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Private sector IR35: What now for recruitment?

July 5, 2018  /   No Comments

Nick Martindale

The current consultation into tackling non-compliance with off-payroll working rules, commonly known as IR35, in the private sector is seen by many as the start of a process to harmonise rules with those already in force in the public sector.

This is ultimately designed to tackle the issue of contractors not paying the levels of National Insurance (NI) the government believes they should.

“While the self-employed and employees already pay broadly the same levels of tax, the government misses out on the 13.8% NI contributions firms usually pay when they hire employees when they hire people who are self-employed, because they are ‘off-payroll’,” says Dave Chaplin, CEO and founder of contracting body ContractorCalculator. “These new reforms are a way to introduce a new ‘off-payroll tax’, whereby firms that hire contingent workers who are like employees will have to pay their usual employment taxes, in the same way they do when they hire employees on-payroll.”

The focus of IR35 and the new reforms revolves around individuals who supply work through personal service companies (PSCs). “There has been widespread concern that there has been a growth in use of PSCs to avoid full PAYE and NICs, and that the original IR35 regime has become ineffective,” says Kevin Barrow, contingent workforce partner at international legal practice Osborne Clarke LLP. “The consultation paper suggests that one-third of PSCs in the private sector are ‘inside IR35’, but that only 10% of that one-third are currently paying the right level of PAYE and NICs under the existing IR35 regime.” The government estimates that cracking down on this perceived tax dodge could generate an extra £1.2 billion.

While the consultation does not finish until August, most commentators believe the most likely outcome is a similar situation to that used in the public sector, which was introduced in April 2017, and which the government claims has brought in £410 million as a result.

The most significant implication for recruiters and their clients may be that the burden for determining whether a contractor falls inside or outside IR35 will shift from the contractor to the employer and agency. “End-users may be given even greater responsibility for ensuring compliance, including being able to demonstrate that the online HMRC status test has been used for each PSC engagement, on pain of various penalties and naming and shaming,” adds Barrow.

Julia Kermode, chief executive of The Freelancer & Contractor Services Association (FCSA), says one of the biggest problems in the public sector has been that employers have decided to adopt a no-risk policy, automatically treating contractors as within the scope of IR35. “Contractors in the public sector are feeling aggrieved and concerned because they are being penalised by facing an unfair tax which HMRC said would only affect non-compliant contractors,” she says.

She identifies three possible outcomes should a similar strategy be adopted in the private sector: contractors having to accept less income without the statutory rights and benefits which employees receive; an increase in assignment rates with costs borne by the employer; and finally contractors leaving roles and seeking alternatives to contracting.

Iain Campbell, secretary general of the Independent Health Professionals’ Association (IHPA), says in the public space the new regime has led in some cases to contractors’ incomes falling by as much as 50%. “These staff are also required to personally cover required expenses such as long-distance travel and insurance, which can total thousands of pounds,” he says. “Many NHS workers find themselves vulnerable to exploitation by peddlers of tax avoidance schemes.”

For recruiters, there are many concerns; not least that the cost of recruiting will increase. Research by the Association of Professional Staffing Companies (APSCo) suggests 45% of agencies in the public space have seen the cost of resourcing contractors increase since the rules were brought in, with almost half (46%) saying this was in excess of 15%.

“What’s more, the consultation document and accompanying collateral gloss over any negative feedback from its own research by burying it below the headline findings,” says Samantha Hurley, director of operations. “For example, almost a third (28%) of central bodies surveyed reported that the reforms had led to them increasing the gross hourly rates paid to off-payroll contractors. However, it was not recorded how significant these rises were.”

A shortage of talent is also a concern, as contractors become less willing to move and even contemplate moving away from contracting altogether. “Contractors in the public sector are much less flexible and agile as a result of tougher sanctions on pay and travel expenses, and as a result it is much more challenging to find the right candidates,” says Michael Bailey, a manager in the legal team at Sellick Partnership. “If similar sanctions are placed on the private sector it could force many highly skilled contractors into permanent employment or longer fixed-term contracts, and this could have major implications on the size of the talent pool and widen the skills shortage in both sectors.” It would, however, at least create a level playing field between the two sectors, he adds.

Recruiters are also likely to find themselves caught between the wishes of their client and the views of contractors who may not feel they should fall within the scope of IR35., as has happened in the public sector. “There are a lot of problems in practice, including claims being brought against recruiters for unlawful deductions from wages because they are deducting at source for NI, as required when paying on payroll,” says Simon Whitehead, founding partner at HRC Law. “If the cases continue at the current rate then lots of recruiters will be left with no choice but to try and recover that, either from HMRC or their clients. It is a difficult commercial situation to manage.”

Agencies have a role to play in helping clients make the right assessment, believes Chaplin. “An agency that blindly agrees with an ‘inside IR35’ assessment which is wrong could be subject to litigation for wrongful deductions,” he warns. “And an agency that blindly agrees to ‘outside IR35’ opens itself to future tax risk. Whichever way they turn, they have to make sure it will stand up in law.”

At the very least, this is likely to increase the admin burden on recruiters. “The public sector IR35 regime has affected the recruitment profession significantly as most organisations are not equipped to manage the implementation of PAYE calculations and deductions,” points out Pete Holliday, managing director of Sopra Steria Recruitment. He believes HMRC should use the information it already has through Employment Intermediary reporting to identify all workers operating as PSCs and issue a CEST questionnaire to each worker to enable monthly collection of tax due.

More generally, it’s even possible this could have a broader impact on the wider economy; a survey by Harvey Nash, for example, finds 62% of contractors believe it will have a very negative effect, while 68% say it will hurt innovation. “The success of many businesses rests on their ability to strategically manage a fluid workforce,” warns Hurley. “While HR teams across the country have expertly used their skills to build and grow efficient, profitable and flexible workforces, changes to IR35 have the potential to throw a spanner in the works.”

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  • Published: 3 months ago on July 5, 2018
  • Last Modified: July 4, 2018 @ 7:02 pm
  • Filed Under: Featured Post

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