What recruitment companies need to know about IR35

Recruitment companies have to deal with plenty of different pieces of employment legislation in their day-to-day operations.

One of these is IR35, which deals with contract workers and the kind of tax that they or their employer has to pay. This most recent introduction of updates to IR35 in 2021 had a significant impact on the recruitment industry. But the legislation is easy to comply with as long as you take the time to understand who it applies to and how this needs to be communicated.

In this article, we share what recruitment companies need to know about IR35 so that you can make sure you’re working in line with the law.

What is IR35?

IR35 is a term used to describe two pieces of tax legislation in the UK. These legislations aim to stop workers from avoiding tax by claiming to be ‘contractors’ and offering their services to clients through an intermediary instead of being hired as employees.

IR35 was originally introduced to combat schemes that used intermediaries registered as ‘limited companies’ to avoid tax and National Insurance Contributions (NIC). If the rules of IR35 apply and a contractor is ‘off-payroll’, they pay roughly the same Income Tax and National Insurance as an employee. 

In 2021, the legislation was updated so that it is the employer’s responsibility to determine whether a contractor falls inside or outside of IR35, instead of the contractor themselves. To comply with IR35, it is the company’s responsibility to determine the status of their contractors and therefore whether they require a certain tax treatment. Failing to correctly declare whether a contractor is inside or outside of IR35 could lead to legal and financial consequences, which all businesses want to avoid.

IR35 and recruitment

The changes to IR35 have impacted the recruitment sector because many recruiters act as an intermediary between contractors and their employers. Whilst it is the responsibility of the employer, as the ‘end client’, to determine the contractor’s IR35 status, recruiters can assist with this process and ensure that the employer finds it straightforward to comply.

IR35 requires employers to assess the type of work that a contractor is doing, the conditions they are working in and the time they spend in order to determine their status. Recruiters can and should help to supply this information when facilitating a contractor’s work so that the end client is as informed as possible.

Recruiters also need to make sure that the employment contracts they are creating are explicit in the working relationship between the contractor and the client so that it is easy to determine IR35 status. By completing IR35 assessments for every contractor your agency works with, you will be in the best possible position to ensure compliance.

Whilst the end client is the one responsible for IR35 determination, off-payroll legislation debt transfer rules mean that recruitment agencies could find themselves being taxed if the fee-payer has not deducted the appropriate tax. So ensuring compliance isn’t just about being helpful to your clients; it’s about avoiding potential financial consequences as well.

It goes without saying that recruiters need to be well-informed about the intricacies of IR35 and stay up to date with any changes made to the legislation. Not only is regular and updated training required, along with regular consumption of IR35 recruitment content, but it’s also very useful to develop assessment and monitoring processes to keep an eye on your contractors and their employment status.

Determining IR35 status

Firstly, before you go about trying to determine IR35 status, you should first make sure that it applies to your client or candidate.

Contract workers who provide their services to clients through a limited company or third party are impacted by IR35. Any organisation or agency that uses or manages contractors who work through a limited company are also liable.

According to official guidance, IR35 applies to these individuals and organisations if:

• A worker uses an intermediary to provide their services to clients, but “would be classed as an employee if they were contracted directly”
• Off-payroll working rules have been decided in a “written, verbal or implied agreement between parties”

The terms ‘inside IR35’ and ‘outside IR35’ are used when discussing this legislation and whether it applies to a specific worker. Being inside IR35 means your contract falls under the off-payroll working rules and HMRC sees you as an employee for tax purposes. Being outside IR35 means your contract points towards self-employment, so you can operate tax efficiently. 

If a contractor is essentially working as an employee, they require a different kind of tax treatment. If they are outside IR35, the company doesn’t have to pay additional tax for their hire, but could become liable if the contractor hasn’t paid the appropriate tax instead.

What should you do?

As a recritment agency, the best thing that you can do to ensure compliance with IR35 is support your clients in determining whether their contractors fall inside or outside of the legislation. Many clients will seek the support of their recruiter in this instance, which means a thorough understanding of the legislation and the process of determining status are required.

When it comes to drawing up employment contracts, make sure that the factors which influence IR35 status are clearly laid out. It can also be useful to regularly review the contracts of the contractors you have placed in organisations to check that their status has not changed.

Make sure you’re educated about IR35

The most recent chanes to IR35 has been in circulation for several years now, so there are a lot more resources and support available for recruitment businesses that want to make sure they’re compliant with the legislation. The best approach to take it to ensure that you’re as educated as possible about status determination and what this means for tax, advising the clients and contractors that you work with to do the same.