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IR35: Why not Engaging PSCs is Too Risky for Recruiters

IR35 reform has been with us since April 2021 and any end client who doesn't class as a small private company and is hiring contractors who trade through their own limited company (PSC) is responsible for assessing IR35 status. This is an involved and complex process, requiring specialist expertise. 

Early on, many clients opted for a knee-jerk strategy of refusing to engage with PSCs, and insisting instead that all contractors were paid through agency PAYE or opt for umbrella employment, but most are now realising how damaging this policy can be. We strongly advise against such a strategy, and in this article we'll explain why.

It will increase your costs

Where a contractor is working inside IR35, through agency PAYE or through umbrella employment, employer’s National Insurance is due on payments made to them. This is not the case for contractors working outside IR35 through a PSC, so refusing to engage PSCs will increase the cost of engaging contractors unnecessarily if they could have been outside.

Contractors who are used to trading through a PSC will experience a drop in their take-home pay if they have to pay PAYE tax and National Insurance. Many will expect the rate to be uplifted to compensate, which again will increase the cost of hiring contractors.  

It will be harder to attract and retain contractors

Obviously, you want to hire the best contractors, but so does every other recruiter and that means the best contractors will always have a choice about who they work for. Quite naturally, they will follow their own interests, whether that means going where they’re paid more or where the conditions suit them.

If a contractor wants to work through their PSC, they will choose to work for recruiters and clients who are happy with that arrangement. Limiting yourself to hiring through umbrella or agency PAYE could leave you only hiring contractors who didn't have a choice, which isn’t a position any recruiter wants to be in.

Your competitors won’t be doing it

So, many of the best contractors will be looking for recruiters and clients who are willing to engage with PSCs, meaning those recruiters who do will have an easier time sourcing key skills for their clients. Where a competitive advantage is this easy to arrange, even if it means building new processes and obtaining expert help, it’s a sure bet that someone will do it. You will be competing with recruiters who are willing to engage PSCs, meaning their contractors cost them less and take home more. 

IR35 compliance is less risky

It’s true that there is cost and risk associated with engaging PCSs. However, as long as you’ve assessed the risks and implemented processes to mitigate them, it's much less risky for your recruitment business than refusing to do so and failing to source the right contractors for your clients.

You don’t have to do it alone

Compliance experts like Orange Genie Compliance will be able to assess your risks and help you design robust processes which will allow you to engage PSCs without putting your business at risk.

Overall, as in the public sector, the best solution is to continue to engage with PSCs while ensuring compliance and controlling the risk to your business. The best and most cost-efficient way to do this is to partner with compliance experts.

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