Taxation for the personal service company contractor has changed with the introduction of the new IR35 Off-payroll rules, so what has been the fallout following the change in April and how has the UK’s recruitment sector been impacted?
The new legislation, which came into effect on April 6, 2021, shifts the responsibility of setting employment status from contractors to the end-client, therefore ensuring contractors are subject to the same tax and National Insurance Contributions as regular employees. The reforms bring the private sector in line with the public sector, where IR35 Off-payroll rules were introduced in 2017.
However, recruiters and politicians have flagged up several issues over the impact of the changes. So what are the biggest concerns?
Recruitment companies have been caught in the middle of the new IR35 Off-payroll rules. On the one hand recruiters have been trying to continue to supply workers to their clients, while also getting to grips with implementing the new procedures.
One of the main challenges has been ensuring end clients correctly determine the contractor’s employment status, ensuring all elements of the assignment are taking into account.
To try to help end clients to define the status of contractors, HMRC introduced a Check Employment Status for Tax (CEST) tool. However, this appears to have led to more confusion around determining employment status.
While it is true that many recruitment firms have ensured a smooth transition to continue supplying workers to their clients, others have not been so lucky.
Those who were ill prepared for the new IR35 rules have not only found it difficult to implement the new off-payroll working procedures but also struggled with the rates and inside IR35 engagement solutions.
For those contractors who fall inside IR35, additional employment costs may need to be absorbed somewhere along the supply chain. If the recruiter doesn’t calculate these costs correctly and negotiate the rates with the contractors and end clients then guess who’s margin gets squeezed?
If you are engaging with inside IR35 contractors directly then check out our profit margin calculator here. It takes into account all the additional employment costs such as National Insurance, holiday pay, pension and the Apprenticeship levy when employing contractors.
Research from the Association of Independent Professionals and the Self-Employed (IPSE) revealed that half of UK freelancers are planning to stop contracting due to the IR35 rules. Nearly a quarter are planning to seek contracts abroad (24%), while others plan to stop working altogether (12%), get an employed role (17%) or retire within the next year (11%).
The confusion and uncertainty has also meant that workers have been reluctant to move between jobs, especially if they are happy with their current terms. This lack of movement has invariably meant a shortage of staff in certain parts of the supply chain and wider industry.
The Loan Charge All-Party Parliamentary Group (APPG) recently published a report, entitled How contracting should work, which appealed for changes to the IR35 system.
As well as calling for UK’s umbrella industry to be ‘shut down’, the report warned that classifying contractors as employees has, in fact, meant that freelancers are reduced to second-class status, without the same employment rights as permanent workers.
Furthermore, the report stated that the reforms had, rather than stamping out tax avoidance, made it more difficult to define the status of freelancers and contractors. This has led to some freelancers being forced to work for unregulated umbrella companies, running the risk of hidden payments and joining tax avoidance schemes.
The Association of Professional Staffing Companies (APSCo) has largely agreed with the APPG report and is urging the Government to review the tax and employment status for the self-employed.
The Insights section of our website has a wealth of information covering the IR35 Off-payroll changes. If you require further help, please do contact Marie Pegram on 01462 687333 or by email email@example.com.
Recruitment Accountants have recently partnered with Qdos contractor who can provide support on status determination statements and insurance. Should you wish to find out more and receive a discount on Qdos services please contact Marie Pegram.