So far in this IR35 series of blogs, we have laid out the ways in which IR35 tax legislation is expected to change from 6 April 2021, and provided information on the ways in which you can begin to prepare in advance. The key information is, you’ll likely be affected if you:
- work with contactors who operate through a personal service company (PSC), and
- those contractors are on assignments for medium-large size clients during/and or after 6 April 2021.
Once you’ve sorted your clients and contractors into the ‘most likely to be affected’, and you’ve used the CEST tool or reviewed the criteria as outlined in our last blog to establish if the working relationship will be deemed as employment based, you’ll have a list of those contractors, and clients, who fall ‘within the scope’ of the new IR35 Off-Payroll regulations.
What are your options?
If a contractor falls inside the scope of IR35, therefore deemed as employed, the fee-payer (usually the recruitment company) will hold the responsibility for deducting tax and National Insurance (NICs) on the contractor’s income. Currently this responsibility lies with the contractor’s Limited Company usually known as a Personal Service Company.
There are generally three options the contractor can choose if inside the scope of IR35:
- Be employed directly by the fee-payer
- Be employed by an umbrella company
- Continue using their limited company
The third option is usually the least likely as the contractor will no longer need their limited company if all their assignments are considered inside the scope of IR35.
What are the additional costs if you were to employ the contractor?
This is where our Margin Calculator comes in. This tool aims to help you understand the additional costs of employing your contractor, and the impact that IR35 may have on your profit margins. Within this simple Excel based Margin Calculator, you can enter the pay rate of the contractor, the margin you wish to maintain, and it will calculate the additional costs and what your charge rate should be.
Please watch my video below for more guidance on using the Margin Calculator.
The difficulty is negotiating with the parties in the contractual chain on who is going to take on these additional costs. Will the contractor accept a lower pay rate as they are now receiving employment benefits such as holiday pay? Are you willing to accept a lower profit margin? Or can you increase your client charge rate?
We recommend starting these conversations early, allowing sufficient time for matters to be dealt with properly and all parties being happy with their position.
We will continue to share more insights on how IR35 will affect your recruitment business. Next, we will look at the impact on contractors, before looking at frequently asked questions and how you can work with umbrella companies as an alternative. As always, if you have any queries please contact Marie Pegram on 01462 687333 or by email firstname.lastname@example.org.
For a simple overview on your responsibility for contractors within the scope you can watch our short video: IR35 – contractors within the scope, your responsibility
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: