IR35 Off-Payroll Reform’s Impact on UK Recruitment Landscape

Welcome to the Future Workforce

The UK recruitment sector has a reputation for its continuous innovation and adaptability. Recruitment agencies have consistently showcased their adeptness in navigating dynamic market landscapes. Recruiters are consistently positioning themselves at the forefront of emerging industry trends and imposed regulations such as the IR35 Off-Payroll Rules (“Off-Payroll”).

Off-Payroll has created a major shift to the recruitment sector. Dominating the whole contractor supply chain, it has had significant implications for contractors, recruiters, and end clients alike. As a result, the entire recruitment landscape underwent a significant, transformative shift which continues to adapt and expand.

Recruitment agencies in the UK should by now all be aware of and obtained a relatively in-depth understanding of their obligations in respect to Off-Payroll. In this blog, we aim to recap on the key aspects of Off-Payroll and its effect on the recruitment industry.

Off Payroll : A Recap

IR35 is the official name for Off-Payroll and refers to a set of tax laws that came into force in April 2000 as part of the Finance Act. IR35 was originally implemented as part of HMRC’s efforts to stop companies and contractors from working together as employers and employees so they could avoid certain taxes. Employers could save money by avoiding National Insurance Contributions of 13.8% (or the 0.5% Apprenticeship Levy) and bypassing any legal obligation to honouring employment rights or offering benefits. And in return, employees posing as contractors could pay less tax on their income.

To combat tax avoidance, IR35’s successor, ‘Off-Payroll Tax’, was introduced in April 2017 in the public sector as the original legislation had become complex and near impossible to enforce. It was rolled out to the private sector in 2021. Off-Payroll was intended to ensure that individuals operating through their own limited companies, known as personal service companies (PSCs), pay taxes and National Insurance contributions correctly on an assignment. These rules shifted the responsibility of determining employment status for tax purposes from the contractor’s PSC to the end client or intermediary engaging the contractor. This change aimed to ensure fair tax contributions and clamp down on potential tax avoidance within the supply chain. Contractors were assessed as being either “inside IR35” (i.e. an employee for tax purposes) or “outside IR35” (i.e. self-employment).

Impact on the UK Recruitment Industry:

1. Shift in Compliance Responsibility

The Off-Payroll reforms placed a new burden on recruitment agencies and end clients to accurately assess the employment status of temporary workers engaged through their own PSC. Navigating the complexities of IR35 compliance has become a critical aspect of operations for recruiters.

2. Challenges in Talent Acquisition

The changes created a level of uncertainty for both recruiters and contractors. Since the implementation of Off-Payroll, the industry has seen many skilled professionals become hesitant to engage with roles deemed to be within the scope of IR35. This unease created a domino effect, impacting the talent pool available to recruiters.

3. Adaptation of Business Models

Off-Payroll has been the catalyst which has motivated many recruitment agencies to reassess the services that they deliver to their clients and to consider new workforce models. This includes offering client’s expert advice on IR35 compliance, conducting thorough assessments, and restructuring contracts to align with the new regulations. Alternative working models such as Statement of Work (SOW) have flourished as a result.

4. Emphasis on Client-Education

A significant aspect of the role of the recruiter post-Off-Payroll is the education of clients on the legislation. Recruiters are obliged to assist clients to understand their responsibilities in determining employment status. Doing so helps to ensure smooth and compliant engagements.

5. Increased Administrative Burden

Off-Payroll has created additional administrative responsibilities for recruiters. This includes the responsibility of managing the payroll taxes and ensuring on-going compliance with the regulations.

Navigating Change

Off-Payroll has undoubtedly delivered a major shift to the recruitment industry in the UK. A shift that looks like it’s here to stay for the foreseeable future.

Contractors engaged with clients through their own PSC on an “outside IR35” basis may remain for the foreseeable future. But, change and growth continues to be ever present as the sector proceeds to evolve and adapt to the shifting landscape of today’s contingent workforce. The rise of alternative working models such SOW and the increased popularity for recruiters seeking overseas opportunities within the US job market, are two key examples of the recruitment industry’s biggest strength: adaptability.

Supporting Recruiters

Our advisers at WTT Legal are experts in all areas of law pertinent to temporary and permanent recruitment and outsourcing arrangements. Whether you are an end hirer, consultancy, recruitment agency or contractor we can help you develop robust contracts, policies, and procedures to ensure that you are operating your business compliantly.

Considering your agency’s US expansion plans? We’ve got you covered – Our legal team has extensive experience in both the UK and US recruitment market. As an APSCO Trusted Partner, we are well placed to advise on transacting business in the US and using your UK entity to engage with US clients.

Want to know more? Get in touch to arrange a free legal consultation with our specialist advisors. Email us at info@wttlegal.co.uk or call us on +44 (0)20 3468 0000 for more information.