will responsible for unpaid tax and NICs on the income of those contractors who fall within the IR35 remit and who are ‘deemed employees’. You’ll have the liability of any failures to make these payments.
Not all your assignments will fall within 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.
What responsibilities will clients have?
The client will be responsible for determining the 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 to your recruitment company and 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.
What responsibilities will my contractors have?
The IR35 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 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:
- review your PSC contractors and assignments that match the criteria;
- check the employment status of those who could be potentially affected;
- calculate the cost impact to you using our Margin Calculator;
- prepare for discussions with your contractors by calculating the cost impact to them;
- begin conversations with your clients and contractors once armed with the above information.
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.