The Government’s much anticipated consultation paper on potential changes to the operation of IR35 in the private sector was published in May 2018.
The Government’s confirmed lead option for change is to extend the public sector reform introduced in April 2017 to the private sector. How would this potential change impact the recruitment sector?
Why is the Government looking at changes?
The IR35 rules were originally introduced in 2000 with the intention of ensuring that individuals who are working like employees but who operate via an intermediary such as a Personal Service Company (PSC), pay broadly the same tax and national insurance as an employee would.
However, the IR35 rules have been largely ineffective as it is the PSC who must self-assess as to whether the rules apply. HMRC estimate there is widespread non-compliance with the rules.
Due to increasing demand for flexible working and efficiency, many businesses use the services of off-payroll workers operating via PSCs, often provided to the end user via a recruitment business, and the use of such arrangements is growing. As a consequence, the estimated cost of non-compliance with the current IR35 rules is set to grow to £1.2bn by 2022/23 in the absence of any change.
What is the lead option for change in the consultation document?
In April 2017 reforms were introduced to tackle the issue of non-compliance with IR35 in the public sector. These reforms have placed the burden for assessing whether IR35 applies onto the public sector end-user of the worker’s services. Where it is concluded that IR35 applies, the fee payer (which may be the recruitment business/agency) is responsible for accounting for and paying the related tax and NIC, including employer NIC, to HMRC.
The consultation document makes it clear that HMRC view the public sector IR35 changes as a success. Their independently commissioned research concluded that the reforms were relatively easy to implement and have generally been working well although many people’s practical experience does not support this. HMRC has now turned its attention to non-compliance with the IR35 rules in the private sector.
In the consultation document the lead, and most likely, option is the extension of the public sector reforms to the private sector although it is acknowledged that the rules, if widened to the private sector, are likely to require some reform.
Are there other options for change?
An alternative option, which will be of interest to the recruitment sector, is to encourage or require businesses to ‘secure’ their labour supply chains. The document confirms that the fiscal and reputational risks associated with labour supply chains is an ongoing area of focus for the government.
This option would be an extension of existing HMRC guidance on due diligence in relation to the use of labour providers which recommends that the end user of the services should ensure that they know where the workers are coming from, how they are being paid and the legitimacy of those arrangements.
How would this potential change impact the recruitment sector?
If the public sector reforms are extended to the private sector, this will present the end user and the recruitment businesses who may supply these workers, with additional challenges, especially if there is little lead time to implement change which could come as early as April 2019.
What should recruitment businesses be doing now?
Whilst it is important to reiterate that this is only a consultation document around potential change, it is generally accepted that no change is not an option. Businesses in the sector should, therefore, begin to:
- assess the financial impacts of the potential change – if new legislation is introduced and particular arrangements are caught, the fee payer will need to account for and pay the related tax and NIC, including employer NIC; and
- be particularly mindful of the potential additional costs when entering into or renewing existing contracts with clients and workers.