A guide to IR35 for recruiters: what you need to know in 2022
If 2021 was the year of big changes for IR35 off-payroll legislation, 2022 will be the year of ensuring ongoing compliance. In this blog, we take a look at what recruiters need to know about IR35 to get you, your end clients and your contractors through 2022 without a hitch.
What happened with IR35 in 2021?
Hopefully, by now you’re aware of last year’s changes to IR35 rules. Because of the postponement of the changes from 2020 to 2021, most recruiters and end clients had a bit of extra time to prepare. New IR35 legislation extended rules to prevent off-payroll working, which already applied in the public sector, to the private sector. This meant that many end clients had new responsibilities to produce a status determination statement for each contract worker they engage outlining whether they considered the engagement to be outside or inside IR35.
- An inside IR35 determination means that the worker is a deemed employee for tax purposes – and the worker and fee payer are required to pay income tax and National Insurance.
- An outside IR35 determination means that the engagement represents true contract working and the contractor can continue to bill for their self-employed services through their personal services company (PSC) and pay tax in the usual way.
The reactions to the changes have been mixed: from very risk-averse clients operating a blanket ban on contract hiring through PSCs (a move likely to prevent them accessing the very best contracting talent), to more enterprising end-clients looking to ensure they have tight compliance systems in place supported by external expertise to assess each contract on a case-by-case basis. It has also created some extra responsibilities and liabilities for recruitment agencies, as it is the “fee-payer”, the entity responsible for paying the PSC – most often the recruitment agency in a standard supply chain – who is liable for deducting the correct tax and National Insurance for inside IR35 contractor engagements.
What were the IR35 headlines from 2021?
While the IR35 changes described above hit the private sector, we kept a close eye on what was going on in the courts and the press. The types of charges that HMRC were pursuing through existing IR35 legislation, which applied to public sector bodies, gave us a good indication of where they might turn their attention in 2022 and beyond as the roll-out to the private sector begins to be enforced.
In the headlines last year there were stories of not one but three government departments being investigated by HMRC for suspected breaches of the off-payroll working rules. In July, the Department for Work and Pensions found itself faced with a £87.9 million bill for unpaid tax and National Insurance. However, HMRC didn’t impose any penalties at this time. The Home Office weren’t as lucky, and got slapped with a £4 million fine on top of their £29.5 million tax bill, though HMRC agreed to suspend the penalty if they can prove that they have fixed their internal processes within 3 months of the ruling. HM Courts and Tribunal service also faced a bill of £12.5 million for incorrect status determinations of contractors.
If you’re recruiting, you need to be aware of these rulings and ensure that your compliance is in place to prevent yourself as the agent (and sometimes fee payer) becoming financially liable for incorrect status determinations. End-clients may also be reading about them in the press and feeling anxious about their responsibilities, in particular the issue of status determination. As a recruiter, it’s your job to understand what constitutes true contract working and highlight to clients the ways that they can check if a role is “outside” IR35. One way to do this is to use an independent tool like the Kingsbridge IR35 Status Tool.
Compliance checks have started – are you and your end-clients prepared?
We’ve heard from many end-clients – especially those in the energy and finance sectors – that HMRC started to begin compliance checks for new IR35 rules as early as September last year. The Institute of Chartered Accountants issued a warning that letters were being sent to businesses asking them about their processes for engaging contractors and determining status. The three-page letters ask businesses to contact HMRC by telephone, writing or email to “talk about the systems and processes your organisation uses to apply the off-payroll working rules”.
As a recruiter, you can prepare your end-clients for this possibility, and prevent panic by giving them an action plan. They should have a written policy for engaging contractors and making status determinations. Encourage them to keep good compliance records so that they can evidence their decision-making on status determination statements. As above, the use of an independent status checker is a good way to prove compliance. HMRC’s CEST tool still exists, but has come up a number of times in court cases, and fails to produce a result in 1 in 5 cases.
Make sure your end-clients know what their next steps will be if they do get a letter. They could have a planned response, or exercise their right to have an agent deal with HMRC on their behalf. Through our IR35 consultancy services, Kingsbridge can step in to act as an intermediary, providing a buffer between an end-client or recruiter and HMRC, and using our years of expertise in IR35 legislation to advise on an appropriate response and compliance.
IR35 one year on – share your thoughts in our latest IR35 survey
To fully understand the impact that IR35 changes have had on our partners in contractor recruitment, we’re running a new IR35 survey. We’re now almost a year on from the changes – what has been the impact on contractor recruitment? How are you coping with compliance? What’s the mood amongst end-clients? We’d love to hear your thoughts so we can work to support you – have your say here.