This article was updated on 31 July 2020 to reflect confirmation that IR35 rule changes will take effect from April 2021.
The Government has confirmed that it intends to reform the off-payroll working rules (commonly known as IR35) from 6 April 2021. These changes will affect an estimated 20,000 recruitment agencies who provide off-payroll workers via intermediaries, such as personal service companies (PSCs), to medium and large businesses in the private sector and to the public sector.
These changes were originally due to come in from 6 April 2020, but a deferral was announced to 6 April 2021 in response to the ongoing spread of coronavirus, to help businesses and individuals.
Despite the deferral, the impact of these changes should not be underestimated, and sufficient preparation will be crucial.
How will this affect businesses in the recruitment sector?
The reform will mean that medium and large businesses in the private sector (excluding those that are ‘wholly overseas’) will have a number of new obligations in relation to services provided through an intermediary on or after 6 April 2021. These changes will also apply to the public sector. The existing public sector off payroll rules will continue to apply until 5 April 2021.
Affected businesses will need to determine whether or not the IR35 rules apply to an engagement and provide a status determination statement to the worker and any third party that they contract with, for example a recruitment agency, setting out the reasons for reaching that determination.
The recruitment agency will then be required to pass on the determination to the next party in the labour supply chain, for example a second agency. Failure to pass on the determination will result in the tax and NIC liabilities resting with the party that fails to pass on the determination.
The end user of the services (the client) will be required to set up a status disagreement process and respond to representations made by off-payroll workers or their fee payer within 45 days of receipt. In this respect, recruitment businesses will need to establish a process for deciding whether or not to challenge determinations in conjunction with the worker.
Where it is determined that the rules do apply, then the fee payer ultimately paying the intermediary 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.
The end user must also provide a statement as to whether in their opinion they qualify as ‘small’ for the tax year specified where requested (most likely by the recruitment agency or worker) generally within 45 days of receipt of the request. Where the end user is ‘small’, the recruitment agency will have no fee payer obligations under the new rules.
Importantly, the proposed legislation will allow for transfer of tax and NIC liabilities back to the first agency in the chain and ultimately, to the end client in certain circumstances where there has been non-compliance at some point in the labour supply chain.
It has, however, been confirmed that the transfer of liability provisions is only intended to be used in circumstances where, for example, a promoter of tax avoidance has entered into the labour supply chain.
HMRC guidance provides the circumstances in which it will not seek unpaid liabilities from parties further up the labour supply chain.
The Government believe that it is appropriate for clients and the first agency to take steps to ensure compliance. Clearly, this will potentially increase the risk profile for UK recruitment businesses, where there is a complex labour supply chain, and will encourage clients to undertake appropriate due diligence on the agencies that they engage with.
For those businesses which had already made changes to reflect the original intended start date of the proposed new rules in April 2020, HMRC has said that Status Determination Statements (SDS) previously made will have no standing in law and will not be used as evidence in any status enquiry dispute during the coming year. However, off-payroll contractors could still face investigation directly from HMRC under the current law.
For those in the public sector, there will be a continuing obligation to apply the current off-payroll working rules that were introduced in April 2017. Public authorities will not however need to comply with the additional obligations, for example to issue status determination statements or to implement a status disagreement process, until 6 April 2021 in line with medium and large businesses in the private sector.
Obligations of each party in the chain
What should recruitment businesses be doing now?
Recruitment businesses should ensure that they are entering into dialogue with clients now to establish how those clients are intending to deal with off payroll arrangements in the deferred period up to 5 April 2021 and thereafter, particularly in view of the potential impact of coronavirus.
In addition, we would suggest that 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 where the arrangements are likely to continue beyond 5 April 2021;
- discuss with clients whether the impact of Covid-19 will lead to more need for the flexibility of off payroll workers than was originally envisaged;
- assess arrangements involving complex labour supply chains and determine if these are likely to increase your risk profile for services on or after 6 April 2021;
- establish whether or not any of your clients are likely to be outside the new rules by virtue of being a ‘small’ business or a 'wholly overseas' business and start early dialogue with clients to confirm the position;
- consider explaining the changes including the status disagreement process, and the potential impact of the deferral, 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 within the new rules, the client will provide a status determination statement to the recruitment business (and the worker) that will need to be passed down the labour supply chain where applicable. The recruitment business that is the ultimate fee payer, will need to account for and pay the related tax and NIC, including the additional cost of employer NIC; and
- be particularly mindful of the potential additional costs and risk when entering into new arrangements or when renewing existing contracts with workers, other parties in the labour supply chain and clients that will continue beyond 6th April 2021.
How can RSM help?
Our specialists have detailed knowledge of the rules and practical experience of working with businesses in the recruitment sector to help them implement the required changes.
We have a multi-disciplinary team of experts who can provide advice and help you prepare for all aspects of the proposed changes, including:
- designing new processes and controls, such as payroll, human resources, finance, data management and IT obligations;
- workshops and bespoke training;
- assistance with status determination reviews and challenges where applicable; and
- review and revision of contracts and key stakeholder communications and employment law support through RSM Legal LLP.