There is now just a matter of months left until the new off-payroll rules, also referred to as IR35, are introduced.
Anyone working in contractor and freelancer recruitment will be aware of this fundamental rule change by now, but how many are truly prepared for it and what it may mean for the recruitment sector?
The future of the PSC
Contractors and freelancers that operate under a Personal Service Company (PSC) will see the benefits of operating under this structure effectively removed if they are deemed by an employer to fall under the IR35 rules – resulting in higher tax and National Insurance costs.
Before the last IR35 implementation date, which was delayed earlier this year due to COVID-19 and a lack of preparation, many businesses had taken a blanket approach to applying the rules.
However, research from insurers the Kingsbridge Group has found that the delay to IR35 has resulted in a third of hirers making a U-turn on blanket bans for PSC’s when implementing the IR35 rules.
Instead, many more businesses are making their own in-house assessments to ensure that they do not include those outside the rules within the new regime.
Regardless, many contractors and freelancers who operate via recruitment agencies are likely to be reassessing their company and employment status in the coming months.
For them, they have several options, the main one being to abide by the IR35 rules and see their income reduced.
For some in this position, they may be able to negotiate higher payments from those using their services to counterbalance any reduced revenues, but for others, they may decide to take a hit to ensure work continues.
Another option may be to close their PSC entirely or look to make it dormant, depending on the contract they are working on. In some of these cases, where contractors are assigned a long contract, they may even decide to take the full plunge and accept full employment to remove the stress and burden of IR35 assessments and compliance.
The third option could see some contractors move under umbrella companies, that will act as a third party to help remove the burden of IR35 and maximise the benefits of keeping a PSC open. This would allow workers to retain some flexibility depending on the contracts they undertake and each employer’s IR35 assessment.
Under the umbrella
Although many contractors are choosing to move to umbrella companies, there are still some concerns about the position they hold and how HM Revenue & Customs may assess their position in the market in future.
Already, recent amendments to the IR35 rules have made the position of these intermediary businesses less certain.
Amendments to Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, made via the Finance Act 2020 that reached Royal assent on 22 July 2020, broadens the legislation’s definition of an ‘intermediary’ to include umbrella companies.
It requires that remuneration is treated for employment tax purposes before reaching the intermediary, which would effectively render the role of the umbrella company redundant.
HMRC has said that this isn’t the intention of the amendment, but several legal experts have pointed out that the legislation opens opportunities for the tax authority to take action against intermediaries that it deems to be non-compliant.
While further clarity is sought on this change, commentators have interpreted the rule change to mean that agencies may, at some point, be required to assume the role of fee-payer, even if the contractor is engaged via an umbrella company.
Agencies would, therefore, need to make tax deductions and run payroll for a contractor before sending the remaining amount to the umbrella company.
Impact on recruiters
The recent amendments to the IR35 rules and changes to the attitudes of employers and contractors have made the position around the off-payroll rules more complex and uncertain.
For some agencies, they may see a reduction in businesses requiring contractors, as well as seeing fewer workers on their books – especially if some freelancers decide to abandon the PSC structure and seek full-time employment instead.
It is also becoming clearer that the new rules may yet place an even greater burden on agencies, especially if the use of intermediaries like umbrella companies becomes less relevant, as has been suggested.
With everything that is already going on in the sector due to the pandemic, this is another area where agencies are being placed under undue pressure that they do not need.
With the clock ticking down to the implementation of the new rules on 6 April 2021, recruiters should seek professional advice and ongoing support with IR35 to ensure they comply with its requirements.