How to Prepare Your Recruitment Agency for IR35

From April 2021, IR35 legislation will apply to private businesses as well as the public sector, meaning your recruitment agency could be affected.

But the good news is, if you get prepared now you can protect your business from potentially impacting your clients, candidates and your agency’s own contractors.

It can be hard to know where to start, so we’ve created this easy step-by-step guide to help you get your agency ready.

What is IR35?

IR35-how-to-protect-your-recruitment-agencyIR35 is a UK tax legislation that’s designed to ensure workers who provide their services through limited companies (i.e. contractors) pay the same tax and National Insurance contributions as employees.

IR35 has actually been around since April 2000, but when it was first introduced, it was up to the contractor themselves to decide if they fell under IR35.

As this made the regulation difficult to enforce, a lot of contractors continued working outside IR35. But now that the Government have estimated that only around one in ten public sector contractors are working under the correct IR35 status, they’ve tightened the rules.

From April, the responsibility for determining IR35 status will be on the end-employer (i.e. your client) rather than the contractor/candidate.

This means, your client must do the following for every contract role:

  • Make an employment status determination to decide if a contract/contractor falls under IR35
  • Tell the worker and agency (or other labour provider they contract with) what their determination is and explain their reason for making that determination
  • Deal with any disputes a contractor has with an IR35 determination.

As an employer, having any contract workers under the wrong status can result in penalties of up to 100% of the debt owed (so if you owe £10,000, you’ll have to pay £20,000 total!).

And if you place a contractor with a client and they have the wrong IR35 status, the onus could be on you.

So what can you do now to get your recruitment agency ready for IR35?

Step 1: Learn who will be impacted

The good news is some of your clients will be exempt from the new legislation.

For example, small private companies don’t have to make IR35 determinations and aren’t liable for any mistakes, so you can continue working with these clients as normal.

A company is deemed ‘small’ by HMRC if it meets two or more of the following requirements:

  • It has an annual turnover not exceeding £10.2m
  • It has a balance sheet totalling no more than £5.1m
  • It had an average of no more than 50 employees for the company’s financial year.

If you’re working with these small clients, nothing needs to change - the contractor will continue to be responsible for their own IR35 determination.

Additionally, if your client is based outside the UK and doesn’t have any presence there, IR35 doesn’t apply at all – even if your candidate is working remotely from the UK.

You can make the most of these exemptions by creating client target lists that focus on the SME sector or the international companies.

Step 2: Learn what makes a contract fall under IR35

how to stop wasting money on job advertsIf you’re suppling large private companies, then this new legislation is going to impact you.

Your client will need to assess each individual contract and declare if it falls under IR35, so it’s important you know how HRMC determines this.

Unfortunately, just like the first roll-out of IR35 in 2000, there isn’t a black and white checklist that will clearly tell you whether a contract falls inside or outside the legislation.

However, with the liability now switching to the end client and away from the contractor, there are some guidelines your clients should follow to ensure a contract is outside of IR35:

  • The contractor has the right to provide a substitute in their place
  • The contractor’s company carries financial risk and is liable for any mistakes they make
  • The contractor doesn’t fall under the direct control of your client and has the freedom to work when they want
  • The contractor doesn’t receive additional benefits an employee would get, like paid holidays or a pension scheme
  • The contract has a start and end date.

Here are some tools you can use to learn what type of contracts fall under IR35:

Step 3: Learn how your agency can maximise IR35

IR35 can give your agency the opportunity to innovate how you work with clients so you can keep billing with them.

Here are three opportunities that will help you make fees with clients impacted by IR35:

1. Convert your contractors into perm placements or fixed-term contracts: This will give you some one-off larger fees to make up for the loss of monthly contractor revenue. You can charge a higher perm placement fee that’ll help you minimise any monthly losses.

2. Start your own project consultancy: To do this you would need to set up a separate company to run your contractors on. You could employ your contractors directly under this consultancy, removing any liability from the client. You can charge your client a higher fee for taking on the IR35 liability too!

3. Partner up with umbrella companies: Umbrella companies hire the contractor directly, removing liability for IR35 from both your agency and your client. Put a partnership agreement in place with your preferred list of umbrella companies so you can offer it as a full-service solution to your clients.

Whatever you choose to run with, the key is to minimise losses and continue trying to pull in as much contractor revenue as possible.

Step 4: Speak to your affected candidates

how to screen a candidate on video recruitment blogIf your client determines a contractor is inside IR35 (meaning the legislation applies to them), it’s likely your contractor will need to take a pay cut. For example, Deutsche Bank have cut contractors’ take-home pay by 25%.

With this in mind, you’ll need to be ready to break the news to your candidate, manage their expectations and help them get ready for these changes.

Once you decide how your agency will operate under, your recruiters need to speak to your candidates about their options for working with your clients. They’ll also need to be aware that they may no longer be paid to their company – instead, they’ll be paid through an umbrella company or PAYE.

While they may have to take a pay cut, there are some benefits to working under IR35 that are worth highlighting to your contractor candidates. For example, they’ll be eligible for a pension, paid holidays and receive other employee benefits they weren’t entitled to as a contractor.

Step 5: Prepare your recruiters for IR35

When your recruiters are taking on contract jobs from clients, they need to ask questions that help them determine whether the contract falls under IR35 or not.

For example, “Would you be happy for the contractor to provide a replacement if they weren’t available on certain days?”.

The answers to these crucial questions will equip your recruiters to advise their prospect on whether the contract is likely to fall under IR35 and what they can do to pull it outside of IR35.

For example, if the contract doesn’t allow the contractor to provide a substitute, your recruiter needs to advise the client that this job will fall under IR35, putting them at risk. Your recruiter should then explain that allowing the contractor to provide a substitute will make the contract IR35 friendly – making the role easier to fill and less risky for your client.

Preparing your recruiters like this will help them be more consultative to clients and ensure they’re properly advertising any role as ‘inside’ or ‘outside’ IR35. It’s great service like this that will keep your clients coming back to your agency time and time again.

Agile agencies are structured to adapt quickly and easily to changes like IR35. Download the eBook to find out how agile recruiting can help your agency overcome any challenge it faces.

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Please note: The content of this blog should not be taken as legal advice and does not offer full comprehensive guidance.

Sophie Cunningham

Sophie is a Content Marketer here at Firefish! After working as a 360 Recruiter she found her perfect niche here at Firefish writing about recruitment.

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