Beyond the stifling winter restrictions to tackle coronavirus, and the UK’s full exit from the EU, lies a third major challenge for recruiters, and it is shrouded in just as much uncertainty and confusion.

On 6 April 2021, changes to the law will make agencies responsible for payment of tax and National Insurance for thousands of workers.

The off-payroll working changes introduced in the Finance Bill bring much of the private sector – apart from the smallest firms (see box on p38) – into line with the rules in place in the public sector since 2017.

It means end users will be responsible for determining the tax status of people who provide services via an intermediary, but fee payers will ultimately carry the can for paying HMRC. Lawyers have warned that this leaves recruiters with a dilemma.

The staffing company is in an invidious position of not knowing if it can rely on the assessments” Kevin Barrow Partner at law firm Osborne Clarke

“The broad position is that if a client carries out an assessment using reasonable care, but gets it wrong, the staffing company acting in reliance of that assessment in good faith is liable,” said Kevin Barrow, partner at law firm Osborne Clarke. “The staffing company is in an invidious position of not nowing if it can rely on the assessments.”

Agencies are left to second guess whether a client is being too scared of the complex rules and classing too many supplied workers as employees for tax purposes. This approach would cost genuine contractors money, add an administrative burden to agencies and potentially see valuable people exit their roles to the detriment of all parties. 

On the other hand, could the end user be playing too fast and loose in a bid to maintain the status quo for contractors – which could lead to a big bill for the recruiter as fee payer further down the line?

An agency with 10 contractors on a site using personal service companies (PSCs), each paid £75k per year for three years, could owe tax and NIC on £2.25m of wages, Barrow points out. If they’ve underpaid these by 15 percentage points because of trusting an incorrect assessment of being outside IR35, that would leave a bill of about £333k and the penalty could double it to £666k even before interest is factored in.

Determining someone as inside or outside IR35 is not black and white; it is based on decades of case law. There are grey areas” Seb Maley CEO of IR35 specialists Qdos

Sector shift?

The nature of the recruiter-client relationship makes it even more likely that the financial burden will fall onto agencies, Barrow adds.

“Even if they can demonstrate that the end user is in fact liable,” he explains, “the end users often require staffing companies to indemnify them for any tax suffered as result of supply of contractors.” 

Ultimately the IR35 changes could lead to a significant shift in the sector, he adds.

“This will drive consolidation of the industry. Rightly or wrongly, end users will trust larger, more sophisticated suppliers to get this right – and to pay any tax when a claim is made. They have stronger balance sheets. 

“It is bad news – fairly or unfairly – for relatively smaller staffing companies who potentially will not be trusted by end users to get this right.”

Seb Maley, CEO of IR35 specialists Qdos, says that when the changes to off-payroll working legislation were introduced for public sector clients in 2017, there was a “massive impact” on delivery of projects.

“The public sector is inherently risk averse and there were blanket determinations so everyone working for a government body was determined as inside IR35,” he says. “It led to people leaving. They had the private sector to jump into.”

Contractors know they will eventually pay a hefty price for being deemed employed rather than self-employed for tax purposes through the legislation, Maley insists.

“The financial impact always ends up with the contractor – they can end up more than 30% worse off in take-home pay if assessed as inside IR35. Employers’ National Insurance, for example, gets passed down the line, and travel expenses can’t be claimed to reduce tax.”

Private sector clients had a dry run preparing for the law change last spring before it was put back a year because of the coronavirus outbreak. This showed that not all end users would treat it in the same way.

“Determining someone as inside or outside IR35 is not black and white; it is based on decades of case law,” says Maley. “There are grey areas.”

Indeed, a government website asks workers using intermediaries a huge number of questions before determining their IR35 status, including whether a substitute can be sent in their place; how much control the client has in selecting tasks, hours, location and working methods; what costs are incurred; and how they are paid. 

“We would urge any agencies that have not yet prepared to do so as soon as possible” Sophie Wingfield, Interim director of policy and campaigns at the Recruitment & Employment Confederation (REC)

Opportunities

The complicated nature of the legislation – which aims to ensure anyone who would be classed as employed if contracted direct pays a similar level of tax as employees – has opened up opportunities for recruiters, as well as threats, Maley says.

Recruiters who can understand the fine points of IR35 determination and help clients understand the benefits of correctly and justifiably ruling a contractor as outside the scope of the legislation will be in high demand both from end users and workers.

“Some agencies have used the rules to good effect for talent attraction.”

End users will also be keen for guidance on how to implement the new laws correctly from April.

“Clients will look to agencies for assistance. Many agencies will have people within their team who specialise in IR35. They can administer a determination process that works well to alleviate risk from client. It can be a core value-add in the relationship,” Maley says.

He stresses that HMRC will be “quite aggressive” in trying to capture tax through the legislative change. And he urges recruiters to seek advice as well as offering it.

“HMRC investigations are massively time consuming, complex and draining. We promote having a very substantive audit trail at 
the outset. 

“Agencies should be getting outside support. We don’t know how HMRC will police this but investigations are likely to involve the agency so it’s important to be prepared. Seeking third party advice is worth the time and expense.”

Sophie Wingfield, interim director of policy and campaigns at the Recruitment & Employment Confederation (REC), warns that some agencies lack confidence in the preparedness of the whole supply chain for the looming changes to IR35.

“Unsurprisingly, Brexit no-deal contingency planning, as well as managing through Covid-19, have been prioritised over the forthcoming tax changes,” she says.

“However, not preparing and falling foul of the rules could have serious financial consequences, and we would urge any agencies that have not yet prepared to do so as soon as possible.” 

A storm over umbrellas

Ministers have been urged to pass legislation to stop the off-payroll working changes interfering with the way recruiters use umbrella companies to administrate tax payments.

HMRC was forced to issue a statement in October after the spotlight turned on a seemingly innocuous amendment to section 61O of chapter 10 of the Income, Taxes, Pensions and Earnings Act.

“It said every company was an intermediary,” explains Dave Chaplin, founder of compliance specialists IR35 Shield.

“An umbrella company would be counted as an intermediary, so the company paying the umbrella company becomes liable for the tax deductions.

“Many agencies legitimately use umbrella companies to avoid operating their own payroll and would need to bring their payroll in-house.”

The Freelancer & Contractor Services Association (FCSA) raised its concerns over this situation and demanded a meeting with HMRC, which the contractor body later described as “positive and constructive”.

“HMRC has accepted that it was never an intention of the reforms to stop a compliant umbrella company from operating as it does today when the new rules come into effect,” said the FCSA after the meeting.

Barrow agreed with the body that an amendment to legislation was needed to ensure umbrella companies were not caught in the changes. But he warned it would not be straightforward, especially with so much occupying ministers’ time. 

“If there is no parliamentary time before 6 April then there may be an announcement that there is an intention to do that in the summer, pending which the government will expect affected people to trust that the legislation will not be enforced on the basis of its current wording. That would not be entirely satisfactory.”

Even if legislation is amended at the last minute, getting umbrellas off the hook, there could be further ramifications, Barrow warned.

“HMRC will be concerned about creating loopholes; and taxpayers will be concerned about other unintended consequences creating uncertainty for members of the staffing supply chain.”

An HMRC spokesperson said: “We have engaged with stakeholders to understand their concerns about part of the off-payroll working legislation and reassure them that the policy intention remains in line with our published guidance.

“We continue to work closely with stakeholders on this issue and are considering what action is required to ensure the rules apply as intended.” 

Five steps to prepare for IR35 changes

The REC says agencies should be ready to answer the following questions:
 

1. Which clients are SMEs and therefore exempt from the new rules?
2. Which workers are working through their own personal service company?
3. How will their clients be making their determinations?
4. Who is in your supply chain – particularly who is the fee payer?
5. What records do you keep on workers?

How to work out which clients are exempt from the IR35 changes

The new rules apply to all public sector clients and to private sector companies that meet two or more of the following conditions:

• an annual turnover of more than £10.2m
• a balance sheet total of more than £5.1m
• more than 50 employees

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