If your recruitment business engages contractors, you will probably have heard of IR35, but it is complex and often misunderstood. In this article we’ll look at what recruiters need to know about IR35 and how it affects you, your clients and your candidates.
What is IR35?
IR35, also known as the Intermediaries Legislation, is designed to prevent so called “disguised employees” getting a tax advantage by contracting through an intermediary like their own Limited company.
The important detail is the relationship between the client and the contractor – if this relationship resembles employment, the contractor is “caught by” or “inside” IR35.
Where the contractor is determined to be inside IR35, PAYE tax and NICs must be deducted from contract fees before they are paid to the contractor, and employer’s NIC must be paid on those fees.
How does IR35 affect your clients?
The vast majority of your clients will be responsible for assessing the IR35 status of any contractors they engage. The only exceptions are small private companies and those who are based entirely outside the UK.
Large and medium UK companies, and all public-sector bodies must assess IR35 status for each contract separately, and provide an IR35 Determination Statement to the contractor and to you as the recruiter.
IR35 is complex and it takes specialist expertise to determine IR35 status correctly. Most end clients need expert help to put the necessary systems and processes in place.
How does IR35 affect your candidates?
IR35 status can have a significant effect on the amount your contractors take home, and may affect how they prefer to engage.
If outside IR35, you can pay their Limited company gross, and they can pay themselves according to their own tax planning strategy, using a combination of salary and dividends.
If inside IR35, PAYE tax and NICs must be deducted from any payments. This often means they will take home significantly less money. Many contractors in this situation switch to umbrella employment, rather than funding their company from taxed income.
How does IR35 affect recruiters?
Where your candidate is found to be inside IR35, and is engaged through a Limited company, you may be responsible for calculating and deducting PAYE tax and NICs from any fees paid. If this is the case, you will also be responsible for paying employer’s NI.
In practice, most candidates will want to switch to umbrella company employment as they’re likely to take home around the same amount, and this avoids a situation where they have to fund their Limited company from taxed income.
The biggest effect IR35 has on your recruitment business is through your clients and candidates. If your business is involved with contractors, both groups will expect you to understand the rules and be able to advise them. As a minimum, this means your team must be able to answer basic IR35 questions and signpost to expert help for more complex or specific queries.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.