Why agencies will bear the brunt of operating 2020’s off-payroll rules
There’s been some raised eyebrows of late when I’ve told contractors the truth -- that it’s agencies who will carry the heavier obligations of the off-payroll rules for the private sector, and not clients, writes Natalie Bowers, co-founder of niche recruiters Bowers Partnership.
It’s not because I’m privy to the contents of the imminent consultation to implement those rules that I can make this deduction -- a consultation, please note, that could entirely upend everyone’s understanding of ‘who does what’ under the April 2020 framework for IR35.
But at the time of writing, the ‘who does what’ reads as a laundry list if you’re a contractor recruitment agency. In fact, if you’re an IT contractor, your agency will be responsible for:
- Administering the IR35 status decision
- Providing the appropriate contract as a result
- Deducting National Insurance and Income Tax in-house
- Charging the client an equivalent sum if Employer NI is due (under an inside IR35 decision)
- Paying you the contractor your net pay (as opposed to gross invoice value)
- Paying the taxes deducted to HMRC
- Reporting to HMRC on it
So no less than seven tasks. Oh, and to potentially do all seven, agencies will need to design, install and maintain appropriate systems and allocate staffing to manage the contracts, deductions and payments to both contractors and HMRC. Looking at what happened in the public sector to contractors’ recruitment agencies, when they had to implement the same sort of systems to operate the same sort of rules, getting ‘systems-ready’ for off-payroll working is no small feat.
Meanwhile, and quite at odds with having to do at least half a dozen tasks, all the end-client has to do is make the decision as to whether the contract is inside or outside IR35.
Yes, a client might need to use CEST or they might use their own solution to test IR35 status, but that’s all part of the same, singular task -- decide if IR35 applies. Some clients might shoot back insisting they’ve got a lot to do right now, like – as per some spurious advice being issued – survey their contingence workforce in preparation of the off-payroll rules.
My view is that such a preparation would be a waste of time. Surveying what or how many contractors you’re engaging right now, if you’re a private sector end-user, for a piece of legislation that is at least 12 months away isn’t going to prove that telling, especially as the April commencement date is way beyond all of your current contractor end-dates. Or should be -- if the current version of IR35 is being adhered to in your organisation.
There’s also a bit of a cushion for clients in the one task they’ve got to do. HMRC has clearly stated that they will support the end-client in their IR35 decision. As an industry legal expert has pointed out, I cannot see why any agency would go against this decision.
But whereas clients have this nice cushion -- HMRC’s backing, agencies have a nasty bed of nails. In fact, even though the end-user gets to decide on IR35, it’s possible that agencies can carry a tax liability.
Specifically, the updated rules for IR35 in the public sector seem to be clear that if a contract is inside IR35, and the entity responsible for paying the contractor (the agency typically) does not deduct National Insurance and applicable tax before paying the contractor, then the agency can be liable for the unpaid tax and NIC payments. You don’t need to get a calculator out to compute that this adds up to being more than the agency’s gross margin on the deal in the first place! This is not a liability to be taken lightly.
Alongside the seven obligations weighing on agencies’ necks, and the need for staff and systems to operate those obligations, this possible liability really is why the burden of administering the private sector off-payroll rules has been placed not on clients, not just on contractors, but on recruiters. Heavily.
That said contractors, you’re of course far from off the hook. Not only do you face the unenviable, career-changing prospect of paying tax like a permie if decided inside IR35, you will be responsible for paying your own corporation tax and VAT -- regardless of whether you are decided as inside or outside IR35. You’ll also need to weigh up each and every time you engage if you’re engager is a ‘small company’ or not (and where it’s not a ‘small company,’ the rules must be a consideration)
More positively for those concerned about their bottom-line, it might interest you to know that I foresee market rates adjusting in an upwards direction, as contractors start to pay more normalised PAYE and NI.
Such workers apparently trust agencies less than clients when it comes to status. But HMRC trusts agencies enough, it seems, to make them do the heavy-lifting with these new IR35 rules for the commercial sector. Be in no doubt -- the taxman has placed the obligation upon agencies to administer what are effectively changes to the way contractors pay tax; but there’s no change in employment status (‘caught’ contractors won’t get employment rights from either agency or end-user), and there’s no comparable risk or burden to end-clients. It seems that the protests the business community put up all those years ago when IR35 was initially mooted as a rule for engagers to administer are still paying off, some twenty years later. It’ll be up to agencies to point out to HMRC that they are part of the business community too, when the imminent consultation is finally unveiled. I urge all parties to respond and make their voices heard.