A huge shift in tax rules is occurring – yet thousands of businesses aren’t prepared for this change. And its impact will be felt not just by companies, but by the recruitment agencies that work with them.
From April 2020, an update to IR35 legislation means that thousands of contractors being employed through a limited company will need their tax paid at source by the hiring company. This rule is being brought in to tackle the £1.3 billion cost of non-compliance currently affecting the UK government.
With less than a year to go until regulation changes come into force, it’s vital that recruiters get up-to-date as quickly as possible, and help your clients to transition to this new way of managing contractor tax requirements.
IR35 is nothing new. It was created in the year 2000 to make sure that companies and contractors aren’t gaining an advantage by providing services via a limited company, rather than being in full-time employment.
In basic terms, IR35 exists to stop businesses ‘disguising’ people who are effectively employees of their company by recruiting their services through another person or entity. Off-payroll workers should pay a similar level of tax and national insurance as a regular employee, but because they don’t meet self-employment regulations, there is a lot of ambiguity around tax requirements – so they often end up paying less than they should.
While some businesses have paid attention to IR35 since it came into force nearly twenty years ago, many firms and contractors are still playing the system. So in 2017, the government announced that it would implement new rules affecting medium and large public sector organisations – and the same standards will come into force for private sector businesses from April 2020.
Previously, it was the contractor’s responsibility to ensure they had the right tax code and set-up within their employment. However, under the new IR35 regulations being enforced from 2020, this responsibility will shift from freelancers to employers, and they will be taxed at source via PAYE.
This means that companies will be responsible for deducting income tax and National Insurance Contributions (NICs) for any contractors that fall under the IR35 status, as well as paying NICs for permanent employees. Failure to do this correctly will result in a financial penalty.
The government has launched a Check Employment Status for Tax (CEST) tool to help firms work out whether their contractors should be classed as employed or self-employed for tax purposes.
The new rules state that responsibility for calculating and making tax payments and NICs to HMRC rests with whoever is paying that contractor – which in some cases is the recruiter, rather than the company using their services. The worker then sets their own tax and NIC liabilities against that figure.
Many recruitment agencies are concerned about being stung for tax payments if there is a shortfall between what either they or their client has paid at source, and the amount due when the contractor tallies up their final calculations for the year.
However, the government recently released a Finance Bill confirming that this will not be the case; only the end client or hirer will be ultimately responsible for determining if a contractor falls within IR35 and settling any tax shortfall that occurs.
Just because the direct impact won’t be financial, doesn’t mean that IR35 legislation changes will not affect recruitment agencies.
For starters, it may change the type of contracts companies are willing to embrace. Some may decide to avoid any type of relationship that could fall under IR35 regulations, instead looking to employ more fixed-term contract workers that are quite obviously freelance. There could also be a reduction in the number of temps being used, which is a major revenue stream for many recruitment agencies.
Additionally, most organisations aren’t tax experts, so they may look to their chosen recruiter for support with IR35 regulation changes.
Recruitment agencies have a critical role to play in making sure their clients understand how rules are changing, pointing firms in the direction of tools like CEST that can help them stay compliant. Yet a recent survey by Qdos revealed that 92% of UK companies are yet to be contacted by their recruitment partner to discuss the impact of IR35.
Finally, it’s very important for recruiters to stay up-to-date with the latest regulations to make sure contractual obligations are in place going forward.
There needs to be a framework in place for determining who should pay any new contractors that fall under IR35 legislation, and assess whether new back office management systems and processes need to be brought on-board to ensure that tax changes don’t create yet another admin burden for already stretched recruitment agencies.
ETZComply ensures contractor information is kept up-to-date at all times. Our market-leading back office software enables candidates to upload their information and manage all contracts, legal documentation and support material through one online dashboard – reducing your risk of non-compliance.
Book a free demo to see how ETZComply and our other software modules can easily manage your recruitment agency back office.
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