Changes to private sector income tax – known as IR35 – are due to come into effect on 6th April, 2020. The legislative changes will shift the tax burden of some contractors and consultants onto the client organisation. An update published last week on the government’s website aims to clarify certain aspects of the changes.
One document in particular will be of interest to recruiters. It contains details of when recruiters may themselves be in line to foot the tax bill of a consultant or temp which they have placed.
Paragraph 11 of the draft secondary legislation for off-payroll working rules from April 2020 says that:
“11. The changes proposed mean that HMRC will first seek to recover any unpaid tax liabilities from the agency the client contracts with, where this agency is UK-based (agency one in the labour supply chain). Where HMRC are of the view that there is no realistic prospect of recovering the outstanding Income Tax from agency one, HMRC will then seek to recover unpaid liabilities from the client.”
In this situation, the ‘client’ is the organisation which receives the services of the consultant or contractor. Essentially, this places recruiters first in the firing line when revenues & customs comes to chase up an unpaid tax bill.
Do recruitment agencies really have to pay contractors’ tax?
The top-line reading of the new guidelines will make uncomfortable news for many in the recruitment industry. But the new laws do not mean that recruitment agencies are responsible for temps’ or contractors’ tax bills. Instead, it places the onus of responsibility with the agency only in some cases, when payments have been missed.
But it does mean that, when authorities believe that some tax money has gone astray, recruiters will be the first to receive a knock at the door. This requires an additional response from the agency. Even if it is only to demonstrate exemption from IR35 liabilities, the process creates more paperwork, and careful admin. Even agencies that are certain of their contractor statuses are unlikely to welcome this extra level of liability placed at their doorstep.
Implementation may be difficult – but there are solutions
Secondly, there are already commentators who are highlighting the challenges facing any organisation in the labour supply chain that wishes to get its IR35 statuses in order.
Graham Simons, writing for Recruiter last week, found a series of legal experts who found new rules hard to implement. Some highlight the inadequacy of the government’s online CEST self-assessment test. Others point to the amorphous nature of the concept of ‘mutuality of Obligation’ (MOO) which underpins all employment law.
With barely two months to go before the laws come into effect, there is still a great deal of uncertainty surrounding implementation. But recruiters can take some steps to insulate themselves against IR35 fall-out.
IR35 checklist for recruitment agencies
- Changes only apply to contractors and consultants that are placed within a medium or large enterprise.
- A medium-sized organisation is one defined as one having fewer than 250 employees and turnover below £50 million
- A large organisation is defined as one that exceeds either of the two attributes listed above.
- Contract work carried out for a client which is a small or micro enterprises will be exempt from the changes.
- There are currently no official plans to roll out changes to affect micro and small businesses. However, some commentators believe that this is the long-term objective. Recruiters and clients must be aware of their statuses in relation to all off-payroll workers.
- Affected organisations must determine the employment status of all off-payroll contract workers.
- Employment status determination is the responsibility of the client organisation receiving the service.
- Employment status determination is carried out on a case-by-case basis. Factors influencing the judgement can include:
- degree of autonomy/supervision within working arrangements;
- level of independence in relation to resources and consumables used in the delivery of the contracted service;
- the wording of contracted agreement;
- the degree by which working practices reflect wording of the contract;
- HMRC has this week identified UK recruitment agencies which lie first in the labour supply chain will have the primary responsibility for unpaid income tax.
- Where collection from the primary agency is considered unrealistic, HMRC will seek payment from the client organisation.
• Need more info? A range of official documents – including the full second draft of the legislation can be found here.