Make sure your clients’ contracts and payroll are prepared for IR35

Does your recruitment agency supply contract staff or consultants to clients? If the answer is yes, the way they are hired and paid could come under scrutiny from 6^th April 2021, as an update to HMRC regulations comes into force.

Most recruiters will already be familiar with the fast-approaching IR35 update – which we explained in detail in a recent countdown to IR35 blog post. However, it’s important to understand what the new legislation means for compliance and payroll processes, or your medium-sized and enterprise business clients could face a hefty fine.

Compliance now falls to companies employing contractors

Up until this point, private sector companies haven’t needed to worry about the way in which they engage with and pay external partners. Many of them have chosen to work with personal service companies (PSCs) or limited company contractors, who can choose whether they are paid in full as off-payroll workers or whether they pay tax at source.

However, from 6^th April, IR35 changes mean these types of contract workers must be taxed at source like permanent employees – and the companies hiring them will face a fine if they fail to comply.

In fact, there’s more than financial penalties at stake for any companies that don’t meet the rule changes; the HMRC has announced plans to ‘name and shame’ companies that don’t meet IR35 regulations, according to The Freelance Informer.

As a recruiter, you have a responsibility to help your clients build legally compliant working relationships with contract or freelance staff, including the way they’re remunerated. If private companies want to continue collaborating with freelancers on off-payroll terms (outside IR35 regulations), then there are a number of requirements their relationship will need to meet:

1. Set out a clear scope of work

Employees need to be flexible in their role; freelancers don’t. The best way to ensure staff on your recruitment books meet new off-payroll legislation is to ensure they are contracted to undertake a specific scope of work for your clients.

If someone is employed to provide one service but there’s clear scope creep and/or a requirement to take on ‘ad hoc’ tasks, the HMRC may view them as fulfilling the role of a permanent employee – and they should therefore be taxed at source. Contract staff know exactly what they’ve been brought on to do, and they set their own systems and processes for getting that work done.

2. Don’t state required minimum hours

Another big difference between a genuine contractor and an employee-in-all-but-name is the way their remit is structured.

Most freelancers will be brought on to work on a specific task or project, however long it takes. They may be given a final deadline and interim milestones, but it’s up to the contractor how they structure their workload to deliver that piece of work on time.

If your client wants to engage contractors for a certain number of hours per week or month, or they give freelancers ‘core hours’ during which they expect them to be available, then that contractor will fall within IR35. Freelancers need flexibility.

It’s also important that your client doesn’t build a mutuality of obligation (MOO) clause into any contracts, or prevent freelance staff from working with other companies at the same time, as this can also indicate a personal service relationship.

3. Make sure someone else can also do the job

To meet off-payroll requirements, it’s important that your client contracts a company to undertake services, not a specific individual. For recruitment agencies, that may well mean that a client’s contract is with you – not the staff member you put forward for the job.

The reason for this is that if someone was unable to do their job for a personal or professional reason, you could provide a suitable substitute to bridge the gap or replace them. However, if a client is reliant on that particular individual being available then it’s a personal service, and they are liable to pay tax contributions for them.

4. Retain separate identities

If clients start wanting to brand contract staff that your agency provides as part of their own business, they could fall under IR35 legislation.

A true freelancer will trade under their own name, with their own website and business cards. They will also be financially self-sufficient; they won’t ask the company they are working for to pay for essential equipment or fund professional training.

There may be a need to give contract staff a company email address and access to internal files, but this should be as far as the two parties integrate from a brand perspective.

5. Don’t provide any perks

There’s a reason people choose to go freelance, and a reason people prefer permanent employment; don’t let your clients blend the two worlds.

In order to continue using off-payroll staff, businesses need to make sure that PSCs and limited company contractors aren’t given any of the same perks as people on their books. This means no paid holiday, no sick pay, no appraisals, and no asking permission to book holiday.

However, it’s still polite for agency contractors to give companies notice before taking time off – and your recruitment agency can help to manage these communications.

6. Look for fresh talent

HMRC’s eyebrows will be raised if a permanent employee leaves their job on Friday, only to start back at the same company on a freelance contract the following Monday. If a business truly wants to change the way they collaborate with expert professionals, it’s a great opportunity for you to show them the fresh talent on your books, ensuring a clean break.

For an even stronger business case, your recruitment agency can take care of the entire infrastructure surrounding freelance employment – from managing the contract signing and onboarding protocol, to processing timesheets and paying contractors or consultants directly. This way, clients only have to worry about settling your agency invoice, not adding each new contractor they engage through you to the payroll. 

ETZ’s full stack recruitment software takes care of everything in the back office – from contracts, compliance and timesheets, to invoicing and payroll. Book a demo to find out more.

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.