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For recruitment agencies, it’s perhaps the hottest topic right now. IR35 is in the spotlight, with non-compliance potentially resulting in recruitment businesses being hit with hefty tax bills plus interest and severe penalties.
At Back Office though, we’re on it. We’ve spent a great deal of time looking at the implications for recruitment agencies and their off-payroll workers, and how you can make sure you comply. Here’s what we found.
The background – what is IR35?
IR35 has actually been around since 2000, and it basically determines how an individual working via an intermediary – such as a personal service company (PSC), another company (including umbrella companies) or a partnership – should be taxed. Its aim is to prevent tax avoidance by anyone working as a ‘disguised employee’; in other words, supplying their services to a client in the same way a full-time employee would but doing it as a contractor or temporary worker through the intermediary.
What’s changing and why?
In April 2020, the IR35 rules are changing. Historically individuals were allowed to determine their own IR35 status, so those using a PSC were responsible for their own tax affairs. But from next year that decision will move from the worker to the party paying the worker’s PSC (the ‘fee-payer’) who is treated as an employer for the purposes of Income Tax and Class 1 National Insurance contributions. And in most circumstances that would be the recruitment agency.
The rules were changed in 2017 for the public sector; from next year, they’ll also apply to medium and large businesses to increase compliance from smaller suppliers and recruitment agencies in the private sector.
How does non-compliance affect recruitment agencies?
Remember, as the recruitment agency you may well be responsible for paying the correct tax and National Insurance to HMRC – so if you get it wrong, you could not only be hit with a hefty tax bill, but also liable to a severe penalty.
If you’re providing off-payroll workers who operate through intermediaries, you’ll need to have a solid understanding of IR35 status tests. You’ll also need to work closely with your clients (the end-hirers) to make sure you both understand the IR35 status of each off-payroll worker – which means you’ll need clear processes and procedures in place to be sure of reaching accurate IR35 status decisions every time with the end-hirers due to that change in responsibility.
What do agencies need to do before April 2020?
Quite simply, now’s the time to make sure you have everything in place ready for the April changes and your new obligations. That means making sure the right people in your organisation understand IR35 and how to make individual status assessments working with your clients and off-payroll workers. Increasingly, specialist IR35 training offerings are emerging, and because not every IR35 assessment will be straightforward – it may even be worth considering engaging your own IR35 specialists if this is a considerable issue for your agency.
By April, Back Office will operate payroll for any off-payroll workers you supply who work through their own company and fall within the scope of the rules using the special tax deduction method for paying them. And of course, we can also pay workers through the conventional PAYE/NI method if you should require it.
Whether you already work with Back Office or not, the team can help you, your off-payroll workers and your clients from falling foul of the new IR35 rules. Just contact them by calling 01260 280 290.