Contractor's Tools
IR35 News
Recruiter FAQs

Are you switching from Limited Company to Umbrella Employment? Click here to calculate your take home pay >>

We have created an information hub to support our Orange Genie Accountancy clients, our Umbrella Employees and agencies where the Covid-19 rules and legislation are explained for recruiters, contractors and the self-employed. Click here to find out more>>

Recruiters: Are Your Clients Prepared for IR35 Reform?

IR35

The reform of IR35 in the Private Sector will come into force in April 2021, which is now just a few days away. By now, we hope your end clients are properly prepared and have a strategy in place to meet their new responsibilities, but we know that many end clients still have work to do. In this article we’ll take a close look at what will change from 6th April, and how you can advise your clients if they’re not yet ready.

Helping your clients assess IR35 status correctly: Download our FREE guide>>

What is IR35 and what’s changing?

IR35, otherwise knows as the Intermediaries Legislation, or the Off Payroll Working Rules, is designed to stop so called “disguised employees” getting a tax advantage from working through an intermediary, like their own limited company (personal service company or PSC).

If “caught by” or “inside” IR35, the contractor must pay broadly the same tax and national insurance contributions (NICs) as an employee would.

From 6th April 2021, contractors will no longer be responsible for determining their own IR35 status, and this responsibility will pass to the end client instead. Where the client determines that the contractor is inside IR35, PAYE tax and NICs must be deducted from any payments made to the contractor’s PSC.

Why your clients need to prepare

Your clients will be responsible for deciding if the contractors they engage are employed or self-employed for tax purposes. There is no statutory definition of employment or self-employment, and IR35 determinations are based on decades of legal precedent, so they can be complex and involved. End clients will need a strategy to deal with this new responsibility, so they can assess correctly and minimise the impact on their contingent workforce.

Your clients’ new responsibilities

From 6th April 2021, end clients who are not classed as small private companies will need to:

  • Assess the IR35 status of any contractors they engage
  • Take “reasonable care” in completing IR35 determinations
  • Communicate their determination, and the reasons for it, to the supply chain, including the contractor themselves, and you as the “fee payer”.
  • Create and administer a “client-led disagreement process” when their contractors disagree with their determination

Why shortcuts are a bad idea

Where end clients are not prepared, or not willing, to assess IR35 status correctly, they may opt to use blanket assessments, or to stop working with PSCs altogether. Some clients believe these are less risky strategies, but they do come with risks of their own.

Blanket determinations

This is where the client assigns a group contractors the same IR35 status, usually based on the role they’re engaged for, without assessing status individually. This obviously saves the client time and work, as fewer assessments are required. This does not meet the requirement in the legislation for “reasonable care” and increases the risk that your contractors will be given the wrong IR35 status. Incorrect outside decisions put the client at risk, as they will be liable for any unpaid tax and NICs. Incorrect inside decisions make recruitment and retention more difficult and unnecessarily increase costs.

Refusing to work with PSCs

Some clients have decided to insist that all their contractors switch from their PSC to a PAYE solution, like Agency PAYE or Umbrella Company Employment. Again, on the surface this looks to be less risky way of side-stepping the need to assess IR35 status.

However, contractors who have a choice are likely to choose contracts where they can work through their PSCs, and clients who are willing to assess IR35 correctly. It’s not advisable for clients to make themselves less attractive to contractors, particularly in competitive sectors where there’s plenty of work for skilled contractors.   

Outside IR35 determinations

The best possible outcome is that your clients assess IR35 status correctly and find your contractors to be outside IR35. This would mean that your contractors can continue to trade through their PSCs as they do now, without any increased risk or liability for the client or for you.

You can help to make outside determinations more likely, by ensuring your clients and contractors all receive the best possible guidance and advice. For example, it may be possible to amend the contract and/or change working practice to move your contractors from inside to outside IR35.

Compliance experts like Orange Genie Compliance can help your clients do everything possible to help your contractors work outside IR35, and at the same time ensure that any outside determinations are correct and safe.

Inside IR35 determinations

It’s almost inevitable that some of your contractors will be found to be inside IR35, and it won’t be possible to change this. When this happens, the contractor will take home less money unless the contract rate can be increased to offset this.

In this circumstance there are three main options, depending on the client and on you as the recruiter:

The contractor can continue trading through their PSC – known as the “fee payer option”

This would mean you, as the fee payer, would have to make a “deemed employment calculation” and deduct PAYE tax and NICs before making payment to the PSC. You would also have to pay employer’s NICs to HMRC. This option relies on the recruiter being willing and able to make the necessary calculations and deductions. It also means the contractor would be finding their company from taxed income, so it’s not usually the best option to choose.

You can pay the contractor directly through Agency PAYE

This involves you paying the contractor, rather than their company, directly through your payroll system. This avoids the need for the contractor to fund their company, but because they’re only engaged while on assignment, they don’t have the same rights, protections and benefits they would have as umbrella employees. This option also creates additional work and cost for the agency, as you must run payroll for your contractors.

The contractor can be employed by an umbrella company

In this case, an umbrella company would employ the contractor and supply their services to you, effectively replacing the PSC in the supply chain and allowing the agency to outsource the cost, work and risk of employing contractors. Because the contractor has one period of employment across all their assignments, they have all the rights, protections and benefits of employment and depending on the umbrella they may receive other benefits as well. For this reason, umbrella employment is usually the best option for contractors who are inside IR35.

If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

Request a Call Back

 

edge promo