Recruiters believe clients are unaware of IR35 reform

Recruiters believe end-clients are blissfully unaware of IR35 reform

Recruitment agencies face another challenge from next April, when the private sector companies they place contractors with will be handed the responsibility for setting IR35 status. If HMRC finds that an end-client has made an incorrect IR35 decision, agencies will hold the liability should they operate as the fee-payer in the supply chain.

The sheer number of recruitment agencies that rely on placing contractors for their income means that IR35 reform, if ignored, exposes agencies to significant risk. It’s a danger over which recruiters do not have direct control and one that can rear its head at any time.

Given IR35 liability can amount to well over £1m for just one contractor, recruiters are advised to work with end-clients to mitigate this risk, ensuring they adopt best practice when it comes to this complex tax legislation.

However, at this moment in time – with less than one year to go until the new IR35 rules kick in across the private sector – it seems there is a lot of work left to do. This is the situation revealed in a new survey of recruitment agencies, undertaken by The Recruitment and Employment Confederation (REC), whose latest research finds:

• Nine in ten recruitment agencies (91%) said their end-clients have only some or no awareness of the changes coming into effect
  
  
• More than nine in ten believe that making end-clients liable for the contractor would improve, at least to some extent, the accuracy of IR35 determinations
  
  
• Nearly a third (30%) of recruiters have no confidence in the ability of the Government’s IR35 tool, CEST, in making well-informed status decisions

Unsurprisingly, this is of real concern, particularly to REC’s Director of Policy and Campaigns, Tom Hadley, who has led the body’s efforts to persuade HMRC to rethink aspects of the tax. He said:

“Contractors and interim managers play an essential role within our economy – especially in periods of transition and uncertainty. The planned changes to taxation which are due to come into effect a year from now could significantly impede labour market agility at a time when UK businesses need it most.”

Meanwhile, REC is also urging businesses to prepare and for the Government to commit to publishing the final legislation by October 2019. This would at least give private sector businesses six months to prepare fully for this controversial change to the rules.

REC also wrote to the Chancellor, Philip Hammond, to state its concerns about making agencies liable. The body sees this as a risky move given the responsibility for administering IR35 ultimately sits with the end-client.

Philip Hammond did reply to REC’s fears, but HMRC’s track record in listening to IR35 experts does not give cause for optimism. In all likelihood, recruiters will end up with this responsibility, fair or not, and it is best for them to proceed and prepare on this basis.

While help from the taxman in advance of the enforcement of changes would no doubt be welcomed by agencies, HMRC’s one outright IR35 win this decade in eleven attempts suggests it has trouble understanding the very rules it created. Therefore, recruiters are urged to take the initiative and engage with end-clients. Do not rely on HMRC for further assistance.

There is another dimension to all of this that recruiters must bear in mind: contractors themselves. Many independent workers are in a state of alarm about IR35 changes, which has been heightened as a result of public sector reform in 2017. Unsurprisingly, disillusionment among contractors runs high. When operating inside IR35, these workers are expected to be content paying tax like an employee, but without receiving any employment benefits.

By and large, contractors are sceptical that agencies and end-clients will get their act together sufficiently to make accurate IR35 determinations by the time reform arrives. Should this be the case, it’s a recipe for serious damage to the sustainability of the independent workforce – a huge threat when the UK economy increasingly depends on the availability of this precious, flexible resource.

Above all else, fairness must come into the equation, as REC’s Tom Hadley explained: “Everyone should pay the right level of tax but what our members want is clarity and a level playing field. We will continue to work with the Government to find solutions and ensure that we do not jeopardise the substantial benefits that contracting brings to the UK economy.”