What is the IR35 and how will it affect Recruitment agencies?

HMRC has confirmed that the existing Intermediaries Legislation rules (IR35) will be extended to encompass all intermediaries operating through personal service companies. This will impact how some recruitment agencies do business. This means that businesses using employment intermediaries will need to check whether their workers are subject to the IR35 rules or CEST (Check Employment Status for Tax). Thus, if a worker is caught by IR35, they will no longer be able to receive their wages as a dividend from an intermediary but instead pay income tax and national insurance directly on their services.

What is the IR35 rule?

IR35 is the legislation that determines whether someone is a self-employed contractor or an employee. If a worker is a contractor, then the business that employs them pays their income tax and national insurance through their contractor’s payment and does not deduct PAYE from their remuneration. In other words, contractors are responsible for paying their own taxes, whereas employees have some or all of their taxes deducted from their pay. This rule states that if an individual is performing the duties of an employee, but their pay is structured as if they were a contractor, then they must be taxed as an employee. This rule is intended to protect the rights of employees who can be vulnerable when their contractors are really employees.

Why is HMRC extending the IR35 rule?

The IR35 legislation was first introduced in 2000 to try and tackle tax evasion through the use of bogus self-employed contractors who, in reality were employees. The problem was exacerbated by the prevalence of gig-economy jobs in the early part of this century, which saw a sharp rise in the use of employment intermediaries.The new Prime Minister Liz Truss has already suggested that she will review IR35.

CEST – Check employment status for tax

HMRC’s CEST will allow employment intermediaries that are caught by IR35 to continue to treat their workers as contractors for tax purposes. The key difference between the two systems is that in the case of CEST, the employment intermediary will have to make a call on the status of the worker for the purposes of their employment. In other words, they are being required to judge whether their worker is an employee or self-employed contractor. If they decide that the worker is a contractor, then they can continue to pay them as they do currently. CEST will be based on a status check of the worker.

Recruiter’s responsibility concerning IR35 and CEST.

Since some recruitment agencies offer payroll services as umbrella companies’ as well to add value. They would be checking the status of the worker. They will need to determine whether they are an employee or self-employed contractor and pay them accordingly. If the status check indicates that the worker is an employee, then you will be responsible for deducting PAYE from their gross payment and paying their taxes. They will need to decide whether it is easier to bring the workers into the business as employees or to make sure that they remain contractors and continue to be paid through their personal service companies.

How will change of rules affect recruitment companies?

There are likely to be added costs associated with working this way, particularly for smaller businesses that may not have dealt with the PAYE system before. Given that the added costs associated with this regime may dissuade smaller businesses from using employment intermediaries, larger recruitment companies are likely to see an increase in their market share. In the event that smaller businesses decide to bring their contractors into the business, they will be required to pay them the same as they would an employee.

Takeaway

The IR35 and CEST rules are likely to mark the end of the gig-economy as we know it. While the legislation extends the IR35 rules to cover all intermediaries, it also introduces a new status called a “consumer”. The status of consumer is designed to protect those who are not contractors but, for whatever reason, cannot be considered employees. Employees have certain rights that contractors do not, such as Statutory Sick Pay, maternity pay and pensions.

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