Special Report - Payroll: IR35 cometh: are you prepared?

With IR35 reforms just four months away, one recruitment firm tells Recruiter it’s time to start holding clients’ hands, as Christian Koch reports

After the Christmas lull, comes the chaos. If any recruiting professional is looking forward to effortlessly easing their way into work on 4 January, coasting their way through the month’s tasks without troubling their Prosecco-addled brains, perhaps even taking a sickie sometime around Blue Monday, they’d probably need to think again. The first few months of 2021 are set to be a brutishly busy time for recruiters.

In-trays are set to be inundated with applications, thanks to the UK labour market having been clobbered by Covid-19 (unemployment will rise from 1.5m to 2.6m, according to the Bank of England). The end of the Brexit transition period on New Year’s Eve may spark staff shortages due to changed immigration rules, while hiring from Europe won’t be as easy as it once was. If that wasn’t enough to make recruiters crawl back underneath their duvets until springtime, then consider this: it’s the final leg of the journey to IR35 implementation with private sector employers.

“It’s going to be a nightmare,” says Leslie Owusu, director of London-based IT recruitment agency Gazelle Global, who has been preparing his team for IR35 since late last year. “When I spoke to clients in early 2020, many had a lack of understanding about how IR35 works. My feeling was, we’re going to have to hold clients’ hands through this.” 

From 6 April, the rules get rebooted, with larger organisations in the private sector now responsible for determining whether their contractors are ‘inside’ IR35 rules (subject to PAYE) or ‘outside’ (operating as a genuine company). As such, recruiters can expect to be busy communicating IR35 changes to clients and helping them become compliant. 

The new rules affect private firms with a £10.2m+ turnover or with more than 50 employees. In fact, although it’s the responsibility of the hiring company to check the employment status of its contractors, all recruiters need to ensure their clients are on the road to compliance. Fail to do that, and your recruiting agency – along with the hiring company – could be liable for any unpaid tax and National Insurance Contributions (NICs) if HMRC finds a worker has been incorrectly classified. 

“If there’s an investigation [by HMRC], then the hiring company and everybody in the supply chain will feel it,” says Ishari Martenstyn, Gazelle Global’s head of contracts & compliance. “If the fee-payer [hiring company] can’t pay, they’ll come down the supply chain to retrieve those funds from the recruitment company or hirer… There’s no option of not being compliant here.”

Martenstyn continues: “At the moment, it’s the liability of the contractor to decide whether their working arrangements fall inside or outside IR35, plus to pay the correct taxes and NIC.

“But from April, all necessary tax and NICs will be deducted before the final payment.”

It’s going to be a nightmare. When I spoke to clients in early 2020, many had a lack of understanding about how IR35 works” Leslie Owusu, director of London-based IT recruitment agency Gazelle Global

Role of the recruiter

What’s the recruiter’s role in all this? According to Martenstyn, recruiters “need to keep the client well-informed, make sure they understand exactly what the obligations are, and to hand-hold them through the process”.

To deal with client concerns, Martenstyn recommends “being like a sponge at this time. Keep up to date with all the HMRC guidance, but also trust industry experts. Read everything”.

Communicating to clients – as simply as possible – is essential. Gazelle Global has created a dedicated online portal online and sent out informative ‘client packs’ on email. As Martenstyn says: “[As recruiters] we’ve got to be careful. We can’t advise clients exactly what to do because that would make us liable if something goes wrong. It’s about giving them enough information to make decisions, create a status determination statement (SDS) and inform their contractors. All our client packs are doing is informing everybody in the chain what they should be looking out for.”

When it comes to contacting clients, Martenstyn recommends adopting a “phased approach”, starting with those businesses in highly regulated industries such as financial institutions or large organisations with a high volume of contractors. 

Recruiters also need to deal with any questions clients may have about the Status Determination Statement (SDS), which determines whether their contractor is operating inside or outside IR35 rules, the criteria that could indicate whether a solo trader is ‘outside’ IR35 include whether they own their own equipment, work for multiple clients or market their services via a professional website. 

As 6 April looms, Martenstyn suggests sending reminders to clients, plus keeping them updated about any IR35 legislation. And with clients expected to lose money by paying taxes for their contractors, a difficult conversation about renegotiating rates might be necessary too. 

To ensure they’re IR35-ready internally, Gazelle is taking steps to keep their staff up to date on the latest information. “We want to keep everybody informed and ensure any questions from clients and contractors are answered,” says Owusu. “We don’t want to end up with a situation where these questions are asked after a contractor has been hired.”

[As recruiters] we’ve got to be careful. We can’t advise clients exactly what to do because that would make us liable if something goes wrong” Ishari Martenstyn, Gazelle Global’s head of contracts & compliance

Contractor challenges

IR35 will throw up additional challenges for recruiters in the months ahead, he adds, especially when it comes to working closely with their contractors.

“You need to think about the mindset of a contractor,” says Owusu. “When they realise IR35 is coming into effect, they’ll be concerned they won’t be earning the same amount… It’s about trying to train their minds that it won’t necessarily work like that going forward. There’ll be some deductions and they’ll need to look at it from different perspectives.”

Owusu continues: “If the average contractor has a breaking point, it’ll be the moment he/she hears that their pay is being reduced. 

“Generally speaking,” he says, “contractors are happy to forgo employee benefits because they like the flexibility and money they can earn. The IR35 extension means it’d make much more sense for them to become permanent. What’s the point of having none of the benefits (sick pay, etc) of employees, but all of the restrictions?”

For employing organisations, the prospect of paying increased taxes could result in their putting an employment freeze on contractors, or even ditching their existing ones. Morgan Stanley, Barclays and Lloyds have already announced they won’t take on any more contractors unless they’re paid on PAYE terms or through an umbrella company.

Unless IR35 gets delayed once again (see box, below), recruiters can expect to spend the next few months informing clients about the IR35 extension and the importance of auditing their contractor workforce. 

“You need to show you’ve done everything you’ve can and taken reasonable care with the client,” says Martenstyn. “Every single person in the supply chain has an obligation to ensure compliance. If not, you could be liable…”

Could IR35 be postponed once again?

The reforms had a trial run in the public sector in 2017 and were originally set to be rolled out to private companies last year, which was postponed due to Covid-19.  

Three reasons why the IR35 changes might not be a reality until 2022 or even later… 

  1. Unemployment woes. The second national lockdown in November and extension of the furloughing scheme until March is set to disrupt employment. The UK’s 2.1m self-employed army faces a “triple whammy” of uncertainty from Brexit, Covid-19 and the IR35 reforms, according to IPSE (the Association of Independent Professionals and the Self-Employed). The prospect of more jobless might force HMRC to postpone.
  2. HMRC has also admitted there is some confusion surrounding the reform draft (it defines umbrella companies as ‘intermediaries’), which could prolong its implementation. 
  3. The tax position of many contractors has also become more nebulous over the past year, with many of them now working from home and using their own (rather than the hiring company’s) equipment.

Check the latest IR35 info at gov.uk, which has an Employment Status Manual, the free (but controversial) ‘check employment status for tax’ CEST) tool, plus regular webinars. 

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Image credit | Shutterstock

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