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IR35: What Is It and What Does It Mean for Recruitment Companies?

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Note: this blog is for informational purposes only and not for the purpose of providing legal advice. You should contact your legal counsel with respect to any questions or issues regarding IR35. 

Since 11 July 2019, when the UK government issued draft legislation confirming that upcoming changes to IR35 will come into play in April 2020, businesses in the recruitment sector have been coming to terms with the significant impact this will have on them.

HMRC (Her Majesty’s Revenue and Customs) estimates 20,000 recruitment agencies will be impacted by the changes in IR35 legislation where they provide off-payroll workers (contractors) via intermediaries, commonly Personal Service Companies, to their clients.

As an employer solutions partner at RSM and a specialist in IR35, I have outlined the key points of the legislation and how it will impact recruitment companies. I’ve also recommended some important considerations for recruitment companies to prepare for April 2020. Recruitment companies should not underestimate the amount of preparation required.

What is IR35 and why is it changing?

IR35 is the UK government’s anti-avoidance tax legislation. It is designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance Contributions as other employees. The rules do not apply to the self-employed. 

Existing IR35 regulations have failed largely because each intermediary, such as a Personal Service Company, has had to ‘self-assess’ whether the rules apply to them. HMRC estimates the cost of non-compliance with the current regulations in the absence of any change will grow to £1.3 billion by 2023/24 in the private sector. 

What is the proposed change?

Before we discuss the proposed changes, it’s worth clarifying a couple of key terms.

End-User refers to the client company where the worker is working. 

Fee Payer is who pays the Personal Service Company, which may be the end-user, a recruitment agency, or another third party, such as an RPO.

The proposed changes to IR35 are as follows:

  • From April 2020, the end-user of the worker’s services must assess whether IR35 applies unless the end-user client is a small company as defined by the Companies Act (see below).
  • Medium and large end-user businesses must provide a status determination statement to both the worker and any third party it contracts with, such as a recruitment agency.
  • The fee payer paying the Personal Service Company will become responsible for accounting for and paying the related tax and National Insurance Contributions (NIC) to HMRC.

This change was first introduced for the public sector in 2017. The reforms are now being amended and extended to the private sector for medium and large businesses only.

Are there any exemptions?

Small end-user companies are exempt from the proposed new IR35 legislation. This broadly refers to a business that has two or more of the following features:

  • Turnover of £10.2m or less;
  • A balance sheet total of £5.1m or less;
  • 50 employees or less.

Unincorporated entities, such as partnerships, will be subject to a simplified test based on whether or not their turnover for a calendar year exceeds £10.2m. There are complexities in the case of subsidiaries of a larger parent company and joint ventures. Advice should be sought prior to concluding that the small company exception applies.

What do the new IR35 reforms mean for recruitment companies?

From April 2020, it will be the responsibility of medium and large businesses in the private sector and public sector entities to determine whether or not IR35 applies to any off-payroll workers they engage with. They must also provide a status determination statement to the worker and any third party, such as a recruitment agency, including their reasons for the determination.

The recruitment agency must pass the determination on to the next party in the labour supply chain (if applicable), such as another agency. Failure to pass on the determination will result in the tax and NIC liabilities resting with the party that fails to pass on the determination.

The end-user business must set up a status disagreement process and respond to any appeals from off-payroll workers or the fee payer within 45 days of receipt. Where the recruitment business is the fee payer, it will need to liaise with the worker and decide whether to challenge status determinations and establish a process for doing so. Where IR35 is determined to apply, the fee payer must apply PAYE and NIC withholding, including the additional cost of ‘employer’ NIC and potentially the Apprenticeship Levy.

Crucially, for recruitment businesses where there has been non-compliance further down the labour supply chain, tax and NIC liabilities may potentially be transferred back up to the first agency in the chain and, ultimately, to the client (the end-user).

What should recruitment businesses be doing now?

Recruitment businesses should not underestimate these changes and sufficient preparation is crucial. As a starting point, we would suggest those in the sector should:

  1. Assess current arrangements and determine the number of workers being supplied to clients who operate via off-payroll arrangements, such as PSCs, who could potentially be caught by these rules.
  2. Review arrangements involving complex labour supply chains and determine if these are likely to increase your risk profile for payments on or after 6 April 2020.
  3. Establish whether any of your clients are likely to be outside the new rules by virtue of being a ‘small’ business and start an early dialogue with clients to confirm the position.
  4. Make arrangements to explain the changes, including the status disagreement process, to the workers you use who operate via intermediaries, such as PSCs.
  5. Assess the direct and indirect financial impact of the proposed changes. For example, will the recruitment business that is the ultimate fee payer need to account for and pay the related tax and NIC, including the additional cost of employer NIC? Consider whether you can renegotiate contracts with your clients to absorb these additional costs.
  6. Be particularly mindful of the potential additional costs and risks when entering into new arrangements or when renewing existing contracts that extend beyond April 2020.

Above all, enter into early dialogue with your clients and prospective clients. Recruitment businesses that are proactive and can demonstrate that they do not have complex labour supply chains and are compliant are likely to be in demand!

How can RSM help?

Our specialists have detailed knowledge of the proposed rules and practical experience of implementing the changes. We have a multi-disciplinary team of experts who can provide advice and help you prepare for all aspects of the proposed changes, including:

  • Designing new processes and controls, such as payroll, human resources, finance, data management and IT
  • Workshops and bespoke training
  • Assisting with status determinations and status disagreement appeals
  • Help with your budgeting, and key stakeholder communications
  • Our Bullhorn integrated cloud software InTime has been designed specifically for the recruitment sector to streamline back-office processing (including but not limited to time and expense capture, PAYE and contractor payments and e-billing). RSM’s IR35 back-office solutions include:
    • Payroll outsourcing – we can provide an outsourced payroll service for impacted contractors
    • PAYE software supply – linked seamlessly with InTime pay & bill software, you can simply manage the payments yourself using our PAYE module

For the latest information and how we can help, visit our IR35 hub at https://www.rsmuk.com/ir35.

IR35David Williams-Richardson, Partner

David is a partner in the employer solutions team in RSM’s Gatwick office, specialising in all aspects of employment tax compliance and advice. He is a specialist in all employment tax aspects of the off-payroll working rules (IR35). He also has particular expertise in issues, such as implementation and operation of salary sacrifice, employment status, termination payments and dealing with HMRC disclosures and reviews, including advice on employment tax aspects of senior accounting officer (SAO), Know your Customer (KYC) and traditional PAYE audits.