Sunday, June 16 2024

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Repeal of IR35 Reforms: What does it mean for your Agency?

Last Friday, 23rd September, Kwasi Kwarteng, the Chancellor of the Exchequer, announced his intention to repeal the 2017 (public sector) and 2021 (private sector) IR35 reforms. Following this, contractors have celebrated the decision, but what does it mean for your Temporary Staffing Agency? How will things change and what should you be doing to prepare?

As always, in our modern society, where there is big news, social media is full of commentary. Unfortunately, this sometimes leads to much misinformation and confusion.

To bring back nuances, Rhys Thomas, Managing Director at WTT Legal & Sebastien Sauca, CEO at SafeRec, answer the following questions that many recruitment agencies have been asking since the news hit:

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  1. What does the repeal of IR35 reforms mean?
  2. What will change for recruitment agencies and their clients?
  3. Can this reform increase your agency’s tax risk?
  4.  What actions would you recommend agencies take today?

 

What does the repeal of IR35 reforms mean?

Sebastien Sauca: There is a lot of information on Social Media from contractors saying that IR35 has been “scrapped” or “cancelled”. Let’s be clear, it hasn’t! The 2017 and 2021 reforms (also known as off-payroll working rules) have been repealed, which required end hirers to determine if a contractor was working through a self-employed engagement (Outside IR35) or employment (Inside IR35). This decision will again be in the hands of the worker’s PSC, who will be responsible for determining their employment status and paying the right amount of Income Tax and NIC. In other words, the rule around determining someone’s employment status hasn’t changed. Only who is responsible for doing so has.

Rhys Thomas: Seb is right; some are misinterpreting the announcements, which, coupled with the current lack of legislative guidance to accompany the proposed repeals, will inevitably result in some reactive actions being taken at all levels of the supply chain. Many of our corporate clients have contacted us over the weekend to understand how their policies can be altered. This is an encouraging sign, but it is imperative to appreciate that the repeals won’t take effect until 6th April 2023 at the earliest. Therefore, policies in place now should not be changed in the short term until the formal details on the repeal (or draft legislation) is released. Instead, early contingency planning can happen. For agencies, the only certainty that you can provide your clients and contractors at the time of writing is that the off-payroll rules remain in place, and HMRC will continue to investigate while they can.

 

What will change for recruitment agencies and their clients?

Sebastien Sauca: This announcement has pros and cons for Recruitment Agencies. The good news is that, on paper, the liability will be reverted to the PSC Worker. They will be responsible for determining their employment status and carry any unpaid tax risk. However, the legislation to not forget is the Criminal Finances Act 2017 (CFA 2017). The CFA 2017 requires employment agencies (and end-hirers) to have reasonable processes in place to prevent the facilitation of tax evasion in their supply chain. If they don’t, they risk prosecution and an unlimited fine. Agencies must remember that their tax risk is linked to several legislations. Unfortunately, repealing some does not mean their risks have disappeared for their company and clients.

Rys Thomas: With the status decision reverting to the PSC, a level of opaqueness is re-established in the supply chain, given the agency and end-client have limited sight of how a contractor manages their financial affairs within a PSC. This has always been the case for outside IR35 engagements, but the expected uptick in outside contracts will heighten this. As Seb says, agencies will need to help protect their clients through transparency by ensuring the IR35 determination is known and that appropriate indemnities are accounted for in contractual agreements. It will require a comprehensive review of PSC contracts.

 

Can this reform increase your agency’s tax risk?

Sebastien Sauca: It might be counter-intuitive to think so, but it probably will. Many agencies believe their tax risk only came with the IR35 reforms, but it hasn’t. As mentioned previously, what initially created risk for agencies and potentially end hirers was the CFA 2017 with the introduction of Corporate Criminal Offences to prevent the facilitation of tax evasion.

Tax leakage linked to an IR35 determination taken by the PSC Contractor creates greater risk due to the agency and end client having no control over it and less visibility as to how it was reached. 

From April 2023, employment businesses will potentially be liable if tax evasion is linked to an incorrect employment status determination. All their candidates will become a potential tax risk if supply chain audits are not undertaken regularly, preferably in real-time.

Rhys Thomas: One of the reasons for Off-Payroll reform was for HMRC to administer IR35 enquiries more efficiently, rather than having to investigate individual PSCs. Given that the repeals restrict this, HMRC will be looking for ways to overcome that. Similarly, they may be looking for a widening of the debt transfer provisions to allow them to seek liability further up the supply chain, where an incorrect determination is identified, and reasonable care by the end client hasn’t been taken. This will be something to watch out for when any legislative guidance is released and will be necessary for agencies to understand to keep their supply chain secured. 

 

What actions would you recommend agencies take today?

Sebastien Sauca: I think that more than ever, Temporary Staffing Agencies must have processes to check/audit/review what is happening in their supply chain. Mitigating risk is becoming easier with technologies and new offerings that hit the market this year. In 2022, it can be easily done by using third-party automated solutions.

Rhys Thomas: Right now, communication with your clients and contractors is vital. With misinformation spreading, an increase in avoidance scheme promotion and a lack of clear guidance, if you are not keeping your supply chain updated, you risk decisions being taken without input. 

Secondly, wait for guidance before reacting. The reforms brought expensive and time-consuming policy adjustments that may now be obsolete. 

Thirdly, speak with experts who can help you liaise with your clients. For example, WTT’s partnership with safe-rec sees us jointly attending client meetings and negotiations on behalf of agencies. When legislation changes, lean on your advisers to navigate you through it. 

–> Book a free consultation with Rhys and Sebastien via Calendly

 

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SafeRec
SafeRechttp://saferec.co.uk
SafeRec is a Technology and Consultancy Company, Partners with the REC and APSCo, that offers automated solutions to agencies to deal efficiently with their Umbrella Compliance. Whether our client is an Agency, a Managed Vendor or an End-Client/hirer, our fully automated AI-Driven Software ensures Payroll Compliance for the entire supply chain. From Umbrella to Agency PAYE, all workers’ pay is audited each week.

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