IR35 private sector move may herald new opportunity for recruiters
Last week’s budget announcement that heralds the tax status change of self-employed people working in the private sector has been derided as a revenue raiser, amid fears that IR35 will have the same impact as it did in the public sector.
Although contractors are calling the change an own goal, as contracting businesses face being hit by private sector companies shunning their services because of potential future tax demands, leading to reduced market competitivity and increased unemployment, the picture isn’t all gloom for recruiters.
So what does this mean for the recruitment industry? Will agencies, already competing in a climate of post-Brexit uncertainty and candidate shortages, face even more difficulties.
New opportunity for recruitment agencies
Neil Pickstone, Co-Founder of Volcanic, predicts new opportunity:
“When the Off Payroll Rules (IR35) were launched in the public sector, they undeniably caused chaos and confusion, but one thing that happened was that we saw a shift from temporary to permanent roles. This led to an increase in fees for recruiters placing permanent staff and opportunity for consultation, strengthening relationships with clients.
“And now what we have, twelve months on from the IR35 status change (where the client rather than the contractor determines IR35 status) starting to bite in the public sector, is data. Published accounts by businesses and contractors in the public sector, as well as freedom of information requests, will give us facts rather than speculative figures on tax implications, the effect on contracting businesses and the revenue generated.
“According to figures from the HMRC, IR35 will help claw back revenue from personal service companies, which costs the exchequer £1.3bn a year. It will be interesting to compare this figure to the published data.
“This move presents the opportunity for recruiters to consider a move towards acting as a professional employer organisation (PEO) or an umbrella model, becoming an extension of their client’s company to handle HR functions, ensuring legal compliance and picking up activity such as candidate onboarding and payroll.
“If a similar move towards permanent roles happens in the private sector, a PEO model supported by the right technology may be an attractive option for placing staff as part of a longer term talent hiring model.”
What is the recruitment industry saying?
Jeanette Barrowcliffe, Finance Director at Meridian Business Support, shares her point of view:
“I’m astonished that the government has excluded small businesses from the Off Payroll Rules (IR35 changes) to be rolled out to the private sector from April 2020. I obviously understand the argument that the administrative burden may hit smaller businesses harder, but if the goal is to create a level playing field then this does the exact opposite.
“Rather than introduce standardisation across the board, the government has created a clear get-out. Plus, by delaying its introduction until 2020, there’s clearly time for some companies to seek out ways to implement this to their best advantage, rather than necessarily embrace the spirit of the law.
“At the start of next year, we’ll be able to see the publicly available data from the public sector changes made in 2017, as PSCs will have to have filed their tax returns by then - and I think the evidence will speak volumes in terms of the revenue generated. I can’t imagine it will be anywhere near the figures quoted by the HMRC. There will also be more visibility on the claims being made by contractors.
“Having had extensive experience of this at Meridian with the Onshore Intermediaries Legislation introduced in 2014, which affected thousands of people working as contractors and freelancers through the CIS, and experience from the public sector changes last year, there is a huge amount of work to be done. With the public sector changes, the sector saw a mass move from self-employment to umbrella organisations, some of which operate schemes which are dubious at best - which wasn’t necessarily the intended outcome. We saw an explosion of tax avoidance schemes using offshore companies, loans and fake intermediaries. The question has to be asked who will be responsible for actually enforcing this change in the private sector too.
“What Meridian will do is start the consultation process in the coming months with our clients, as this change in legislation will change where the liability sits. We don’t yet know the full detail of how this will work in the private sector or how this will flow down the supply chain but it will largely depend on the definition of small business and how people will move to implement the change.”
Ask the PEO professionals
Matt Walters, Chief Operating Officer at Capital GES, a global provider of employment and payment solutions, shares his expert view:
“I feel the government is only scratching the surface of the real issue here. What the UK and other countries need to address are the much bigger societal questions of how workers are classified, how their financial future will be secured, and who will be responsible for enforcing the decisions.
“I predict that in the coming years, we will see a complete restratification of our working society that reflects the various new ways that companies and individuals work together. This will need to define the roles of employees, personal service companies, flexible workers, contractors, freelancers, et cetera, and set out a clear and fair plan for tax, pensions and other contributions within a completely changed work environment.
“When IR35 first came in in April 2000 it caused panic on a huge scale. We worked with companies to understand what was needed and deliver compliance - and business continued. This latest introduction will no doubt follow a similar trajectory.
“What’s needed now is a not a sticking plaster but a long term overhaul, with clear definitions, outcomes and actions that gives businesses a toolkit to understand the different options and how to adopt and embrace them."
The only certainty is change
Neil Pickstone concludes: “The only certainty here is that change will continue to happen.
“We know that a loss of staffing resource was a major problem on public sector contracts – with major recruiters reporting decreased revenue from temp contracts. We anticipate that private sector businesses will be keen to avoid the same fate, and its adverse impact on profitability.
“We’d suggest recruiters talk to their clients now to identify potential pitfalls and develop a strategy, based on evidence gained from the experience of the public sector and knowledge of their talent pipeline. The good news is that because the implementation is nearly 18 months away, there’s time to lobby for change as well as to develop a practical solution.”