This change will impact businesses in the recruitment sector who supply workers who operate through intermediaries, such as personal service companies, as well as the medium and large end user clients using the services of off-payroll workers. The work required to be prepared for this change should not be underestimated and sufficient preparation will be crucial.
- Why is the Government introducing this change to IR35?
- What is the proposed change to IR35?
- How will this proposed change to IR35 impact businesses in the recruitment sector?
- What should recruitment businesses be doing now to prepare for the change to IR35?
- How can RSM help?
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 Contributions (NIC) as an employee would.
The IR35 rules have, however, been largely ineffective as the PSC has had to ‘self-assess’ whether the rules apply. Consequently, HMRC estimate that there is widespread non-compliance which they have been unable to effectively tackle.
Due to increasing demands for flexible working and efficiency, the use of such off-payroll arrangements has grown, exacerbating the cost of non-compliance. As a result, HMRC estimate that the cost of non-compliance with the current IR35 rules in the private sector will grow to £1.3bn by 2023/24 in the absence of any change.
Changes are, therefore, being introduced to reduce the cost of non-compliance and to make it easier for HMRC to monitor and enforce compliance in the future.
The reform will place the burden for assessing whether IR35 applies onto the private sector end user of the worker’s services, for all payments by medium and large businesses from 6 April 2021.
Where it is concluded by the end user that IR35 applies, the fee payer (which may be the end user themselves, or a recruitment agency, or other third party paying the intermediary) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
The new rules will only apply to medium and large businesses in the private sector who are the end user of the worker’s services and to the fee payer, if different, such as fee payers in the recruitment sector.
Where the end user of the worker’s services is a small business, the responsibility for assessing the arrangements, and applying IR35, will remain with the PSC. Whilst it is currently unclear, it is expected that in this situation the fee payer, such as the recruitment business, will not have any additional obligations other than the existing requirement to submit a quarterly intermediaries’ return to HMRC with details of all workers placed with clients where they do not operate PAYE.
The Government have indicated that they intend to use ‘similar criteria’ to that found in the Companies Act 2006 to define a small business. Under current legislation this is broadly a business that has two or more of the following features:
- a turnover of £10.2m or less;
- a balance sheet total of £5.1m or less;
- 50 employees or less.
Under the proposals, medium and large businesses in the private sector will need to determine whether the IR35 rules apply to an engagement and formally notify the ultimate fee payer, such as a recruitment business or agency which pays the worker’s intermediary.
Where it is determined that the rules do apply, then, for payments from April 2021, the fee payer will need to apply PAYE withholding and incur additional costs, such as employer’s NIC (currently 13.8 per cent) and the Apprenticeship Levy (0.5 per cent) where appropriate. Additional processes and resources may need to be put in place to meet these IR35 compliance requirements and associated PAYE/NIC withholding obligations, going forward.
Recruitment businesses should start to prepare for the proposed new rules now and should not underestimate the amount of work required to be sufficiently prepared for the change.
As a starting point we would suggest those in the sector should:
- Assess current arrangements with clients and determine the number of workers being supplied who operate via ‘off-payroll’ arrangements, such as PSCs, who could potentially be caught by these rules.
- Establish whether or not any of your clients are likely to be outside the new rules by virtue of being a ‘small’ business and start early dialogue with clients to confirm the position.
- Consider explaining the changes to the workers you use who operate via intermediaries such as PSCs.
- Assess the direct and indirect financial impact of the proposed changes. For example, where arrangements are caught, the client will provide a determination. The recruitment business, as the fee payer, will need to account for and pay the related tax and NIC, including the additional cost of employer NIC.
- Be particularly mindful of the potential additional costs when entering into new arrangements or when renewing existing contracts with workers and clients that will continue beyond April 2021. As part of this, consider whether it is appropriate to continue to engage with workers operating via PSCs who are likely to be impacted by the proposed new rules.
Our employment tax specialists have a detailed knowledge of the proposed rules and practical experience of implementing similar changes that were introduced for the Public Sector from 6 April 2017.
We can advise on all aspects of the proposed changes, including an audit of current arrangements to assess the potential impact of the new rules on your business. We can also provide training and Q&A documents for your staff.
In addition, we can offer a facilitated workshop for businesses potentially impacted by the proposed changes. The content of each workshop is tailored to individual requirements but will cover:
- a step-by-step guide on how the new rules are likely to operate;
- the systems and processes that will be required to remain compliant;
- an overview of the changing risk profile as a result of the proposed changes;
- a discussion around how to determine status under the IR35 rules; and
- a focus on the practical considerations and suggested next steps, including an action plan.
The workshop should be attended by appropriate stakeholders in the business, including heads of finance, tax and HR, payroll and procurement.
If you would like to discuss the content of our facilitated workshop in more detail or if you have any specific queries on the proposed rules, please contact David Williams-Richardson.