TBOS's Advice On The New IR35 Legislation To Recruitment Agencies Placing Contractors In The Public Sector
The recruitment industry (or part of it) is heading towards a major legislative change on the 6th April 2017, the likes of which haven’t been seen since AWR was implemented in October 2010. This legislation will affect all agencies making contract and temporary placements into public sector clients and will change the way that agencies make payments to the candidates working for these clients.
BUT WHAT DOES IT ALL REALLY MEAN?
The legislation (in layman’s terms) means that any contract or temporary placement made into the public sector (based on if the client is registered on the Freedom of Information Act Listing) will be subject to an IR35 test that will determine whether the candidate is to be paid either as an “employed” or “self-employed” worker. The test should be completed by the public sector client using a HMRC online tool and once completed the status will be given to the recruitment agency (deemed the “fee payer”) so that they can ensure the candidate is paid correctly. Depending on the result, the agency can pay the candidates as follows:-
- If the candidate is classed as “employed” then the agency can pay either through their PAYE scheme or via an umbrella company. Though payment can still be made to a limited company, you must ensure that tax and NI deductions are made before payment is made.
- If the candidate is classed as “self-employed” then the agency can pay under their PAYE scheme, pay via an umbrella company or to the candidates own limited company.
Whereas the responsibility for the IR35 status and the payment of the correct taxes used to fall to the contractor and the company making payment to them (i.e. Umbrella or Limited Company), from the 6th April 2017 it will be the responsibility of the recruitment agency (“fee payer”) to ensure that the candidate is paid under the correct IR35 status provided by the public sector client and as such that the correct taxes have been deducted and paid to HMRC.
WHAT’S THE REASON BEHIND IT?
This legislation has been brought in by the government to ensure that contractors who are doing the same job as an ‘employed worker’ are not able to obtain greater take home by claiming various expenses and paying lower taxes by taking dividends instead of a full salary. With the changes to umbrella companies meaning that candidates cannot claim travel and subsistence expenses from 6th April 2016, this pushed a number of candidates to change to running their own limited companies but not being classed under IR35 correctly. The new IR35 legislation will keep the candidates who should be classed as “self-employed” running through their own limited companies and move the ones who should be “employed” back to paying the correct PAYE payments.
WHAT ARE OUR CONCERNS?
The main issue for the recruitment industry is that the legislation has been rolled out very poorly by HMRC, who made a major change to the legislation in December 2016 (where the client is now going to provide the IR35 status instead of the agency generating the status) following a long consultation. Also the HMRC online tool is still being tested and refined and will not be available until 27th February 2017 so no placements can be tested yet and there is further clarification to the legislation due in March 2017. All of these delays mean that there is very little time for the affected recruitment agencies to implement processes and procedures to ensure that the current placements and new placements conform to the new legislation.
We have grown concerned over the past couple of months due to the number of rumours and conjecture being banded around by some umbrella companies about how the agencies should proceed at this stage with their contractor placements, as well as trying to scare the agencies into making rash decisions before the legislation actually comes into force. Some companies are advertising a supposed ‘solid solution’ to ensure agencies are not liable for the IR35 status and will take away the responsibility of the candidates’ taxes from the agency if they move all of their contractors to their company. Some companies are citing that they have created a solution with various expert lawyers and accountants to get around the legislation. However, because the legislation has not yet been finalised, there is still time for HMRC to quash these solutions (if they are in fact able to do what they say they can) before the 6th April 2017.
DO YOU NEED TO TAKE ANY IMMEDIATE ACTION?
TBOS is very apprehensive that agencies will start making decisions on behalf of their contractors based on discussions with the umbrella companies or reading their advertisements where it may not be necessary. At our visit to the Recruitment Agency Expo this week, it became apparent from the agencies and suppliers that we spoke to that there is much uncertainty surrounding what the legislation means for the industry and what recruiters should be doing now to prepare themselves.
All of the TBOS clients that deal in the public sector have been contacted and given the following advice:-
- Firstly, identify which clients are on the Freedom of Information Act list (some clients may surprise you by being on the register such as: TFL, The National Gallery, BBC, Channel 4, etc.)
- Secondly, identify the candidates working at these clients to see how they are currently being paid:
- If the candidate is being paid PAYE or through an umbrella company then they will meet the requirements for both IR35 status’s (i.e. “employed” or “self-employed”)
- If the candidate is being paid through a limited company or self-employed, these are the candidates who the legislation may affect
- Thirdly, speak to the clients to see how they plan to implement the new legislation and when (after the 27th February 2017) they will be able to let you know the existing candidates IR35 status.
- Lastly, speak to the candidates who may be affected by the legislation to ensure they know there may be a change to their payments going forwards depending on the outcome of their IR35 status.
TBOS believes that at this stage, until the HMRC online tool and the amendments to the legislation are released, it is not in the agencies best interest to make any drastic changes to the candidates on-site or engage any services that may be unnecessary. Communicating with the clients and any affected candidate is the best option at this stage to ensure that all affected parties are on the same page should any changes need to occur.
As far as TBOS can see, the changes that may need to be made would be only to the “employed” status candidates if they are working through their own limited company or self-employed company. These candidates should ideally need to be moved onto the agency PAYE scheme or be paid via an umbrella company to ensure that the taxes for these placements are made correctly as an employed worker. TBOS understands that moving the contractors to this payment method is easier said than done, but it does need to be done to ensure that no tax liability falls on the agency for making incorrect payments.
HOW CAN WE HELP?
TBOS already runs PAYE schemes for the agencies we manage and we believe that in most cases, it would be advantageous for most of the affected candidates to move to the agencies PAYE scheme instead of 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 account until it needs to be paid out. There is no visible advantage for the candidate to use an umbrella company, as there is no real difference between the take home pay through the agency PAYE and an umbrella company because they can’t claim expenses.
We are also aware that this legislation only affects public sector clients and placements, but we envisage that in the future this will also be implemented outside of the public sector (although HMRC cannot say when/if this will occur).
TBOS will be keeping a close eye on the updated legislation and will continue to update our agencies on what they need to do to remain compliant. We will be providing further advice as the information is released but if you would like more information on how TBOS can help your agency through this legislation change, please contact our office.