However, it has some serious flaws that recruitment businesses should be aware of.
So what's changing?
- The current rules
Under the current rules, where a personal service company (PSC) contractor works for a hirer in the public or private sector, the PSC must decide if IR35 applies to the assignment. If IR35 applies, the PSC makes the appropriate income tax and NI deductions and accounts to HMRC. If the PSC gets it wrong, the PSC is liable.
The government believes there is widespread IR35 non-compliance and that many PSC contractors do not pay the correct amount of income tax and NI. The government is therefore introducing new laws to clamp down on IR35 non-compliance in the public sector.
- The new rules
The government believes recruitment businesses supplying contractors into the public sector have a duty to ensure their PSC contractors pay the correct income tax and NI.
From April this year, where a PSC contractor is supplied by a recruitment business into a public sector body, the hirer must decide if IR35 applies to the assignment and must notify the recruitment business. If IR35 applies, the recruitment business must make the appropriate income tax and NI deductions, report them through RTI and account to HMRC. If the recruitment business gets it wrong, the recruitment business will be liable for the underpayment and for the interest and penalties imposed by HMRC.
If there is more than one recruitment business in the supply chain, then IR35 payments must be operated by the recruitment business which contracts with the PSC.
The government is developing an interactive online tool which can be used by hirers to determine whether IR35 applies to a PSC contractor's assignment. it remains to be seen how effective this tool will be.
The new laws will not apply to PSC contractors in the private sector. However, many experts believe it is simply a matter of time before we see a private sector roll-out.
How does this create a risk for my recruitment business?
Whilst the draft legislation helpfully puts the onus on the public sector hirer to determine the PSC's IR35 status, there are some significant gaps in the legislation:
- The hirer's duty to tell the recruitment business the PSC's IR35 status only really kicks in if the recruitment business requests the information from the hirer in writing. Therefore, the onus is squarely on recruitment businesses to build requests for IR35 information into their placement processes.
- Following the request from the recruitment business, the hirer has 31 days to provide the information. In practice, recruitment businesses cannot wait 31 days for this information. Therefore, recruitment businesses will need to put measures in place to manage the risks presented by delays in IR35 information.
- If the hirer gets the IR35 decision wrong, liability for any unpaid income tax and NI sits with the recruitment business. The legislation does not transfer liability to the hirer which means the recruitment business is on the hook for the IR35 decisions made by the hirer. Again, recruitment businesses need to look at what measures they can put in place to mitigate this risk.
What should I do now?
As the new laws are due to come into force in April this year, recruitment businesses should take action now to ensure they are prepared and:
- identify the supply chains which will be affected by the changes (including direct supply models and supply via other agencies)
- review payroll processes to make sure PSC contractors can be paid correctly and income tax and NI remitted to HMRC and reported through RTI
- review contracts with clients, other agencies in the supply chain, umbrella companies, payroll providers and PSCs to make sure they protect the recruitment business from the risks introduced by the new laws
The consultation on the draft legislation closed on 30 January and the final legislation is expected to be published shortly before implementation.
For more information or advice, please contact Michael Delaney on 01923 919 316.