IR35 Guide for Recruiters

Now over 20 years since the initial impact of the ‘Intermediaries Legislation’, often referred to as IR35, the new changes relating to April 2021 will be felt a lot more intensely by recruiters.

The original legislation was created to ensure that contractors operating as ‘disguised employees’, were paying the correct amount of tax and NI by taxing them in a similar fashion to those who are employed.

As it became a popular route for contractors over the years, it also created a problem for HMRC because the decision of how the rules were applied rested solely on the contractor e.g. if they were a genuine contractor (outside IR35) or an employee (inside). Unsurprisingly, most contractors put themselves outside of IR35 and enjoyed greater tax benefits, something that HMRC disagreed with in many instances, but found hard to enforce against by having to target individual PSC’s every time they brought a case. The knock-on effect was that HMRC were not winning enough of the IR35 employment related cases which is why they have targeted the ‘upper chain’ in a move designed to have greater success and ‘self-policing’ of their policies.

What’s changing?

Many recruiters will be aware of the changes that affected the public sector in 2017, and from 6 April 2021 the similar IR35 reforms to the private sector will come into effect, meaning that contractors will no longer hold the responsibility of determining their employment status on assignments.

The main consequence will be that the end hirers will be responsible for assessing IR35 status. Where contractors are found to be inside IR35, the fee payer e.g. a recruitment agency will have to deduct PAYE tax and National Insurance from any fees paid to the contractor's limited company.  

The Impact

The reforms give your clients the responsibility for carrying out IR35 assessments, which is easier said than done due to the additional work involved, but also the exposure to compliance risks.

Where the organisation engaging the PSC is medium or large the reforms to the private sector will see end hirers having to provide Status Determination Statements (SDS) to both the contractor and the first agency in the supply chain.

Status Determination Statement

A new inclusion, the SDS declares a contractor’s employment status following an IR35 assessment and provides the reasoning behind the determination. This statement must be provided before the contract begins, and meet the basic criteria:

• Confirm all parties in the supply chain and their details
• Verify whether the determination finds the contractor either inside or outside IR35.
• Detail the reasons for the determination outcome.
• Outline the appeal process should the contractor wish to appeal the decision.

Of course, for those contractors assessed as being outside of IR35, there will be little change apart from maybe getting used to the new assessment process.

The fee-payer obligations

Because it is normally the recruiter who pays the contractor’s earnings to their limited Company, this will mean that any PSC’s who are assessed as being inside IR35 it will be the agency who has to complete the “deemed employment” calculation and make deductions for PAYE tax and NICs, including employers NI. This causes extra administration, potential costs, and headache for recruitment providers.

Supply chain trust

Following the reforms, where HMRC believe there is no realistic prospect of recovering the outstanding tax and NI from the fee-payer, which could be down to a disputed SDS, they could look to recover this from the end hirer. HMRC have stated that this will only be used where they believe a tax avoidance scheme has entered the supply chain.

This makes it of paramount importance that end hirers and recruiters work closely with each other to have a clear process of how they will engage contractors, and if engaging with PSC freelancers, which level of workers to assess, ensuring an SDS has been completed properly and keeping communication open throughout the chain.

Assessing the workforce

A good exercise to complete in conjunction with the end hirer is to look at current contractor usage and what might need to change. This includes:

1. Identify the contingent workforce e.g. how many are PSC’s.
2. Clarify who is responsible for making the decision on employment status.
3. Identify where the tax liability sits – who will be the fee-payer.
4. Check the contract chains – direct hires, recruitment hires.
5. Confirm how the facts will be established for any potential future PSC engagements. e.g. status review tools from HMRC’s CEST, Qudos or IR35 Shield offering.
6. Establish a communication chain between the end hiring managers and yourselves.
7. Review the payroll process for engaging any contractors that are staying with their Limited company but are ‘inside’ IR35.
8. Confirm how the information is going to be collected, maintained and reported on.

The Result

Although these new changes do not mean the end of contractors being engaged through PSC’s per se, it will no doubt reduce the number of Limited Contractors that clients feel comfortable assessing and engaging with, especially in certain sectors.

‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace or there will simply be a removal of being offered a ‘Limited Company’ option when placements are presented. This is understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models. This will mean it becomes vital for the recruiters to be advising their clients early and with clarity on what the future of engaging with contractors looks like. This is also where working with a reputable umbrella provider could also make the difference

The Solution

It’s not all doom and gloom. We realise the effort required to get everything in place can be overwhelming, but we are here to help with compliant contractor options as an alternative to the rigorous process that now surrounds the engaging of PSC’s.

At Orbital, we are not looking to provide third party services for IR35 assessments backed by insurance, we are concentrating on what we do best – simple self-employed and PAYE services for any level of worker in any industry. It is not a crime to be despondent about doing the whole status determination process, there are other alternatives that can be just as useful for your contractors, you, and your end clients:

• CIS/Non-CIS Sole Trader – the next best thing to Limited Company, as sub-contractors are self-employed, but with a lot less admin. The less ‘fuzzy’ SDC test applies instead of the IR35 test.
• Umbrella PAYE – tried and trusted by recruiters and contractors in various industries over the years. This is a simple model where workers can engage on different assignments under one employment, with full employment benefits.
• Joint Employment – Straight up PAYE but with VAT savings for agencies who especially operate in zero-VAT rated/VAT exempt industries.
• PEO Model – Margin free for the worker on a ‘what you see is what you get’ PAYE rate. This is a bureau-style service with fully outsourced HR and payroll managed by Orbital.

If you would like to discuss how the options we have could be suitable for your temporary workers whilst also assisting your end clients with IR35 solutions, please drop us a line at: compliance@orbitalservices.co.uk or on the contact form below.

We can also keep you updated with any seminars/webinar events that we will also be hosting over the coming months.