Changes to the off-payroll rules next April will mean that recruitment agencies play a crucial role in the IR35 process. Agencies will need a strong understanding of both the off-payroll rules, and how the reforms are likely to impact their clients. This short guide sets out the main considerations and action points for agencies.
From 6th April 2021, medium and large companies in the private sector will bear the responsibility for determining the IR35 status of contractors working through a limited company. This will bring the off-payroll rules into line with changes to the public sector introduced in 2017. Additionally, the reforms will see the introduction of the Status Determination Statement (SDS) and a client-led disagreement process, as well as debt transfer provisions.
While it is the end-client’s duty to determine the IR35 status of the contractor under the new rules, the financial liability and responsibility for applying IR35 lies with the fee payer, which will usually be the recruitment agency. Agencies must ensure that they understand both their legal obligations, and the expectations of their clients in order to mitigate risk and ensure the continued functioning of the supply chain.
How agencies can assist in addressing IR35 risk
While the end-client is responsible for deciding a contractor’s IR35 status, it’s likely that they will rely on recruitment agencies to assist with this process. Recruiters will play an important part in mediating negotiations with contractors, which could involve contractual changes and the renegotiation of fees.
Agencies will need to ensure that the paperwork for outside IR35 engagements is correct. This includes ensuring that the “upper-level contract” between the end-client and agency, and the “lower-level contract” between the agency and contractor, are consistent.
Agencies will also need to implement processes to calculate, pay and report taxes for contractors who are deemed inside the legislation and put them on payroll – either their own or outsourced.
Recruiters’ IR35 Legal Obligations
In some cases, end-clients have required their agency to take on the IR35 determinations. Although this is not a legal obligation for recruiters, they must consider their relationship with the end-client and the repercussions of incorrect determinations on the supply chain. They must also make themselves aware of the following:
Small companies’ exemption: If you place a worker on assignment at a small company, the worker continues to carry the responsibility of determining the IR35 status of their own contract. This does not apply to organisations in the public sector. A company is considered small under the Companies Act 2006 when two or more of the following applies:
- Turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- Number of employees not more than 50
Applying the SDS: Once the IR35 status of the assignment has been assessed, the end-client must pass the Status Determination Statement (SDS) to the contractor and the next agency in the supply chain. This must be passed down the supply chain until it reaches the fee payer (usually the agency), who will then be responsible for applying the Status Determination Statement. If the contract is outside IR35, the agency will need to continue to monitor the working arrangements so that the contract accurately reflects the working practices. Any changes may require subsequent SDS and changes to the contract.
Making payment and deducting taxes: If the SDS deems the contractor to be inside IR35, then the fee payer (usually the recruitment agency) becomes responsible for paying the contractor appropriately by making a deemed payment calculation. The deemed payment calculation is the amount payable to the contractor’s business, minus any VAT, deductible expenses and costs of materials.
The agency will then need to deduct income tax and National Insurance Contributions (NICs) before paying the contractor the final sum. They will also need to pay the relevant employer’s NICs as the agency becomes the contractor’s employer for tax purposes. Payments will need to be reported to HMRC using a Full Payment Submission.
Potential problems agencies need to be aware of: The off-payroll legislation fails to define what an employment relationship is, instead using a complex combination of ongoing case law and key status tests, none of which are determinative on their own.
A number of independent inquiries, such as the Lords report, have found serious flaws within the legislation which have yet to be addressed by HMRC. In addition, the accuracy of the government’s Check Employment Status for Tax Tool (CEST) has been called into question numerous times.
Uncertainty around the reforms has led to many organisations adopting “blanket” policy in order to avert risk, such as automatically classifying all contractors as inside IR35, or introducing bans on contractors working through limited companies. There’s a real possibility that this will happen again as the deadline for reform approaches.
Although the April 2021 reforms introduce a requirement to take “reasonable care” when making IR35 status determinations, what constitutes reasonable care is not clearly defined in the legislation. This leaves contractors at a disadvantage, as does the “client-led” disagreement process for disputing status determinations.
IR35 Compliance Checklist for Recruiters
- Ensure you have correctly classified small companies who are eligible for exemption and keep up to date with any changes that would affect this classification.
- Compile an audit of your current end-clients to understand their IR35 standpoint and how they plan on making determinations.
- Consider if you are willing to carry the risk of being the fee payer and if your systems will be able to cope. You need to consider how you will make PAYE deductions from limited company invoices.
- Running a further internal audit on the number of off-payroll contractors you have supplied will provide valuable insight.
- Flag contracts that will extend past April 6th 2021 and speak to your clients about their plans to assess these assignments.
- Ensure you are comfortable with explaining IR35 and the possible impacts to your contractors and end-clients.
How can Amaze Umbrella help?
Engaging a compliant umbrella company such as Amaze means that we become the contractor’s employer, taking the fee payer responsibilities from you. As the fee payer, we’ll make all the necessary tax and National Insurance deductions and pass these on to HMRC.
This completely removes the IR35 risk from the supply chain, leaving all parties to continue to fulfil their main obligations. Projects won’t be delayed and contractors will always be paid on time with our daily payroll.
What’s important is that agencies act now to ensure that they are protected from the fallout of reform. Our FCSA accreditation for umbrella services means that we’re 100% compliant with all employment legislation, meaning you’re protected from unscrupulous practices that can leave contractors and agencies exposed to risk. If you would like to find out more about the IR35 reforms and what they mean for your agency then please get in touch here.