IR35 – what recruitment agencies need to know

One of the biggest bumps in the road within the recruitment industry over the last few years has been the changes to IR35. Even though things seem to have settled over the last few years, if you are a recruitment agency placing or looking to place limited company contractors you need to be aware of IR35 and how it can affect you. So, what is IR35 and what do recruitment agencies need to know?

IR35, or “off-payroll working,” is a tax legislation in the UK brought in by HM Revenue & Customs (HMRC) aimed at tackling tax avoidance by individuals working through an intermediary, such as a limited company or a personal service company (PSC), but who would be considered employees for tax purposes if they were directly engaged.

The (fairly) recent changes to the legislation (2017 for public sector and 2021 for private sector) shifted the responsibility for determining the employment status of contractors from the contractor to the client or the agency that engages them.

Client Responsibility: End clients now need to assess whether the contractors they engage would be considered employees for tax purposes if they were engaged directly. This involves evaluating factors such as control, substitution, and mutuality of obligation. However, if the end client is a small company, the responsibility remains with the contractor to determine their status.

Determining Employment Status: The end client may provide a Status Determination Statement (SDS), but the client, agency or contractor may also engage an independent IR35 assessment tool (such as Kingsbridge https://quba.solutions/partners/kingsbridge/) to help verify this. They may also choose to use HMRC’s own Check Employment Status for Tax (CEST) tool, even though this has received heavy criticism for not taking all the factors into relevant consideration.

IR35 Status: – The IR35 status of a contractor will either be;

  • Employed for tax purposes (inside IR35) – need to be paid PAYE
  • Self-employed for tax purposes (outside IR35) – can be paid gross through a limited company

Impact on Contracts: IR35 may affect the terms of engagement between agencies, clients, and contractors. Contracts may need to be reviewed and updated to reflect the new IR35 rules.

Compliance: Agencies must ensure compliance with IR35 regulations to avoid penalties and legal consequences. This may include keeping accurate records, conducting status assessments, and providing necessary information to HMRC.

Offering Guidance: Agencies can offer guidance and support to clients and contractors navigating the IR35 rules. This may involve providing resources, training, or consulting services to help them understand and comply with the legislation.

QUBA Solutions provide a flexible invoice finance and back-office solution specifically for recruitment agencies and help to pay thousands of contractors compliantly each week. If you would like to know more about how we could help your agency please contract Peter O’Donnell on 07876 805 128 / peter.oodonnell@quba.solutions – www.quba.solutions