IR35 for Recruiters

    What does IR35 mean?

    IR35 is a tax legislation, officially known as ‘off payroll working rules,’ that is designed to combat tax avoidance. Specifically, it was designed to target ‘disguised employees’ – individuals who provide services to clients through their own limited company or personal service company, but who would be considered to be employees if this intermediary company did not exist. Limited company contractors would therefore be considered inside IR35 and would need to pay tax.

    If an employee falls under the IR35 they are a fee payer and therefore are subject to national insurance contributions and must deduct income tax from their salary. Whereas, if someone is genuinely self employed then they are not subject to this UK tax legislation, which makes it crucial that recruitment agencies understand how the IR35 works.

    What should agencies be mindful of?

    Maintaining compliance with off payroll rules is absolutely paramount for recruitment agencies in order to avoid potential penalties and legal consequences.

    Understanding IR35 Status Determination

    Whether in the public sector or private sector, agencies should have a deep understanding of determining employment status and IR35 status, recruitment agencies should know the criteria used to assess whether contractors working fall inside IR35.

    Criteria to assess IR35 Status

    • Control – the level of control that an end client has over the contractors working practices, including where they work, how they work, and when they work, as well as whether the contractors working can subcontract the work or hire help, as well as if the client provides the tools or not.

    • Substitution – if a contractor has the right to provide a substitute for their work, it is an indicator that they are in business of their own account.

    • Mutuality of Obligation (MOO) – this refers to the obligation of the client to provide work and the contractor to accept and perform the work. If there is an ongoing relationship of obligation, this suggests an employer/employee relationship.

    • Financial Risk- the degree of financial risk by the contractor is a key factor in determining IR35 status. If the contractor is responsible for correcting their work by their own account, if they have liability insurance, or if they take the financial risk if a project goes awry.

    • Integration – if a contractor is treated as a part of an employers workforce, such as with staff meetings or has access to employee benefits, such as sick pay and holiday pay, it is considered to be an employment relationship.

    • Exclusivity- the requirement of exclusivity is an indication of an employment relationship.

    • Intentions of the parties – HMRC will take into consideration the intentions expressed within the contract. However, they will also look at the real life working practices of both parties.

    Client Communication & Education

    Agencies should be communicating IR35 reforms and regulations to their clients, so that they can understand their responsibilities, including conducting and issuing a status determination statement, as well as complying with tax and national insurance obligations.

    IR35 Assessment Tools and Resources

    Confusion about the regulations and rules is rampant, so HMRC has put together resources for IR35, meaning recruitment agencies and employers are more able to make accurate determinations of IR35 status. They have the Check Employment Status for Tax (CEST) tool as well as other resources, so agencies can use these to provide clients with professional advice and evidence based assessments of a contractor’s status.

    Risk Mitigation & Compliance Strategies

    Each recruitment agency should put strategies into place for ensuring they can mitigate risk and check compliance with IR35 reforms and regulations. It’s important to check that contractors aren’t working under personal service companies in order to avoid income tax and national insurance contributions.

    IR35 Changes for Recruitment Agencies is our guide for recruitment agencies so you can stay up to date with any current reforms and regulations for both the public sector and private sector businesses.