Managing IR35 Reform for Recruitment Agencies
Published: 21/01/2020
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The final IR35 legislation has now been released and is in full force for all parties involved. We are providing this article as guidance for owners and managing directors of recruitment agencies on how to manage IR35 reform. To start on a positive note, let us say that things are not as grim as they may seem.
Last year, contractors understandably became disgruntled by the changes in the IR35 legislation. Many had already been victims of IR35 errors in the public sector, which naturally led to outrage as the policy spread to the private sector as well. A popular and widely discussed solution to navigate these changes is forming or working through ‘consultancies’ and creating a Statement of Work (SoW). Meanwhile, news stories are filled with contradictory blanket inside IR35 decision narratives, cases of outright bans, and ‘go PAYE or go home’ ultimatums.
Yet, there are still many end clients prepared to accurately assess the IR35 status. The final legislation has now come into effect, also signalling that private sector businesses and recruitment agencies are no longer protected by the ‘light touch policy. ' In other words, the year during which recruitment firms would not be penalised for non-compliance has expired. This necessitates a review of how well-prepared your company is for compliance.
The change, although often viewed positively, isn’t always welcomed. The announcement of the IR35 changes has marked a significant shift for recruitment agencies. It compels them to reassess their previous operational processes. With uncertainties like concerns regarding contractor retention due to the new off-payroll rules, this is clearly not perceived as a positive change.
The IR35 changes are not grounds for panic or dismay. Their novelty and difference from what we are used to may seem threatening and unfavourable at first glance. However, further exploration may reveal them as an opportunity for the recruitment sector to evolve into something better. This is why you should keep your cool and do what needs to be done, observing the outcomes and planning your next steps accordingly.
The best way for recruitment agencies to adjust to IR35 is to understand it in the first place. This involves grasping the correct terminology, criteria, and implications of non-compliance for all parties involved. Once its essence is understood, optimising for the change becomes easy.
Another way to speed up the process is to rely on tools that accommodate the new regulations. We also recommend inviting a specialist consultant to conduct a training session for your teams.
Due to the controversy surrounding the ‘light touch’ policy for the first year of the reform, many recruiters remain in denial. They are behaving as if the changes in the IR35 legislation will not be implemented or will not be permanent. Although we cannot guarantee that there won’t be additional tweaks in the years to come, we are certain that the main rules introduced in April 2021 will not change. Recruitment agencies need to acknowledge this and respond accordingly.
IR35-ready companies are being realistic about the situation. Like contractors, they didn’t want the reform to happen. It’s not in their interest to accept the added risk or to deal with the increase in admin that came with the changes. However, the companies that will cope best with the shifts are the ones that accept the situation. They’re allocating the time and resources necessary for IR35 because they understand the value of compliantly engaging contractors outside IR35.
As suggested in the introduction, regardless of what recruitment firms think about IR35, it is not going away anytime soon. The only option is to adapt. The sooner you grasp this and initiate the process, the lower the risk of facing penalties in the future. In other words, do not delay or take a casual approach to IR35 compliance just because you disagree with it. Ultimately, it is your business and reputation that will suffer.
We cannot highlight and emphasise enough the importance of communication regarding the legislation. The companies that are prepared to engage contractors compliantly outside IR35 began a dialogue with the contractors on their books months ago. It’s crucial that every party involved understands the position of the other, fostering a collaborative, relationship-building decision-making process.
Clients consulting contractors and agencies about their IR35 status naturally have a better chance of making correct IR35 decisions, potentially saving themselves from fines. Collaboration is therefore key and is something that firms adopting a measured approach to reform understand well.
The government isn’t unaware of the implications that changes in IR35 are having on contractors, employers, and recruitment agencies. This is evident in its willingness to give the private sector a year to adjust, as well as in the introduction of legal tools such as CEST to support the transition. However, how effective are the solutions provided by officials in aiding compliance?
Addressing the previously raised question, the IR35 tool offered by HMRC isn’t – and never has been – adequate for the task. Consequently, many companies have ceased relying on it entirely. Refusing to use the revenue tool means engagements assessed through CEST are verified with a comprehensive review of IR35 status.
Since the IR35 liability has now shifted from the contractor to either the agency or company, many fee-paying parties are safeguarding themselves with IR35 insurance for assessments outside the legislation. Essentially, contractors ensure their tax status is set accurately and carefully, regardless of the assessment results provided by CEST. Ultimately, this insurance gives companies the confidence to make outside IR35 determinations and protects fee-paying recruitment agencies.
There has been discussion about private sector engagers reaching an SoW with recruitment agencies and sometimes contractors. An SoW, typically established between a consultancy and a client to outline deliverables, timeframes, activities, and costs, eliminates the need for an IR35 assessment from the end client. This is because the responsibility will fall to the consultant or provider of the service to determine the contractor’s status.
But it’s vital that the services provided by the consultancy are genuinely outsourced. A SoW can’t be a provision of labour disguised as a consultancy agreement to evade the rules. HMRC will scrutinise arrangements that appear to be ‘hastily cobbled together consultancy agreements’. Additionally, there are several financial compliance implications for contractors seeking to establish a consultancy. It’s certainly not a straightforward process.
That said, companies are receptive to the concept of an SoW. However, for it to be above board, significant changes are necessary in the way a contractor delivers services to that business.
The short answer is yes. While there is no solution (at least not yet) that can definitively determine whether a contractor falls within the IR35 regulations, there is a plethora of software designed to assist you with the process. In fact, ever since the announcement of the legislative changes, most recruitment-oriented solutions- be they CRM, ATS, pay and bill systems, or others- have started adjusting their platforms to help users comply with these regulations. Depending on their key functionalities, platforms already offer various IR35-related features. If you're unsure what your software vendor offers in that regard, reach out to them for clarification.
Having always worked extensively with clients across the industry, we understand the implications of the IR35 reform on recruitment agencies. This is why our software has undergone a series of changes to accommodate IR35-compliant practices. For example, our approval module has been tailored to function based on deliverables rates rather than time, which is one of the key factors distinguishing a ‘hidden employee' from a contractor. This doesn’t mean that time-based approval is no longer available - rather, we’ve taken steps to accommodate all types of clients across the board.
Since a significant portion of our software focuses on generating and distributing invoices, we’ve implemented automatic income tax and national insurance deductions for contractor recruiters, in light of potential regulatory changes. As always, we take pride in offering a wide range of customisation options. This means you can still create a tool that’s tailored to your business needs. Additionally, it has been upgraded to ensure compliance with the latest IR35 changes.
The ‘light touch’ period is now over, and the responsibility for non-compliance has shifted from the contractors to the recruitment agencies and companies. While this is certainly not a welcomed reform for any of the involved parties, it should not be viewed as something you cannot adapt to. However, considering the IR35 legislation changes as a temporary inconvenience is not the right approach either.
The changes are expected to persist for years to come; therefore, the best course of action for a recruitment agency is to accept this reality and adjust its operations to remain compliant. While the initial period may not be easy (as change almost never is), over time, we may discover that these changes present new opportunities that would not have been available to your firm otherwise. It all depends on the perspective.
The IR35 reform is not the end of the world. Let’s explore how we can make it work for you.
Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal / financial expert in this area before acting on any of our advice.