For agencies supplying limited company contractors, it is more important than ever to consider IR35, otherwise known as the intermediaries legislation. It is well within the best interests of an agency that they ensure all workers are engaged under terms and conditions which accurately reflect the manner in which the services are provided.
Introduced in April 2000, the ‘Intermediaries Legislation’, was brought in to address the perceived tax avoidance of individuals fulfilling the role of an employee whilst making use of a personal service company as an intermediary for tax purposes. Working in this way prior to the legislation’s introduction enabled such an individual to pay substantially less tax and National Insurance than was owed. It also enabled the hiring business to reduce their employers national insurance bill.
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The reform to IR35 within the public sector, implemented on 6th April 2017, meant that agencies supplying contractors to the public sector have since been financially liable for the tax status if, after an enquiry, HMRC considers that the agency did not pay the contractor correctly.
Implemented 6th April 2021, the more recent reform to IR35 within the private sector, and the implementation of the new off-payroll working rules, resulted in a step change of responsibilities for all within the supply chain. With contractors working for medium-large end clients now no longer responsible or liable for their IR35 status, these roles have been placed with other parties within the contractual chain.
In short, since these reforms, the end client has been responsible for determining IR35 status and the fee-payer for that engagement is now liable for paying any resultant tax liabilities to HMRC. It should be noted that on any occasion where the end client does not adhere to their obligations under the new legislation, the IR35 liability could move from the fee-payer to the end client. In many cases, the fee-paying party within a contractual chain is the recruitment agency.
The fee-payer is financially liable for any penalties or backdated tax and National Insurance Contributions. This means that the fee-payer in the supply chain generally carries the most risk even though it is the hiring organisation which is responsible for the assessment made.
In most typical contractual arrangements where a recruitment agency sits between the contractor’s PSC and the hiring organisation (end client), the recruitment business will be the fee-payer.
If you are actively placing limited company contractors with medium-large end clients or public sector bodies, you will therefore likely be highly involved in the IR35 determination of those contractors. Many clients will look to their recruitment agency for support in this matter, and depending on the policies of the end client, you may need to take extra measures in order to compliantly place contractors and ensure all obligations under the off-payroll rules are met.
First and foremost, one of the most positive things you can do is encourage end clients to undertake fair determinations and provide support where necessary. This can be as simple as offering up options for a professional third-party compliance service.
As a recruiter, you can help by mediating any contractual changes with the legal team where required. It is also important to note that the upper level contract (i.e., the contract between your agency and the end client) can have a decisive impact on a contractor's IR35 status. Any discrepancies between this contract and that between the agency and contractor, can be the difference between winning and losing an IR35 case. There should therefore be no discrepancies between the contracts - this can also assist with any contractual disputes where terms differ between the contracts, such as those concerning notice periods.
By having a general understanding and appreciation for the difficulties associated with the IR35 legislation, you can build a better rapport between your end clients, yourself, and the contractors you place. This will likely result in the development of a pool of dedicated contractors for your end clients.
At Qdos, we provide a range of services to help recruitment agencies including insurance-backed assessment services, training and support for you and your clients, consultancy services, and audits of your business processes and policies in relation to IR35.