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April marks the beginning of not only a new tax year, but a year since IR35 reforms came into place, impacting how businesses operate for the future.

Although these changes were designed to combat tax avoidance across the UK, they have resulted in several negative implications for recruitment businesses and the wider supply chain including, labour shortages and wage inflation.

IR35 and the impacts on the recruitment industry

Increased administrative burden

IR35 reforms moved the responsibility for determining the employment status of a worker to the ‘End Hirer’, impacting the way that recruitment businesses operate.

Staying abreast of independent review structures, approval policies and status determination statement’s (SDS) for each contractor they engage has ultimately come as a huge administrative burden.

Whether it’s through the redistribution of work, the employment of new administrative support or the investment in external suppliers to manage compliant processes; the added pressure of increased administration has impacted businesses both financially and operationally.

In order to support clients in making accurate IR35 determinations for contractors, HMRC launched a Check Employment Status Tool (CEST) in 2017 which allows clients to answer a series of questions around a worker and their engagement. However, over the year there have been several concerns raised over the tool and its ability to accurately assess a worker’s employment status. CEST has been questioned in terms of its accuracy since the Department for Working Pension (DWP) were hit with a huge £87.9m tax bill due to incorrectly assessing a contractor’s status by using CEST. Computer Weekly stated that this is “not the first public sector entity to receive a sizeable IR35-related tax bill after using CEST to assess tax status of its contractors, as NHS Digital received one totalling £4.3m in November 2019”, highlighting the clear challenges that many employers have had to face due to a lack of adequate support from HMRC.

Contractor shortages

Following amendments to IR35, many limited company contractors have chosen to withdraw from contracting due to the financial implications of being placed on an inside IR35 determination.

Contractors have been faced with the worry of employers miscategorising their IR35 status, not having adequate or flexible enough dispute processes, and subsequently recruitment businesses have been unable to attract and retain top talent; something which is of a huge concern for an industry already struggling with the effects of labour shortages since the pandemic.

Seb Maley, CEO at Qdos, said “Far too many businesses are insisting that contractors work on the payroll, regardless of their true IR35 status. Not only will this see businesses struggle to attract the flexible talent they need to recover from the pandemic but forcing genuinely self-employed people onto the payroll will also result in significant and needless cost rises.” (Contractor Weekly)

Read more on IR35 and the impacts for contractors here

Disguised remuneration and the ‘Wild West’

Immediately after IR35 chapter 10 amendments, many contractors were forced to work through Umbrella companies promising inflated take home pay through cloudy arrangements.

The Loan Charge APPG (All Party Parliamentary Group) are pressuring the government into taking action to clean up the ‘Wild West’ and subsequently, the government have issued a ‘call for evidence’ into the use of Umbrella companies with specific mentions for both disguised remuneration and mini umbrella company (MUC) fraud. Many contractors now find themselves in situations where they are involved in tax avoidance schemes - rather than maintaining prior relationships with specialist accountancy firms.

In a press release, the Loan Charge committee highlighted an inquiry into ‘How Contracting Should Work’ shortly after the introduction of IR35 reforms:

  • Recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list/recommended to clients, even sometimes including fitted kitchens and holidays for recruitment agency directors. This then incentivises non-compliant providers (who because of non-compliance have higher margins) to offer large bonuses to gain access to potential clients.
  • In some cases, contract, freelance and locum workers are being pushed to use a specific umbrella company and, in other cases, workers are given no choice as to which umbrella company to use, so the situation facing the worker is effectively ‘take it or leave it’. This is a particular problem when the only source of work in a sector is via recruitment agencies. This is the case for many workers including some lower paid contract and locum workers.
  • In some instances, public sector approved agencies and even public sector organisations themselves have recommended people use umbrella companies that have put them into ‘disguised remuneration’ schemes.
  • A general lack of transparency over deduction, fees and contractor pay/payments and some recruitment agencies ignoring the legal requirement to provide all workers with a Key Information Document (KID).
  • Some umbrella companies appear to be unlawfully deducting employer’s taxes from contractors’ pay.
  • The covert withholding of holiday pay by some umbrella companies, because the contractor did not know it was claimable. In some cases, this has also involved umbrella companies refusing to pay Covid furlough unless contractors waived their right to holiday pay.

It’s clear that many of the contractors previously operating through a personal service company (PSC) have now been forced to use structures that could be involved with tax avoidance. Subsequent government tax collection has likely been reduced, causing a negative drain on public funds.

The effect on the wider supply chain

Over the past year, the supply chain has been faced with rising wage inflation, labour shortages and low unemployment rateswhich has understandably had a damaging effect on the staffing sector.

Contractors have raised their daily rates to compensate with the possibility of working inside IR35 and with the current cost of living crisis, businesses have struggled to sustain demands.

As a result, supply chains across the UK have been impacted and recruitment businesses have been faced with the difficulty of sourcing talent for these roles.

IR35 reforms have had some positive effects. End Hirers now need to collaborate with the entire labour supply chain, either in establishing employment status, issuing the relevant SDS or highlighting where there are clear gaps for due diligence. Whether it’s communicating with recruitment agencies, personal service companies and contractors; the IR35 changes have enhanced the need for closer relationships to be formed within the chain.

The IR35 reform plays a key part in influencing our wider processes here at Bar2 and is essential in guiding contractors through the complex world of contracting.

Although these changes have clearly introduced challenges, we are confident that businesses operating within the sector arecontinuing to evolve their processes to comply by IR35 standards; creating a more compliant, open and fair industry.

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