Highlights
- Responsibility for assessing whether IR35 applies will shift from the individual contractor to the end client or recruitment agency
- Recruitment agencies are concerned that they won’t have sufficient information to determine a contractor’s IR35 status
- If a client is unwilling or unable to make assessment for each of their contractors, will they make a blanket decision that they are all ‘inside IR35’?
It’s been two years since the significant reforms to IR35 legislation in the public sector and as announced in the Autumn 2018 budget, contractors, agencies and end-user clients are starting to prepare for the extension of the legislation to the private sector in April 2020.
The end of May saw the public consultation on the subject end and as we await the final summary of responses that will inform the draft Finance Bill legislation, it gives us time to consider the shift in responsibility, additional burdens of new red tape and paperwork and exposure to risk the changes will bring for all recruitment agencies.
What are the changes?
From 6 April 2020, the responsibility for assessing whether IR35 applies will shift from the individual contractor to the end client or recruitment agency.
For workers whose assignments fall inside IR35, the client or agency will need to deduct income tax and employee National Insurance (NI) and pay employer NI.
Failure to comply with the changes leaves an agency exposed to risk and extra expense.
Why are the changes being made?
The legislation is designed to stop contractors working as ‘disguised employees’, by taxing them at a rate similar to employment.
HMRC estimates that without the reforms the country will lose £1.3bn in tax revenue by 2023/24 and the new rules as well as bringing the private sector in line with the public sector, are designed to tackle tax avoidance by contractors who HMRC believe would be employees if they were not using a limited company structure.
Who is going to be impacted?
Contractors who find themselves within IR35 will have tax and NI deducted at source monthly, so they could be worse off by 32% per month, more if a higher taxpayer.
Tax is deducted as if the contractor is an employee, but it should be noted that the contractor does not receive any employment benefits whatsoever and is still subjected to increased risks and responsibility of contracting.
From April 2020, all companies and recruitment agencies, apart from those with fewer than 50 employees or less than £10.2m annual turnover, will have to assess the employment status of any contractor they use.
If your end user is a “small” company nothing changes, and workers engaged in contracts with ‘small businesses’ will remain responsible for determining IR35 and not the client, even if the worker is hired via a recruitment agency.
The compliance risk will move away from the contractor to the entity paying the contractor, either the client or the recruitment agency and therefore, they can be held responsible for incorrectly assessing the status of a contractor and are liable for any non-payment or late payment of PAYE, NIC, interest, and penalties.
The agency will also have to pay employers’ NIC and potentially the Apprenticeship Levy which will impact margins, productivity and create a large admin burden.
Are we ready for the changes?
The complexities of IR35 and IR35 status determination is leading to a great deal of confusion.
Recruitment agencies are concerned that they won’t have sufficient information to determine a contractor’s IR35 status and will have to ask the client to give an opinion.
However, the question being asked is “will the clients be able to make an accurate determination of a contractor’s IR35 status?” as the rules are so complex and rely on in-depth knowledge of case law, individual contracts, and working practices.
Sadly, if the client gets the status determination wrong, it is the recruitment agency that will liable for the unpaid tax and NIC payments and not the client.
If a client is unwilling or unable to make this assessment for each of their contractors, will they make a blanket decision that they are all ‘inside IR35’, whether this reflects reality or not?
Indeed, a survey by Brookson Legal Services found that 59% of respondents were considering taking a blanket approach to assessing their contractors – because they did not have the time to make decisions about contractors individually.
Offshore Recruitment & Accounting Services
So, what should agencies be doing now?
- If they aren’t already, any recruitment agency should be learning all they can about IR35 and their contractors’ working practices and written contracts to determine if their current IR35 status is correct.
- Agency staff will need the training to ensure they can explain changes to IR35 to contractors who are ‘inside’ or ‘outside’ the legislation.
- The first task has to be to work with both clients and contractors to determine the IR35 status of every contractor currently on assignment.
- Determining the true status of a contractor is vital and if the test declares that the contractor is not within IR35, an agency has to be comfortable not deducting tax and NIC, especially with the additional risks.
- All internal systems and processes, such as payroll and onboarding policies, will need to be changed.
Above all else, it is time to act now as before we know it next April will be here and we all need to be prepared. For the agencies struggling with accounting and payroll functions, IMS People Possible is the right offshore accounting support you can count on. To know more: http://ow.ly/QGnu30oYOSd