Like or loathe it, AWR will reveal the true cost of IR35

The Agency Workers Regulations (AWR) that come into force on October 1^st 2011 allow recruiters and employers to quantify, for the first time, the real cost of IR35, writes Crawford Temple, managing director of Professional Passport, a compliance and risk management group specialising in contracting.

While the regulations have steered away from direct comparisons to IR35; preferring instead to rely on the broader definition of ‘being in business on your own account,’ it has already become widely accepted that assignments outside IR35 are likely to be considered as outside the scope of the AWR.

The direct result of this is that for the first time, since the introduction of IR35 more than 10 years ago, there is now a real and quantifiable cost, or saving, that can result by accurately establishing the status of the assignment.

If a hirer was looking to engage a worker, after the regulations come in to effect, and that worker was comparable to an employee earning £50,000 per annum, the impact becomes clear.

If the worker was engaged through their own limited company on a business to business relationship with the working arrangements, relationships and contract clearly indicating a status outside of IR35, then the daily rate would be £217 per day.

If that same assignment were to be both inside IR35 and in scope of the AWR then the rate would have to increase to £260, to meet the comparable pay requirements.

This difference of £43 per day, or an effective rate increase of around 20%, is likely to provide enough encouragement, and motivation, for hirers to get to grips with IR35 and ensure, where appropriate, relationships become aligned.

With an annual increased cost of almost £10,000 per worker, this provides a real opportunity for recruiters to ‘add value’ to their clients.

Professional Passport is offering both training and support services to assist recruiters with this; including a unique service where HM Revenue & Customs will formally confirm the IR35 status of an assignment.

We believe that applying a segmented approach to a hirer’s temporary workforce will not only reduce risk significantly but also save a client money; other evidence also suggests that they could get better quality candidates as an unintended consequence.

The segmentation of a hirer’s temporary workers is likely to fall in to the following categories:

Outside IR35 and Out of Scope AWR

In these cases it is likely that the hirer will insist on engaging workers who operate through their own limited companies as this will save money. This has no MSC risk to recruiters.

Inside IR35 and Out of Scope AWR

Technically this is achievable although likely to be higher risk and could easily result in challenges. We would suggest that any situations that fall in to this category should be reviewed carefully, with the client considering whether they are prepared to change their terms and dealings to align the assignments as outside IR35, or treat the assignments as inside IR35 and AWR-caught.

Inside IR35 and In Scope AWR [meeting comparable pay requirements]

For most hirers this is likely to be the main category the temporary workers fall in to. In these cases workers can be engaged through either agency payroll, a traditional umbrella or through their own limited company.

Inside IR35 and In Scope AWR [failing comparable pay requirements]

As it is the exception that proves the rule, most hirers will have a few temporary workers that fall in to this category. In these cases the Swedish Derogation Umbrella model provides an answer for most clients and workers.

What is essential, in a world post-AWR, is to ensure that the terms of all assignments accurately reflect the reality; this reduces risks for all parties.

More information and full explanations of all the options available can be found in The Professional Passport Contractors Guide to The AWR.