Concerns that recruiters may be taken to court over unlawful deductions of employers’ national insurance contributions (NICs) have created a cloud of confusion ahead of new IR35 rules coming into effect for the private sector on Tuesday April 6.
Amid the news that group litigations are being prepared to seek compensation from employment agencies or umbrella companies that have deducted NICs from contractors’ gross pay since IR35 was introduced in the public sector in 2017, Apsco issued a statement in a bid to address recruiter concerns ahead of new off-payroll working rules being introduced to the private sector next week.
Changing from outside to inside IR35
Tania Bowers, Legal Counsel and Head of Public Policy for APSCo, said it was important that companies clearly differentiated between “outside IR35” rates and PAYE/umbrella rates.
“When a contractor changes from outside to inside IR35, our advice to members has always been that the cleanest approach is to terminate the original contract with the PSC and issue a new one on new terms,” she explained.
“This is generally required as most workers – as we saw from the 2017 reforms and are already seeing now – provide their services through an employment solution at an umbrella company rather than continue to work inside IR35 under their PSC. However the contractor works, inside IR35 or umbrella, if clients are unwilling to increase their rates then our members are left in a position where they need to offer the contractor a new contract, but on different fee rates, as employers’ NICs and apprenticeship levy contributions – where applicable – must be paid. The Key Information Document is intended to address the issue of transparency over pay, but currently it is not having the impact hoped for.”
“The recruitment company must pay the umbrella a sum which covers the employment costs, including holiday pay, apprenticeship levy contributions, NICs and worker gross pay. This means that the worker’s gross pay will be less than the amount paid by the recruitment agency to the umbrella. As an HMRC spokesperson explained recently, ‘it is legitimate for umbrella companies to deduct employers’ national insurance contributions from the payment they receive from the recruitment agency’.”
Financial burden to recruiters
David McCormack, CEO of employee benefits and outsourced payroll provider HIVE360, explained the financial burden for recruiters.
“Recruitment businesses running an in-house payroll of 400 workers will add over £30,000 each year in administration and resource costs. Those using an umbrella company to pay workers are forcing workers to carry the burden of processing costs on average £20 per worker per week – that’s around £1,000 a year based on an average £18,000 salary.
“Recruitment companies have three options – either return to in-house payroll, cut workers’ pay, or outsource payroll to a recommended PAYE-compliant specialist. If agencies offer workers a fair comparable PAYE rate, the workers are better off financially being paid via a PAYE model – to work it out, deduct the weekly fee and all costs of employment going through an umbrella company and see the real ‘take-home pay’ for workers.
“Obviously, if there are hidden tax schemes behind the umbrella (mini umbrella, micro umbrella or elective deduction models sometimes called Hybrid), then it’s likely that agencies won’t offer a directly comparable PAYE rate.”
New HMRC off-payroll report ‘too little, too late’
APSCo is critical of the timing of the release of a new report from HMRC and IFF Research into the impact of off-payroll reforms on employment companies, citing the research as being “too little, too late”.
“The research revealed a number of insights that were to be expected, with some recruitment firms already noting a drop in contractor numbers and client demand for PSC contractors,” Bowers said. “It is reassuring to see, though, that most staffing companies have been preparing ahead of the deadline. It is, however, disappointing that this research has come to light so late in the day…leaving little time for action from HMRC.”
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