From 6 April 2020, 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%.
Will this affect your clients?
It won’t affect everyone, so it’s important to be aware of the criteria and whether your clients fit within it.
All medium and large 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:
- an annual turnover of less than £10.2m;
- a balance sheet total of less than £5.1m;
- no more than 50 employees.
The rules won’t be applied retrospectively – the focus is on new engagements, not historic cases.
Fit the criteria? What next?
The responsibility for unpaid tax and NICs on the contractor’s income will lie with you as the recruitment company and your clients – not the contractor.
The client is 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 agency and the contractor.
Once the decision is made, the recruiter must deduct and remit PAYE and NICs as needed, and will be liable for any failures along with the client.
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, 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 is already available, and it’s a good tool to get an idea of how HMRC would view an assignment.
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 Stuart Hutchison on 01462 687333 or by email email@example.com.