Guest blog: What recruiters need to know about IR35 and the off-payroll working rules
Guest blog by our partner Qdos
IR35, and the off-payroll working rules, in particular, have been featured in the media even more than usual in recent weeks.
From the revelation in the now infamous mini-Budget that IR35 reform was to be repealed, to a spectacular U-turn less than a month later, the toing and froing from the government has left recruitment agencies with plenty of questions.
In this jargon-free article, we update you on the latest and outline ways recruiters like you can ensure compliance.
What is IR35?
Before we dive in and so that you’re up to speed – IR35 is a legislation introduced in 2000 to prevent contractors from avoiding tax by operating as ‘disguised employees’.
‘Disguised employment’ is when a contractor operating via their own limited company provides their services in a manner that reflects employment, rather than self-employment.
The thinking is: if a relationship between the contractor and the client reflects employment, then the contractor should be taxed as an employee.
What’s the state of play?
Despite the back and forth in Westminster, IR35 reform – also known as the off-payroll working rules – remains in place.
Ex-Chancellor Kwasi Kwarteng had announced that reform would be repealed in April 2023, only for his successor, Jeremy Hunt to scrap this change, along with the vast majority of the tax changes revealed in the mini-Budget.
So what does this mean for recruiters?
As you were, effectively. Recruitment agencies must continue to ensure their IR35 compliance given that nothing has or will change – at least for the foreseeable future.
With the off-payroll working rules remaining in play, public sector organisations, plus medium and large private sector businesses are responsible for determining IR35 status.
Fee-paying parties – often the recruitment agency – carry the liability, assuming that all legal obligations have been met throughout the supply chain.
With this in mind, it’s vital that recruiters ensure the IR35 status determinations made by the end-client are accurate and compliant.
How seriously is HMRC taking IR35 compliance?
In a word, very. Government departments have collectively been issued with IR35 bills in excess of £250m. These staggering amounts – which also include multi-million-pound fines for the ‘careless application’ of the IR35 rules – tell you everything you need to know about HMRC’s priorities.
Meanwhile, in the private sector, the tax office has been busy conducting compliance checks, issuing letters to businesses in various sectors asking them a range of questions – from how many contractors they place or engage to how is IR35 status assessed, and much more.
Throw in the economic backdrop and all the signs point towards increased IR35 compliance activity going forward.
Key IR35 tips for agencies:
Do not rely on HMRC’s IR35 tool (CEST)
The government’s Check Employment Status for Tax (CEST) tool doesn’t fully align with IR35 case law, has been dismissed in IR35 tribunals and cannot provide an answer regarding status in approximately 20% of cases.
Seek genuine IR35 expertise
Fortunately, CEST isn’t mandatory. Independent IR35 contract assessments, for instance, provide a rigorous, in-depth review of IR35 status. If an end-client insists on using CEST, recruiters should ideally seek a second opinion, to ensure compliance.
Work with end-clients
Ultimately, it’s in a recruiter’s best interests to ensure compliance. Along with the fact that fee-paying agencies may carry the liability, contractors naturally gravitate toward contracts that belong outside IR35.
By collaborating with end-clients and contractors to make fair, accurate IR35 status assessments which allow genuine contractors to operate outside IR35, agencies will be better placed to attract these workers.
Some end-clients have chosen to stop engaging contractors as a direct result of IR35 reform – whether by insisting that they operate via umbrella companies or become employees.
This can have a significant knock-on effect on agencies placing large numbers of contractors. Therefore, recruiters who rely on contractors are advised to reach out and support end-clients with their IR35 processes, helping them to understand that IR35 reform is manageable with the right approach.
Protect your interests
Given fee-paying recruiters are liable for IR35 under the off-payroll working rules, having comprehensive insurance in place in the event of an IR35 investigation is critical. IR35 insurance covers the cost of expert advice, defense against HMRC and resulting liabilities, along with fines and even interest up to your level of cover.
The road ahead
After the U-turn over the IR35 reform repeal, the pressure is already mounting on new Prime Minister, Rishi Sunak, to examine the true impact of this legislation.
However, given Sunak was Chancellor when reform was introduced in the private sector and made no mention of IR35 in his first leadership campaign, recruiters should work on the basis that IR35 will remain in its current form for the foreseeable future.
With this in mind, IR35 compliance must remain a priority.
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Qdos are specialist providers of IR35 support and insurance services for recruitment agencies and contract staff. They help protect your business and your clients from tax liability and legal claims, providing peace of mind for you and your clients. View their services here