2017 changes to the application of IR35 for contractors in the public sector has meant that recruitment agencies have become far more involved in the application of the intermediaries legislation.
The amendment to the IR35 legislation, often referred to as the ‘off-payroll working rules’ was implemented from April 2017 after being announced in the 2016 Autumn Statement. Whilst previously the determination of employment status for tax purposes was the responsibility of the limited company contractor, this was passed from April to the end user.
Whilst it is the end client’s duty to determine the IR35 status of the workers engaged to them under the new rules, the financial liability and responsibility for applying IR35 lies with the fee-payer, which will usually be the recruitment agency.
These rules are also to be extended to medium-large private sector businesses from April 2021, which will also see some amendments for the public sector – See IR35 Changes Explained for more information
In some cases, the end users have required that their agency take on the IR35 determinations, but for the purposes of this guide, we shall assume that the end user is taking this responsibility as per the rules.
If the end user deems the contractor as being outside the scope of IR35, the contractor will continue to provide their services as usual, providing there are no significant changes to their working practices during the course of the engagement.
If the end user deems the contractor as being inside IR35, then the fee-payer (usually the recruitment agency) becomes responsible for paying the contractor appropriately by making a deemed payment calculation.
The deemed payment calculation is the amount payable to the contractor’s business, minus any VAT, deductible expenses and costs of materials. You will then need to deduct income tax and NICs before paying the contractor the final sum.
You will then also need to pay the relevant employers NICs as the agency becomes the contractor’s employer for tax purposes. Payments will need to be reported to HMRC using a Full Payment Submission, much in the same way as you will do for PAYE workers and keep a record of the deductions on a deductions working sheet.
Whilst it all sounds straightforward, it is seldom so. Many agencies aren’t set up for putting contractors on payroll, and it adds a wealth of administration in liaising between contractors and end users to find out the status of an engagement to be able to apply the rules correctly.
The office-holders rules can be misconstrued when dealing with contractors, as they are office-holders in their own companies. These rules only apply when the contractor holds an office position in the end client’s organisation, as opposed to being Directors of their own companies.
A common occurrence on jobs boards since the implementation of the off-payroll rules in the public sector, is the advertisement of ‘inside’ or ‘umbrella’ rates, meaning that the end client has already determined the role as within scope of the IR35 rules. This can be confusing for many contractors as it is often unclear if the advertised rate represents the fee before or after deductions being made, and further confusing when ‘umbrella rates’ are advertised as it is unclear what exactly has been deducted for umbrella fees, or if they have to use a particular umbrella company or not.
Some clarification of these points can be helpful when advertising job roles, not only for contractors, but to encourage applicants. Contractors are more likely to apply for roles where they can see the rates and terms on offer clearly.
For more information, please contact us on 0116 478 3390.