IR35 is a piece of legislation which affects all contractors which provide services through a personal service company (PSC) and is designed to prevent contractors from working as disguised employees by taxing them similarly to those in permanent employment.
During the 2018 Autumn Budget, the Chancellor of the Exchequer announced reforms to off payroll working in the Private Sector, where the private sector business is a medium or large company. Changes were to be introduced in April 2020 however following the COVID-19 pandemic, the government announced that reforms would be postponed to April 2021.
An extension of changes introduced in the public sector two years ago, the reforms will see medium and large businesses become responsible for assessing the IR35 status of their contractors. As part of these changes, in the event of an inside IR35 determination, the tax liability will also transfer away from the contractor to whichever party in the supply chain manages paying the worker (the fee-payer). The primary result of this transfer of responsibility is that in the event of an inside IR35 determination, the fee-payer will be responsible for paying any taxes to HMRC.
While the basics of the proposed amendments to the IR35 legislation are largely understood by recruiters, there are several questions that recruiters such as yourself may be asking.
So, to supercharge your understanding of IR35 reform, we’ve answered your most frequently asked questions.
Why is IR35 relevant to recruiters?
As a recruiter placing contractors in the UK, the changes to IR35 legislation is one of the most significant pieces of legislation which you need to understand. This legislation has been active since 2000 and has evolved over time.
When placing contractors who operate through their limited company, also known as a Personal Service Company, the topic of IR35 is inescapable.
The shift in responsibility means it is likely that your end hirers will be looking to you for guidance in how to apply the rules correctly.
Will contractors be automatically placed inside IR35?
This should be considered a possibility, as it happened to many contractors after the reforms to the public sector back in April 2017. Many public sector bodies treated their contractors in the same way, referred to as a blanket determination.
The April 2021 reforms introduce a requirement to take ‘reasonable care’ when making IR35 status determinations although what constitutes reasonable care is not defined in the legislation, it is unlikely that blanket determinations will satisfy this requirement. If HMRC find that the end hirer has failed to take reasonable care, the Status Determination Statement will not be valid and therefore the end hirer will retain the fee payer responsibilities and will therefore be responsible for any unpaid taxes.
Once the IR35 status of the assignment has been assessed, exercising reasonable care, the end hirer 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 (the organisation that pays the PSC) who will then be responsible for applying the Status Determination Statement.
As a recruiter, it’s in your best interests to work with your end hirer to ensure that all contracts are assessed correctly.
What are the implications of being inside IR35?
Your role as a recruiter can often be challenging, and complicated legislation doesn’t simplify things.
Currently in the private sector if the contract is found to be inside IR35, the contractor must take what is referred to as a ‘deemed salary’ payment from their company, i.e. the income that their company receives for the inside IR35 assignment is treated as salary, after a 5% allowance for expenses. The contractor must apply the IR35 rules and account for this, with help from their accountant. For inside IR35 engagements in the public sector, Income Tax and National Insurance contributions are deducted at source by the ‘fee payer’, from April 2021 this will be the case for engagements inside IR35 in the private sector where the engagement is with a medium or large company.
What are my next steps?
As a recruiter, there are a few steps to take to ensure you’re best prepared for when these changes come into effect. We would recommend that you begin assessing your flexible workforce to identify how many are working through a PSC, and how they could be affected.
Recruitment agencies will become responsible for the following set of responsibilities:
- Although the end hirer will be responsible for determining a contractor’s IR35 status, you need to pass status determination statements to the next party in the supply chain.
- Discussing the implications of an inside IR35 status determination with the end hirer and confirming if there will need to be a rate renegotiation. Is the end hirer willing to absorb the additional costs? Our Business Impact Tool can help with these discussions.
- Where you occupy the position of ‘Fee Payer’ for inside IR35 assignment payments you will be responsible for deducting National Insurance and Income Tax.
- Paying the contractor their net pay (as opposed to gross invoice value) where the assignment is found inside IR35
- Paying the correct amount of taxes deducted to HMRC
- Making RTI submissions to HMRC
How can we help?
Engaging a compliant umbrella solution such as Parasol means that there are no fee payer responsibilities for you, as we become the contractor’s employer. As the fee payer, we’ll make the necessary tax and National Insurance deductions and pass these on to HMRC.
We’re with you all the way to guide you through the reforms to the private sector. If you would like to find out more about the IR35 reforms and what they mean for your agency, take a look at our dedicated IR35 hub for recruiters.