IR35 - Effects on Agencies

Keith Knight, Manager at Aspire, comments on the recent report into the effects of the IR35 reforms on employment agencies. 

On the 23rd of March 2021, the Government published a report into the effects that the Off-Payroll working rules, otherwise known as IR35, have had on employment agencies.

The research, conducted by IFF Research between November 2020 and January 2021, involved interviewing 34 employment agencies that currently or previously had contractors on their books that work through their own personal service companies (PSC) or another intermediary.

The research covers the effects of the 2017 off-payroll working, public sector reforms on employment agencies and how contractors have been impacted. The report goes into further detail in terms of what support, the Government believe, may be required from HM Revenue & Customs to support agencies further, ahead of the private sector reforms, which come into force on the 6th of April 2021. The report also goes into some detail on the effects the April 2021 reforms have already had.

Aspire, have summarised the key points below.

2017 Public Sector Reforms

• Many agencies reported that the number of contractors on their books, across all engagement structures, had remained stable or increased since 2017.
• Some agencies reported that their numbers were able to remain stable, due to the profile of their client base or their business model helping them retain contractors.
• All agencies supplied contractors to both public and private sector clients, as such, they believe that the freedom to choose between public and private assignments motivated contractors that worked through PSCs to remain with the agency.
• Some agencies with alternative engagement methods said that contractors and clients shifted over to different methods of engagement (e.g., agency payroll and umbrella companies) with minimal churn.
• Where agencies reported a decrease in the number of contractors since 2017, it was more common for this to be attributed to external factors rather than the 2017 reform to the off payroll working rules. Such as, the UK’s exit from the EU and the COVID-19 pandemic had reduced the availability of work, which in turn impacted contractor numbers and  resulted in several delayed or cancelled projects within construction sector.
• The UK exit from the EU had resulted in workers leaving the UK, particularly in the transport and healthcare sector.
• Working through the payroll of agencies or through umbrella companies was viewed by clients and contractors as a way to reduce exposure to the off payroll working rules and a way to reduce the administrative work associated with the reform.
• Many agencies with public sector clients were required to make changes to their internal processes in response to the 2017 reform. This included, introducing payroll systems, new compliance checks and making arrangements with umbrella companies.

2021 Private Sector reforms

• Although most agencies had a good understanding of the reform, a few reported having difficulties understanding certain elements of the changes. These agencies understood the basic principles of the reform but reported confusion around elements like employment status determinations, whose responsibility and liability it was for conducting determinations and which organisation in the labour supply chain fulfils the role of the ‘fee-payer’.
• Some agencies believe that a number of end clients were anticipating another delay to the reforms.
• However, some agencies gave accounts of clients having a poor understanding of the reform. These clients were often said to have misunderstandings around which types of assignments were inside the off payroll working rules and which were outside. Consequently, agencies have had to spend time liaising with these clients to explain the rules and how to apply them.
• Some agencies highlighted experiences where they had issues with contractor awareness and understanding. For example, some agencies mentioned incidents where they had spoken with contractors who had no awareness of the reform. Meanwhile, some agencies had experienced disputes with contractors over employment status determinations and their plans for engagement options after April 2021, which they often attributed to a lack of understanding. A few agencies commented that some contractors were not taking the reform “seriously” because they did not expect it to be introduced.

The full report can be found here.

Aspire Comments

On review of the findings detailed above, the full impact of the Off-Payroll working rules, both in the private and public sectors, may not be felt, in full, until after April 2021. As agencies were able to mitigate the impact in the public sector reform by giving the contractors an opportunity to accept assignments in the private sector, which were outside the scope of the rules at the time, this lessened to some extent the impact of the 2017 reforms. Now that both sectors are aligned, we expect that the full extent of the reforms may be felt.

Given the complex nature of IR35, cost and administrative burden, we would expect that end hirers may decide to only engage with PAYE contractors, which would mean an increased use of employment intermediaries from April onwards. Whilst this may mitigate the administration of IR35, care needs to be taken by agency clients to ensure that they have effective Due Diligence practices and policies in place for their extended supply chains.

Whilst we understand that not all end hirers are making blanket bans on Personal Service Company contractors, there is certainly a movement in the industry where agencies are taking on the burden of making assessments on behalf of their clients. Whilst this is not necessarily forbidden, ‘Reasonable Care’ needs to be taken by all in the supply chain when making determinations and is critical for the end hirer who has overall responsibility. As we know, the Legislation requires the end hirer to make determinations and pass them down the supply chain. Therefore, we would expect there to be a process in place to ensure compliance with the Legislation, as well as a keen eye on demonstrating reasonable care, with particular focus on making sure the right parties have the right information and training to ensure they make appropriate decisions.

As we know from case law, IR35 is a complex area for HMRC to effectively challenge when determining an individual employment status. However, we would expect that it would be easy pickings from a compliance perspective where HMRC can demonstrate you, and your supply chain have not taken reasonable care in arriving at the decision you have made.  In particular, if it finds that a party in your chain has provided fraudulent information, which was referenced in the Budget and covered by Aspire in our article on the 3rd March 2021, which can be found here, that entity will be liable for any underpayment of tax.  

For more information about Due Diligence and IR35 please do not hesitate to give us a call on 0121 445 6178 or email enquire@aspirepartnership.co.uk