IR35: Recruitment Agencies Must Prepare for Changes

When the IR35 reforms hit public sector workers in 2017, no one had a clear idea about the impact they would have on contractors and agencies. Looking back at how it all played out, a few trends are clear:

Contractors lose the most: From weathering blanket bans pushing all PSCs into the ‘inside IR35’ category to witnessing an additional reduction of take-home pay by 13% to 25%, public sector contractors had a tough time post IR35. No wonder a number of contractors bid goodbye to public sector assignments and searched for greener pastures in the private sector.
Agencies face administrative burdens: In many cases, agencies moved workers to the PAYE model and had to help them with payroll and related support. In addition, it became tougher to find and recruit candidates for the public sector.
A profusion of IR35 avoidance schemes: Although there are compliant services providers, some still end up introducing schemes commonly revolving around getting an opinion from a QC (Queen’s Counsel) for creating a model around saving taxes until it is challenged in the court. In the wake of IR35, the market witnessed the emergence of all kinds of tax avoidance schemes, although HMRC deemed such arrangements as illegal. Many agencies chose an easy way out by asking the contractors to register with Umbrella companies – which solved the problem in a legal way but left the workers with even less take-home pay.

IR35 in the private sector: moving towards the inevitable outcome

While everyone in the recruitment industry hopes that the IR35 reforms are not extended to the private sector, the HMRC is keen on rolling them out.

HMRC’s intentions were first made public via the Autumn Budget document. Section 3.7, titled ‘Off payroll working in the private sector,’ said that the government saw IR35 reforms for the public sector as successful and will consult on how to tackle IR35 non-compliance in the private sector.

In April 2018, Philip Hammond’s Written Statement (Spring Statement – consultations) hinted that IR35 consultation for the private sector off-payroll working will be published in the coming months. The Written Statement says that the government will publish:

“Off-payroll working – a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform. The Government will work with businesses and individuals to mitigate the potential administrative burdens of any future changes.”

On May 18th, the government consultation on off-payroll reform in the public sector was finally published, along with an IR35 factsheet.

Why is the HMRC so keen on rolling out the reforms to the private sector?

While the consultation does not put a date on the implementation of IR35 in the private sector, it does show that the HMRC is keen on a more stringent application of the IR35 rules. At this juncture, it is not clear when and in what form the reforms will be extended to the private sector, but it does look very likely that the government wants to use the public sector model for the private sector too.

Industry voices raised against private sector IR35 reforms

At this stage, most voices in the recruitment industry see the introduction of IR35 reforms in the private sector as a disaster.

Julia Kermode, chief executive of The Freelancer & Contractor Services Association (FCSA) said:
“The reforms in the public sector have had a devastating impact, as has been widely reported… We disagree that public sector compliance has improved since the reforms were implemented; all that we have seen is an increase in numbers on payroll, which is not substantive proof that they should be there at all.”

Reacting to the consultation document, Chris Bryce, CEO of The Association of Independent Professionals and the Self-Employed (IPSE), expressed his disappointment: “For the government to even consider introducing the ill-judged changes to IR35 in the public sector to the private sector, before their full impact can be truly analysed, is outrageous…How can the government hold this anti-business consultation when it won’t even know the full tax implications of the changes made last year until people file their tax returns in January 2019?”

How HMRC views the issue

The wording in the off-payroll consultation document and the IR35 factsheet provide an insight into how HMRC looks at the entire issue. Some of the statements include:

The cost of non-compliance in the private sector is growing and will reach £1.2 billion a year by 2022/23.
HMRC estimates that we have already raised an additional £410 million of income tax and NICs due to the [off-payroll in public sector] reform.
Research shows that for most public authorities, the reform has not made it harder to fill vacancies
Research shows that for most public authorities, the reform has not led to higher rates for contractors.
The CEST service gives an answer in 85% of cases.
Evidence shows that the vast majority of public authorities made assessments on a case-by-case basis.
We welcome views on taking a similar approach to that taken in the public sector last year, including how the reform might need to be adapted if this approach was pursued.

Clearly, the HMRC views public sector reforms as a major success and hopes that the introduction of similar reforms in the private sector will help improve IR35 compliance & help increase the income tax revenues. The government has been criticised earlier for taking the decision first and publishing the consultation after. So, in addition to adapting the public sector reform, HMRC has proposed two options (pages 24 & 25 of the consultation), which revolve around 1) record keeping of payment details, and 2) requiring businesses to secure their labour supply chains.

However, most voices in the industry fear a repeat of IR35 in the public sector, which left just 4 months for the agencies to comply with the new rules. Contractor UK feels that HMRC has already made up its mind and is ready to roll out the reform to the private sector.

Impact of IR35 in the private sector on recruitment agencies

A lot will change if the IR35 reforms are rolled out to the private sector. However, the blanket bans on contractors that are not working well even within the public sector are unlikely to work for the private sector. So, some workers will continue to work as contractors, while many others will be on the payroll. As a result, recruitment agencies will need to:

Find ways to deal with the increase in administrative burden
Hire staff with expertise and knowledge of payroll and IR35
Incur additional costs to streamline the process, a task that will take 3-6 months
Divert the focus to IR35-related queries and updating payroll and other software

How agencies can prepare for the rollout of IR35 in private sector

QX specialises in high-volume payroll processing for the recruitment industry – we processed over 1,000,000 during 2017. Our plug-and-play IR35 payroll solution helped many of the leading recruitment agencies to continue functioning smoothly in the wake of IR35. We help agencies with compliance, payroll processing and query resolutions, making sure that their employees can focus on activities where they can offer the highest value.

Our expertise in this area ensures that we are able to streamline the process for a new agency within 3 months while offering cost-effective services – up to 50% lesser than in-house costs. We also offer out-of-hours services, update and assist agency leaders with ongoing legislative changes and weave any necessary changes into our process.

Need assistance? It’s better to be prepared ahead of time.

April 2017’s IR35 reforms caused a lot of confusion and disruption for agencies serving the public sector. The spectre of IR35 now haunts the private sector. Does your agency have a plan in place to deal with it?

Our advice and support helped many public sector agencies navigate challenges stemming from the introduction of the IR35 reforms in April 2017. We held an event (snapshot below) featuring expert advice on how to manage changes associated with the reforms and look forward to organising a similar event in the coming months.