If you work with contractors, you’ve probably heard of IR35, also known as the Off Payroll Working Rules or the Intermediaries Legislation, and the reform that came into force on 6th April 2021. In this article we’ll look at how the reform affects recruiters in the contractor market.
What is IR35?
IR35 concerns the employment status of contractors who work through an intermediary, like their own limited company (PSC). Where contractors are deemed to be “inside” or “caught by” IR35, they have to pay broadly the same amount of tax as an employee would.
Since April 2021 your end clients have been responsible for determining the IR35 status of any contractors they engage.
How does this affect your contractors?
If the client finds that the contractor is outside IR35, everything can continue as normal. Where the client finds them to be inside, you will need to deduct PAYE tax and NICs before paying their limited company – unless they move onto a PAYE solution like umbrella employment or agency PAYE.
When your contractors are inside IR35
The best outcome for everyone is that your clients assess IR35 status correctly, and find your contractors to be outside IR35, so they can safely continue working as they are. Where this is not possible, there will be some unavoidable effects:
Contractors will take home less money, as PAYE tax and NICs must be deducted.
Contractors will cost more, as Employer’s National Insurance must be paid to HMRC.
Ultimately, this adds up to clients paying more, or recruiters and contractors making less, with the end result depending on specific market conditions.
The dangers of tax avoidance
Where contractors are inside IR35 for the first time, their income will fall unless the rate is increased to compensate. While using a tax avoidance scheme may look to your contractors like a viable solution, the vast majority of such schemes don’t work and will leave them with huge tax bills to pay.
Some schemes will also leave you at risk of prosecution and penalties under the Criminal Finance Act 2017, and of course there's a risk to your reputation when contractors inevitably get into trouble.
It’s vitally important for you and for your contractors, to avoid involvement with tax avoidance schemes.
How will this affect recruiters?
Many recruiters can’t rely on being able to renegotiate the rate with the end client, and contractors are unlikely to be happy taking home less money. This leaves you the challenge of attracting and retaining the contractors your clients need, in an environment where rates and margins are being squeezed.
In this situation, you’ll need to find a way to compete for contractors that doesn’t involve paying more and making less.
Adding value without paying more
Where your clients are found to be inside IR35, they are going to take home less money, and there’s really nothing you can do about that unless the client can be persuaded to pay more. Retaining existing contractors and recruiting new talent could be a challenge in these circumstances.
However, in our experience, while it’s an important consideration, contractors don’t only choose recruiters and clients based on how much they will be paid. The circumstances surrounding their engagement are also important, and if your contractors feel that they’re well treated and valued, they’re less likely to move on when they’re found to be inside IR35.
How Orange Genie can help
One possible solution is to add value with employee benefits, but this has to be done in the right way. To achieve the desired effect, you’ll need benefits that your contractors will value, and that means they have to make a genuine difference to their lives.
Fortunately, if your contractors choose Orange Genie as their umbrella company, this can be achieved at no cost to you. Our employee benefits platform, Orange Genie Edge, gives your contractors access to a huge range of benefits and services designed to help them make their money go further, care for themselves and their families, and get more out of life as a contractor.
Orange Genie Edge services are currently in use by thousands of our contractors, saving them money, allowing them faster access to healthcare, helping them manage their mental health, their fitness and wellbeing and their caring responsibilities.
By making life easier, better and more rewarding for our employees, we also improve contractor satisfaction and retention for our agency partners, which helps you to attract and retain the contractors your clients need without having to pay or charge more.
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