IR35 changes and the implications for Recruiters

It is probably fair to say that all recruitment companies and the candidates and clients know what IR35 is and the importance of adhering to it. For completeness, though, and just to review, basically it is the requirement to pay tax and national insurance for contractors. One way of thinking about it is that, in essence, it applies if you could be considered part of the daily operation of the business. The bottom line is IR35 says you cannot act and behave like a regular employee and still claim to be on contract. There is plenty of advice around on IR35 and where it applies and, as usual for this kind of legislation, there seemingly endless loopholes and pitfalls.

As with all legislated and complex tax-related issues, it’s best to make sure you are clearly meeting the demands of the reporting and regulations requirements. If you don’t, then there are potentially some real problems to be handled, as some high-profile cases have shown. Since it came into force in 2000, IR35 has been through several changes, and in 2017 it is due another major overhaul, his time with a focus on public service.

By the beginning of 2017, all public sector departments will have come up with a 5-year plan to plug the skills gaps in their services and, of course, the contractors needed to fulfil them. As part of this process, they will also need to assess if those contractors should be on payroll and, therefore, PAYE. These are not changes to IR35 as laid out in the last budget; they are additional rules relating only to public service sector providers. Some of the changes to come into force will be:

• If a contractor is operating as a limited company, the company responsible for paying that company will need to assess the status of the working practices in place. This could be direct from the public service department but is quite likely to be via an agency.

• If the working practices in place are deemed employment, then the company who is responsible for paying that company will need to assess the payment as employed work. That means Tax and N.I. will be deducted and it will probably mean the end of the tax relief for travel and subsistence.

• The contractor’s limited company will no longer be liable for the tax and national insurance – it will become the responsibility of the paying agent.

This is only a brief overview, and there are other rules and regulations surrounding the new schedules. However, clearly there is a change in the emphasis of where the responsibility lies in ensuring that the tax and NI needs are met. As always, everyone in the chain will need to be aware of the changes and ensure that the payment arrangements are equitable and robust.

There are, to put it mildly, some potential issues to be considered as well. For example, what happens if the paying agent is not skilled enough to assess the new rules? While it is probably a simple change for teachers or medical industries which are likely to be all public sector, what about things such as I.T., working for the BBC or C4, or things such as building support areas which may be both? If the contractor is supplying public sector and private sector, there will need to be two different criteria applied to the payroll and corporation tax ​demands. What about existing contracts where the pay and tax details were created before the new rules? If the process of deciding what is and is not deemed ‘employment’ is not clear, then there could be a grey area of subjective judgement coming into play. That could lead to some variation in how hard and fast the rules are applied. At the moment, the process of appealing against a decision seems to be undefined as well.

So, the biggest burden of these new regulations would seem to fall on the agent or paying company supplying the staff to the public sector. That will mean at best, more paperwork, and could mean confusion and difficulty in the initial stages.

The government will be introducing an electronic system to help with the process and will presumably offer a full range of support materials and advice to ensure this all goes smoothly, so some of the current grey areas could well become clearer before they are introduced next year. At this stage they are under review, but it seems very likely that they will come into force as they appear to have the full backing of the government and the preparation is already underway.

As always, the advice is to make sure that wherever you are in the chain, you know your responsibilities and that that you are working with a reputable and competent supply chain. There is a link below to the guidance, it’s not exactly light reading, but it is worthwhile.

https://www.gov.uk/guidance/ir35-find-out-if-it-applies#penalties-for-not-following-ir35-rules

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/526614/Off-payroll_working_public_sector-reform_intermediaries_legislation.pdf

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