Outsauce Director Richard Foster reviews IR35 to help agencies stay on the right side of this law.
We have been surprised recently by the number of cases brought to us by recruitment agencies who were concerned they had fallen foul of the HRMC’s Intermediary Legislation, better known as IR35.
IR35 was HMRC’s answer to what they described as ‘disguised employees’, i.e. those individuals who would be considered an employee but who instead contracted with an employer through their own intermediary.
This intermediary, often in the form of a Personal Service Company (PSC) or a limited company, would receive all payments due in respect of the services provided by that individual, who would then be ‘paid’ via the intermediary, which allowed them to pay a different level of income tax and National Insurance to a normal employee.
This law then ensures that where an individual would be an employee if they were providing their services directly, rather than through the intermediary, their income is treated like that of an employee and they pay the same tax and NICs as an employee.
Due to the complexity of this law, the result was that many contractors subject to IR35, switched to using an umbrella company because while the tax-benefits were negligible they were far outweighed by the removal of the time and costs of administrating and operating their own limited companies.
From April last year, the responsibility for determining whether a contractor falls within IR35 in the public sector shifted from the contractor to the client employing their services which saw a crackdown from hiring managers to de-risk them from non-compliance. However, the responsibility to deduct NIC and PAYE has remained with agencies, as does the liability. It’s therefore imperative that agencies are confident about the relationship between the contractors and their clients.
If you are acting as an agent and have a contract to provide workers, usually temps, to carry out agreed duties for a client, then, for income tax purposes, the worker is treated as having employment with your agency, and their daily duties are such as they provide to the respective client.
If you are providing candidates to fill permanent positions, then the workers will have a contract of employment with the end client and you aren’t responsible for paying them after you’ve made the introductions to the hirer. In this case the hiring company is responsible for the income tax and NIC payments.
Those on temporary contracts however, are your responsibility. The wages they receive are treated as earnings from your employment and are subject to income tax as employment income, meaning a PAYE system must be operated. In addition, the worker is treated as an employed earner for Class 1 NICs purposes and their wages are subject to the appropriate deductions. As the agent you are responsible for ensuring that tax and NIC is paid correctly.
The only time this doesn’t apply is if the worker is not subject to supervision, direction, or control by any other person. This however, is terribly difficult to prove.
What could be of even greater concern is the launch of HMRC’s consultation into ‘Off-Payroll’ working in the private sector last month, which has given plenty of indication that it could extend the current IR35 rules to the UK as a whole. This will mean another seismic shift for recruitment agencies that probably won’t have time to police this thoroughly and will once again mean the need of a strong back office partner to help with the relevant compliance.
If you have any questions about IR35 or other employment legislation get in touch…