As a recruiter, you must understand IR35 legislation and how it applies to contractors working on temporary assignments. In this article, we explain what IR35 is and how it impacts recruitment agencies, contractors and end clients.
Introduction to IR35
IR35 was introduced in April 2000 as a way for the government to stop so-called “disguised employees” from taking advantage of tax breaks that were not intended for them. If a contractor is outside IR35, they’re genuinely self-employed and can operate as a Personal Service Company (PSC) director. However, if a contractor is inside IR35, they work the same way as permanent employees and must be taxed at source and receive a net salary just like a permanent employee.
HMRC reformed the off-payroll working rules for the public sector in April 2017, and it became the responsibility of the end client to determine the contractor’s IR35 status. The off-payroll working rules came into effect in the private sector in April 2021. From this point, all public authorities and medium and large corporations in the private sector were responsible for determining the worker’s employment status. If a worker is deemed inside IR35, the fee-payer is responsible for accounting for and paying Income Tax and National Insurance Contributions (NICs) to HMRC.
The only exception to the off-payroll working rules is if the private sector end client is based entirely overseas, with no UK presence, or if the private sector client meets the criteria for the small business exemption.
Inside or outside IR35 – what are your candidate’s options?
It is important to note that status determinations are made on a contract-by-contract basis; one role could be deemed inside IR35, and the next could be outside IR35.
Outside IR35
If, following a status determination, your candidate has been deemed to operate outside IR53, the client has found that the contractor is engaged on a genuinely self-employed basis. They can become a director of their own limited company or get paid (gross) for that assignment into their limited company if they already have one. An outside IR35 determination means they can pay themself tax-efficiently with a combination of salary and dividends.
Inside IR35
If your candidate is inside IR35, the terms of their engagement are similar to that of a permanent employee. The fee payer (umbrella company or recruitment agency) must deduct PAYE tax and NICs at source before making a net payment to the contractor. If a contractor is inside IR35, working through a limited company has no tax benefits, and it is often more advantageous for your candidates to use an umbrella company.
What is a Status Determination Statement?
The Finance Bill 2020 included amendments to IR35 legislation, and one of the critical inclusions was the requirement for end clients to produce a document called a Status Determination Statement when assessing a contractor’s IR35 status. An SDS document outlines the contractors’ employment status (inside or outside IR35) and the reasons for their determination.
The SDS needs to be produced on a contract-by-contract basis for every temporary worker the end client wishes to engage to mitigate the risk of incorrectly classifying the IR35 status of an assignment down to either using a blanket rule or one rule for all role-based assessments.
Chain of responsibility – where does the liability sit?
The end client is responsible for determining the IR35 status of a contractor in both the public and private sectors. Once the client has determined the IR35 status, they must provide an SDS in writing to the contractor and your recruitment agency explaining the determination.
The end client must conduct a thorough assessment of each contractor. If the SDS requirements are not met, the client has failed to take ‘reasonable care’ in their decision-making and will assume responsibility of the ‘fee-payer’, meaning they would be liable for any unpaid tax.
Once a client issues an SDS, the liability for operating PAYE/NICs concerning the contractor passes to the next person in the supply chain between the contractor and the client. Many recruitment agencies work with umbrella companies to pay their candidates to reduce the administrative burden of payroll management and the potential risks associated with payment and compliance.
It is crucial that your agency conducts thorough due diligence for each provider on your PSL and only refers your candidates to compliant umbrella companies. HMRC is increasingly stepping up their efforts to target tax avoidance, and the introduction of the Criminal Finances Act 2017 has made it easier for them to prosecute companies (especially recruitment agencies), facilitating tax avoidance and tax evasion.
Recruitment agencies risk being found guilty of non-compliance under the Criminal Finances Act 2017 if candidates are not paying the correct tax and NICs or if your agency is found to be referring candidates to non-compliant providers. Additionally, debt transfer rules under off-payroll legislation give HMRC the power to pass the tax liability back up the supply chain if the fee-payer responsible for deducting the tax did not do so. If this happens, your agency could face a substantial tax bill.
Accreditations
SafeRec
We recently became a SafeRec Certified umbrella company to provide complete transparency to our recruitment agency partners and the workers we pay. Every time we process a payslip for one of your candidates, they receive an audit report showing that all deductions are compliant and workers have been paid correctly. You will also receive a monthly report outlining the results of every audit we’ve processed for your candidates using our service.
FCSA
Churchill Knight Umbrella and Churchill Knight & Associates Ltd are proudly accredited by the Freelancer & Contractor Services Association (FCSA). The FCSA is a leading professional body committed to ensuring the supply chain of temporary workers complies with HMRC regulations. We must pass a strict and thorough audit each year to keep our accreditation.
Partner with Churchill Knight Umbrella
There are plenty of reasons why you should partner with Churchill Knight Umbrella:
- Compliance – We are FCSA accredited and SafeRec Certified, and this level of transparency protects your agency against the risks associated with serious legislation such as the Criminal Finances Act.
- Comprehensive service for your candidates – Your candidates will receive free insurance cover worth £25 million, employee benefits including statutory maternity/paternity pay and sick pay, Same Day Faster Payments, a quick and easy registration process and ongoing support from our dedicated Onboarding and Customer Service teams.
- Excellent online reputation – Churchill Knight Umbrella has an excellent online reputation with fantastic reviews on Google and Trustpilot.
- Experience – We pay thousands of contractors every week – you can refer candidates to us with complete confidence that they will be well looked after.
- Multiple services – We provide a range of services alongside umbrella payroll to ensure your candidates receive the required service. For example, we offer a pension salary sacrifice service for workers who want to build their retirement funds, and we have recently launched a new CIS payroll service for construction workers.
Contact us
For more information about Churchill Knight Umbrella and the benefits of partnering with us, please give our expert team a call on 0808 2525533 or email agency@churchill-knight.co.uk.
