18th January 2021

Countdown to IR35: what recruiters need to do before April


The UK government’s proposed changes to IR35 tax legislation are finally coming into force in April 2021, after being postponed due to the global coronavirus pandemic.

IR35 will have a massive impact on how recruitment agencies operate, and the type of candidates you can put forward. To help you prepare, ETZ is recapping how regulations are being reformed, and what your team needs to do between now and April to be IR35-ready…

What is IR35?

Most recruitment agencies will be aware of IR35 by now, and what it means for your business. As a refresher, IR35 is a piece of tax legislation that affects both employers and contractors – and its requirements are changing.

Under IR35, HMRC can collect additional revenue in a situation where companies are using intermediaries or consultants on a regular basis, in lieu of permanent staff. It stops organisations from appointing limited/personal service companies who are effectively ‘disguised employees’ – meaning they get the benefit of their expertise without having to pay National Insurance Contributions (NICs), sick leave, holiday pay or pension contributions.

While IR35 itself is not new, the remit for off-payroll tax is changing in April 2021. From this date, all private sector businesses with at least 50 employees and a turnover in excess of £10 million will be obliged to assess the employment status of their contractors, using a defined set of rules.

For any intermediary found to be fulfilling the role of an employee, companies will need to set up a PAYE arrangement for that person’s income tax and NICs.

Who will be affected by IR35?

April’s changing legislation will affect both employers and those under contract. For example, if HMRC deems a personal service company to be an employee, they will be subject to NICs and income tax on the same terms as employed people – reducing their take-home pay by up to 25%.

We’ve already mentioned that larger enterprises will assume responsibility for calculating the status of the contractors they use. Any off-payroll tax due will be payable in addition to that contractor’s fees, increasing the financial commitment associated with instructing them.

To help companies and contractors work out whether any of their current arrangements will fall under the new IR35 update, HMRC has launched a new online Check Employment Status for Tax (CEST) tool.

However, as the Freelance Informer reports, this tool has already come under scrutiny, as over 188,000 users have received an inconclusive verdict when completing the online questions. As such, many employers are looking for support from an umbrella company that can ensure the freelancers and contractors they use are operating outside of IR35.

What does IR35 mean for recruiters?

As a recruiter, there are real implications to the off-payroll tax update, which your agency must be aware of before new legislation comes into force in April.

First of all, companies may be apprehensive about the type of person they appoint, for fear of falling under IR35. Therefore, it’s important you establish whether your clients are happy to instruct off-payroll workers going forward, or if they would prefer not to use freelancers. It’s helpful if you have a recruitment CRM system in place to record this information, so you can accurately document their preferences.

Talking to businesses about their preferences could actually prove beneficial to your agency, as 89% of recruiters say their guidance has directly influenced their clients’ IR35 strategies.

Secondly, you need to understand the exact set-up of every candidate you put forward for positions and projects. Many recruiters currently supply personnel that operate through private service companies, and therefore will fall under the new IR35 criteria.

While there is no direct financial impact on recruiters in terms of liability, a decline in demand for freelancers in light of IR35 will impact many agencies’ bottom lines. However, there may be chance to offset this dip if some clients decide to look for permanent employees in place of current contractor arrangements.

You may also choose to protect your consultancy revenue stream by employing the services of an umbrella company to manage freelancer employment and payroll services. This external partner will ensure intermediaries are operating outside of IR35.

What should recruiters do to prepare for the update to IR35?

While there’s no way of stopping new legislation from coming into force, recruiters can protect your business from the impact of IR35 changes by ensuring you’ve done the following before April 2021:

For companies, candidates and recruiters, there will be an inevitable period of adjustment when IR35 adjustments are rolled out in April. A clear action plan and the right recruitment technology stack will make it much easier to adapt, and will minimise the negative impact of this legal change.

ETZ is already helping recruitment agencies to get IR35 ready. Book a free demo to find out how we can support your business.


PLEASE NOTE: The opinions expressed in this blog post are those of the authors and are provided for general information purposes only. This blog post does not constitute legal advice. Nothing in this website should be construed as legal advice. This blog post contains links to websites owned and operated by third parties.

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