It’s the subject everyone’s talking about but what do the IR35 changes mean for recruitment agencies?
The topic of IR35 changes has become a hot topic in the recruitment industry. With the new rules set to come into effect soon, many recruiters are scrambling to understand how it will affect their operations. IR35 is a tax legislation that was introduced to tackle tax avoidance by individuals who provide their services to clients via an intermediary, such as a limited company or personal services company. The new rules are set to shift the responsibility of determining whether a contractor is an employee or a self-employed individual from the contractor to the end-client or hirer.
The changes are set to affect recruitment agencies in a number of ways. Firstly, they will need to have a deep understanding of the new rules to ensure that they are operating within the parameters of the law. This is particularly important as the new rules will require agencies to identify whether the contract they are offering is inside or outside IR35. Secondly, they will need to have a system in place to communicate the new rules to their clients, particularly those who may be unfamiliar with the legislation.
What is IR35?
To determine how someone is engaged with a business for tax purposes, whether they count as an employee or a contractor, is done by using the intermediaries regulation, also known as IR35. This prevents employees working on a rolling contract from disguising themselves as a contractor when they’re really an employee.
What are the changes?
Public sector bodies who employ contractors’ services, will now be responsible for assessing whether they are compliant with IR35 or not, rather than the contractors deciding this themselves. If IR35 applies, then the contractor will be taxed at source exactly as if they were an employee. However even though they may have to pay tax like an employee, their employment status will not change so they will not receive benefits such as pension contributions, holiday pay and unfair dismissal rights. The Treasury says it hopes to raise £185m for the year 2017/18 and an HMRC spokesman said “These reforms are about promoting fairness in the tax system and we are clear that everyone should pay their share.”
These changes will be coming into effect as of 6 April 2017, and will have a massive impact on recruitment agencies across the UK who employ contractors. It is also believed that depending on the success of the new IR35 laws on the public sector, there is potential for it to be extended to the private sector as well in the future.
How will IR35 affect recruitment agencies?
According to Deloitte, contractors’ incomes will typically fall by 13% if the new IR35 proposal for the public sector is introduced. Consequently, recruitment agencies’ margins will be reduced so they will make less money on each contractor they place. The changes will also naturally cause uncertainty in the market and undoubtedly more agencies will be pushing their contractors into IR35 to satisfy the taxman.
You will need to ensure you have the best recruitment CRM in place, in order to be more efficient.