What do the new IR35 “off payroll” rules mean for recruiters?

Recruitment firms are no strangers to regulation, with a wave of new legislation washing over the industry in recent years. And 2021 looks set to be no exception, with the extension of the new IR35 “off payroll” rules to most of the private sector. So what do the changes mean for recruiters?

Until 2017, recruiters could rest secure in the knowledge that limited company contractors were a “safe haven”, because tax risks sat with contractors themselves. In April 2017 things changed in the public sector, and from 6 April 2021, the IR35 legislation will be rolled out to the majority of private sector businesses, bagging the Treasury revenues of an estimated £1.3 billion per year by 2030 along the way. So how should the recruitment industry approach the changes?

When it comes to IR35, it’s critical that recruiters understand their own risk profile. How many limited company contractors do they have on their books? What is it that these contractors do? And how long do their assignments last? This last point is important: any assignment that is long term would raise a glaring red flag with HMRC. Conversely, where recruiters are only engaging contractors on a very short-term basis, this should sound fewer alarm bells.

Clarity is lacking for recruiters

And here’s one problem with the new rules. HMRC’s CEST tool has been heavily criticised as unfit for purpose, and there have been numerous examples of HMRC losing IR35 appeals in recent years. If the CEST tool cannot be trusted how do clients and recruiters gain certainty that their assessments will be accurate and accepted by HMRC? There’s no statutory definition or test to follow, and that means there’s no clarity for recruiters when it comes to IR35 decisions. An updated CEST tool has been promised so we will have to wait and see if that proves any more reliable.

That’s not the only concern for recruiters. The robustness of the supply chain itself is also a critical consideration. In many situations, the new rules will see contractors forced to switch from a pay-gross to a PAYE arrangement. And while many recruitment agencies have their own payroll, those that don’t outsource that function to an umbrella company. Under that model, the umbrella company employs workers and must still account for PAYE and National Insurance contributions. But if that company is non-compliant and fails to properly account for PAYE (for example using offshore arrangements), the liability can filter right up through the supply chain.

There are also reputational concerns in the event of an end-user client being associated with a non-compliant supply chain below it. This puts the onus firmly on recruiters to make sure they have done everything they can do demonstrate their own compliance, as well as that of the umbrella companies contracting with the agencies further down the chain, when it comes to procurement.