End users will have to decide the IR35 status of the engagement, but the recruitment agency is responsible for making correct tax deductions.
Recruitment agencies who may not have payroll in-house will have to deduct tax and NICs from all contractors who fall inside IR35, AND find the funds to pay employers NICs and the apprenticeship levy on these contractors pay.
Failure to do so could mean HUGE consequences. If correct deductions aren’t made, HMRC will seek recovery from the agency and potentially, EXTRA PENALTIES can be added.
End clients classed as “small businesses” are exempt – but this does not apply to recruitment agencies.
The IR35 rules were designed by HMRC to tackle “disguised emplyment”, a practice whereby a contractor provides their services through a Personal Service Company (PSC) in order to benefit from the tax advantages of being self employed, even if this does not accurately reflect their working practices.
The current rules require contractors using a PSC to look at the way they work and decide whether they fall outside IR35 (self employed for tax purposes) or inside IR35 (should be taxed as an employee). The PSC then must pay tax appropriately according to its IR35 status decision.
From the 6th April 2020, your client will be responsible for deciding the IR35 status of every engagement with a PSC contractor. This change of responsibility was rolled out for assignments in the public sector in 2017 but will be extended to the private sector from this date.
Your client must take reasonable care in reaching their decision and give reasons for their conclusions. They must communicate their decision in the form of a Status Determination Statement (SDS) to your agency and the contractor. In practice the end user will probably try to issue the SDS before you start the assignment.
The new rules apply to all contractors who supply their services via a PSC.
The majority of your clients will have to apply the new rules, however small businesses meeting two or more of the following criteria are exempt:
From the date the new legislation takes effect, liability for deducting appropriate tax and NICs from the contractors fee sits with the “fee-payer”.
The fee-payer is the entity which pays the PSC company, which is usually the recruitment agency.
Failure to deduct correct tax and NICs based on whether the contractor is inside or outside IR35 could have significant repercussions for your agency, such as:
A practical solution is for your agency to ensure that all PSC contractors who are or are likely to be assessed as “inside” IR35 are paid through an umbrella company who will deduct tax and NICs at source through PAYE.
IR35 is a piece of legislation that applies to all contractors / temporary workers, who work via their own limited company.
IR35 requires a decision to be made on your work status and this decision impacts the tax payments for your current work and contract.
In the past, the decision to see if IR35 legislation applied to your current work and contract, was your personal decision to make.
From April 2020, this is no longer the case. It will no tbe your personal decision anymore.
It will now be the decision of the company you work at each day, referred to as the “end client”. The “end client” is not your recruitment agency.
If your “end client” decides you are “outside IR35” (you remain self-employed for tax purposes), nothing will change for you.
If your “end client” decides that you are “inside IR35” (you are an employee for tax purposes), you will have your income taxed at source, the same as being paid PAYE by an employer.
If this is the case, it may not be cost-effective for you to use your own limited company for this particular piece of work and contract.
Many “end clients” will use the HMRC approved CEST (Check Employment Status for Tax) tool, to make their decision.
The tool asks a number of questions, at the end of which a decision on IR35 is given. CEST can be found online here:
Some “end clients” have already begun communicating their decisions (“status”), while others will still be assessing their existing contractors/temporary workers.
It is the “end client’s” responsibility to communicate their decision to you, you are not expected to ask for it.
You will be able to appeal a decision on your “status”.
However, if an “end client” has taken reasonable care in making their original decision, they do not have to change their mind on appeal.
Many contractors/temporary workers will stop owning a limited company and move to being employed by an umbrella company, a preferred alternative by many recruitment agencies.
Speak to one of our specialist advisors as soon as possible, who will help you move from owning a limited company to being employed by an umbrella company.