IR35 - Changes to legislation and impact to recruiters

From April 2017, an amendment was made to the IR35 legislation to tighten guidelines around PAYE tax and National Insurance Contributions (NIC) payments for those working in the public sector.

IR35 was originally introduced in 2000 to tackle the problem of ‘disguised employment’. This is where organisations hire workers on a self-employed or freelance contractor basis, usually through an intermediary, rather than hiring on an employment contract.

The amendment affects any freelance worker providing services to a public authority, such as the NHS, Transport for London and the BBC etc. 

The legislation also affects any public service hirer or recruiter currently using freelancers.

What is IR35?

Over the last few years, HMRC have been made aware of a ‘freelance loophole’, in occasions where both freelancers and hirers were able to avoid tax and NIC payments through disguised employment.1

IR35 has seen an extra 58,000 individuals paying income tax and National Insurance.2

As a contracted employee, deductible income tax could amount to as much as 46% of the annual salary, with NIC payment taken as an additional tax. However, as a limited company, individuals are not recognised as employees. This allows the hirer to avoid paying Employer’s NIC and the limited business to pay less PAYE and NIC as per their annual allowances.

By registering as a limited company, some contractors, have been taking advantage, registering as ‘freelance’ despite the employer deciding the hours and terms of the role.

This is where IR35 steps in. Workers now need to prove that they are independent and able to move from job to job in order to be recognised as freelancer. The hirers and recruiters will also have to demonstrate whether an individual in self-employed or face the possibility of being charged employers’ NIC.

Who does it affect?

Up to 90% of public sector agency workers are not paying enough tax.3

From April 2017, the responsibility of assessing a worker’s employment status shifted to the public authority, recruitment agency or third party employer. This makes the employer responsible for deducting and paying over any PAYE tax or NIC should an employee not be recognised as freelance.

IR35 applies where:

  • The worker is required to work at the end client’s site.
  • The worker is supplied with equipment by the end client.
  • The worker is directed by a manager or other officer of the public sector body.
  • The worker is leading a team.

To be outside IR35, the worker will:

  • Work mainly from their own office.
  • Provide their own equipment.
  • Employ their own staff.
  • Meet their own costs and expenses.

Potential changes to IR35

The new finance bill is currently only affecting the public sector. However, this will be reassessed in November 2018 possibly in the Autumn statement, and may subsequently extend to the private sector in the upcoming financial year, affecting even more recruiters who specialise in this area.

If IR35 extends to the private sector, 5.5 million businesses could be affected. 4

What does this mean for hirers?

The new challenge to hirers is understanding when they are responsible for paying PAYE and NIC taxes. Recruiters, as the final intermediary in the supply chain, need to be aware that they may be liable for PAYE and NIC deductions and payments to HMRC where they weren’t before.

Use HMRC’s online tool to find out if you, or a worker should be classed as employed or self-employed for tax purposes.

Reasons for concern?

With the right checks, there is no reason for hirers or recruiters to be concerned about continuing employing contractors or freelancers. However, to avoid unexpected tax investigation costs, it is advisable to check the status of your workers and continue to review the status of returning freelancers.

Alternatively, umbrella companies look to gain huge benefits from the rising uncertainty surrounding IR35. As the primary employer, an umbrella company is responsible for paying NIC and PAYE for the contractors they outsource, via recruiters or direct to the hirer. Umbrella companies could represent a lower risk option for hirers concerned about assessing their workforce.