Are you wondering how the new IR35 legislation will affect your recruitment business?
We thought so, we've asked our friends over at SA Law to help explain the changes in more detail...
In July 2019, the Government published draft legislation that, with effect from April 2020, the IR35 ‘off-payroll’ rules will be extended to the private sector in the same way as the public sector has been required to do since April 2017. Inevitably, this has generated a lot of uncertainty around how end-user clients (“clients”) and employment businesses will practically operate the new legislation.
WHAT DOES THE IR35 LEGISLATION MEAN FOR YOUR RECRUITMENT BUSINESS?
In terms of what this means in practice, if a candidate is deemed by a client to be “employed” or “within IR35”, the employment business must ensure that it is paying the candidate either PAYE, via an umbrella company or making off-payroll deductions if they are still paying to a limited company. This will ensure that the candidate is taxed as an employee to protect the end client and the employment business itself from possible liability from HMRC.
However, if a client deems a candidate during a placement to be “self-employed” or “outside IR35”, the employment business can pay the candidate via whichever method the candidate wishes to be paid (i.e. via PAYE, to an umbrella company or to a limited company).
IF YOUR CLIENTS ARE DEEMED AS A 'SMALL COMPANY'
While the Government has confirmed that the changes will not apply to small clients, they will have a sizable impact on medium and large-sized clients who engage contractors through a personal service company (PSC). Although there was initially some confusion over what constitutes “small”, the Government has confirmed that it will use the same criteria contained in the Companies Act 2006, which deems an organisation as being “small” if two or more of the following criteria are met:
- Annual turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million
- Number of employees – no more than 50
For both incorporated and unincorporated businesses that cease to be small during an accounting period, the off-payroll working legislation will apply with effect from the start of the next tax year.
WHAT DOES THIS MEAN FOR CONTRACTORS ENGAGED WITH 'SMALL COMPANIES'?
Contractors who are engaged by small clients will continue to operate the IR35 rules as they currently do and the responsibility for determining their employment status will not pass to the client. However, medium and large-sized clients will become responsible for applying IR35 and determining the employment status of the contractor, rather than the contractor doing this themselves.
It is important that both clients and employment businesses start their preparations for the new legislation in advance of its implementation in order to avoid any last-minute panic or the incorrect determination of contractor’s status. Employment businesses should start speaking to their clients about the legislation to let them have details of the “check employment status for tax” (“CEST”) test on the Government website (https://www.gov.uk/guidance/check-employment-status-for-tax). Client also need to understand that it they might need to increase rates to compensate for limited contractors moving to PAYE or umbrella companies.
PREPARATION FOR APRIL 2020
It is advisable to remind clients to have processes in place to determine if the IR35 rules apply to future engagements. Under the new rules, clients will also be obliged to have a dispute resolution procedure in place to allow for status decisions to be challenged (the government will be setting minimum criteria for this).
Both employment businesses and clients should review and amend the terms and conditions upon which they engage contractors to ensure they are compliant with the upcoming IR35 rules. Specialist advice should be sought if current contracts need amending. In addition, having an agreement in place which sets out that each party agrees as to the status of the contractor will evidence the true nature of the relationship as it will outline the specific reasons why IR35 doesn’t apply. A document in this regard will go a long way if an IR35 enquiry is raised by HMRC.
Employment businesses should check their current payment software and payroll systems and determine whether they are capable of operating deductions for tax and NICs. Training should be provided to those who oversee the processing of invoices to ensure that the contractor receives the correct net payment and any VAT.
WHO IS LIABLE?
Liability for non-compliance will rest with the party that has failed to meet its responsibilities. It will then pass along the supply chain as each party fulfils its obligations which means that no one will be able to disregard any issues and assume it is someone else’s problem. Essentially, HMRC will have the right to transfer tax liabilities within the supply chain until they find someone who can pay. All parties in the arrangement should therefore choose to engage with reputable and compliant businesses/individuals in order to manage and ultimately avoid future risk.
With this in mind, employment businesses should also assess the umbrella companies they are using to ensure they are making the correct PAYE deductions. It is possible that some might be using methods which could leave both the client and employment business liable for taxes. As part of this process, it is worth checking whether the umbrella company being used is registered with a recognised body such as Professional Passport, FCSA or one of the recruitment movements such as REC, APSCo or TEAM, all of whom will be familiar with IR35 requirements.
With less than 12 months to go until the new legislation is enforced, both employment businesses and clients who engage contractors through PSCs need to consider the practical steps they can take in preparation and understand their obligations under the new rules.
Click here to read other interesting articles on the SA Law Website https://salaw.com/views-insights/
HOW TBOS CAN HELP YOUR AGENCY WITH THE UPCOMING IR35 CHANGES
TBOS currently provides many PAYE schemes to our agency clients, because of this we believe it would be advantageous for most of the affected candidates to move to the agencies PAYE scheme instead to an umbrella company. This will aid the agency cash-flow as the agency will not have to pay VAT on the candidate’s rate and will be holding holiday pay and PAYE money in the agency bank account until it needs to be paid out. From our experience, there is no visible advantage for the candidate to use an umbrella company. From the figures we’ve seen, there is no real difference between the take home pay through the agency PAYE compared to an umbrella company because they can’t claim expenses.
If you would like to discuss your payroll requirements ahead of the IR35 legislation changes, please do not hesitate to call our office on 0345 504 6333.