We take a look at IR35 and the upcoming changes in April 2021, whether this will affect your recruitment business and if so what you need to do next.
We take a look at IR35 and the upcoming changes in April 2021, whether this will affect your recruitment business and if so what you need to do next.
The changes to IR35 were due to come into place on 6 April 2020. This has been delayed until 6 April 2021 as part of the additional support the government provided for businesses and individuals to deal with the economic impacts of coronavirus.
From 6 April 2021, IR35 tax legislation will be updated to the newer off-payroll working in the private sector tax rules to ensure fairness between all types of workers, and subsequently reduce tax avoidance by contractors and those hiring them.
It focuses on establishing ‘deemed employees’, those contractors working in the same way as employees within the client company. The aim is that everyone will pay the same income tax and National Insurance contributions (NICs), despite the contractor operating through an intermediary, such as a personal service company (PSC).
For recruitment firms, it’s important to be aware of the changes and start planning for them now. The financial impact could be significant for your contractors and clients, and if so, there will be a knock-on effect to your business too. For example, if deemed to be treated as an employee, the contractors’ income could be reduced by up to 25%.
What are the IR35 Off-Payroll changes?
Currently, the responsibility of making the employment status assessment which means determining whether a contractor is employed (inside) or self- employed (outside the scope of IR35) and paying the relevant tax and National Insurance was the party closest to the contractor, therefore their personal service company.
The new off-payroll rules now shift this responsibility of employment status assessment to the organisation receiving the individual’s services (“the client”) and the fee payer (usually the recruitment business or umbrella company) is responsible for deducting the relevant taxes.
Will this affect all clients?
It won’t affect everyone, so it’s important to be aware of the criteria and whether your clients fit within it.
All public authorities and medium and large private clients will be responsible for assessing the employment status of the contractors who work for them via their own PSC, deciding if they should be treated as an employee or as self-employed for tax purposes.
This will mean PAYE and NICs is payable on the contractor’s income and will be deducted by the party with the contract with the PSC, so either the client organisation or, more likely, the recruitment firm.
It will not apply to small companies who meet two of the following criteria:
The rules won’t be applied retrospectively – the focus is on new engagements, not historic cases.
How will I know if my client fits the criteria?
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 are our responsibilities?
The client is responsible for determining the status of the contractor and must take reasonable care in doing so. Once the decision is made, the client is then responsible in communicating the decision in the form of a Status Determination Statement (SDS) and pass this down the contractual chain to the recruitment agency and also directly to the contractor.
The fee-payer (which could be you, the recruiter) is then responsible for deducting PAYE and NICs as needed, and will be liable for any unpaid taxes should the SDS not be applied.
The client should also have a process in place to deal with any potential disagreements with the decided employment status. The client must respond within 45 days of receiving the representation. HMRC will not get involved with resolutions, and without a process in place, the client may still be liable for tax and NIC.
What to do now?
Begin by assessing the size and scale of the impact on your firm, clients, and contractors. There will be less surprises in April if you start having conversations now to work out the type of assignments you currently have, and whether they’re within the criteria for IR35.
You can see how the status will be determined by using HMRC’s Check Employment Status for Tax (CEST) which was updated in November 2019, and it’s a good tool to get an idea of how HMRC would view an assignment.
Next Steps
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.
We will be providing further guidance in the coming weeks on how to assess the employment status, choosing umbrella companies and what impact from a financial perspective this may have on your business. We will also be providing calculators to help understand the impact on your margin should a contractor be inside the scope of IR35 and also the impact on the net pay of the contractor. In the meantime, if you have any queries please contact Marie Pegram on 01462 687333 or by email m.pegram@uhy-uk.com.
For a simple overview of what the changes are you can watch our short video: IR35 – What are the changes?
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:
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