Organisations contracting with third-party recruiters will receive some protection from tax liabilities under the proposed changes to private sector IR35 rules, a draft bill has said, but they could still be charged if the recruiter goes under.
The latest draft of the changes, published yesterday, would see HMRC first going to the agency working directly with self-employed contractors to recover any unpaid tax or national insurance liabilities if, for example, a contractor was incorrectly categorised as falling outside the scope of the off-payroll rules.
However, the draft bill also stipulates that in the event the agency is unable to pay, HMRC can seek any unpaid taxes from the end client, meaning organisations cannot completely outsource their IR35 risk to recruiters.
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IR35 legislation aims to ensure workers undertaking similar roles in the same organisation pay the same tax, regardless of whether they are an employee or a contractor working ‘off payroll’, and employers or recruiters using contractors who are covered by IR35 are required to deduct income tax and national insurance from their pay as if they were an employee.
Under the reforms – which have been in place in the public sector since 2017 – the responsibility of deducing whether contractors are covered by the rules moves from the individual contractor to the employing organisation or the recruitment firm placing the contractors.
Matt Fryer, head of legal services at Brookson Group, said there was nothing significantly new in the latest draft of the legislation, but added that the clarification over who was liable for unpaid taxes was welcome.
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He said the “debt transfer” rules were likely added to dissuade organisations from using any of the non-compliant recruitment firms that have entered the market since 2017.
“The practical implication of these provisions is that end hirers and agencies need to be extremely careful with the payment intermediaries – umbrella companies, fee payer service providers, etc – they engage with,” Fryer said.
“HR teams and recruiters alike must conduct due diligence on their entire supply chain, ensuring compliance with the new off-payroll rules and looking for accreditation by a reputable entity such as the Freelancer and Contractor Services Association.”
Susan Ball, employer solutions partner at RSM, said the draft showed the government was “pressing ahead” with the planned changes despite the opposition.
Ball said: “While there may be a very short window for minor changes resulting from the review to be included in the tabled final legislation, businesses and contractors need to carry on with their preparations with the expectation that the majority of the provisions contained in today's draft and the primary legislation issued in July 2019 will reach the statute book.”
The latest draft of the changes to the private sector IR35 off-payroll rules comes a few days after some of the UK’s largest recruiters wrote to the chancellor calling for a delay to the rollout of the changes.
The letter, signed by Reed, Hays and ManpowerGroup, among others, highlighted that a lack of proper regulation would mean non-compliant recruiters that failed to pay the correct taxes would “thrive” under the new rules.
“We need to get the rules right, deliver on regulation for umbrella companies and have proper enforcement in place before pressing go,” the letter said.