Staying ahead of changing regulations allows you and your care business to avoid headaches and keep operating smoothly. In our December blog post, ClouDoc review changes to ‘off-payroll working’ (OPW) rules and IR35, and how these changes might affect your company. To learn more about how our policies can help the smooth operation of your temporary staffing healthcare business, visit https://www.cloudoc.co.uk/company/subscription-detail/temporary-staffing-policies-and-forms, drop us a line at support@cloudoc.co.uk or give us a call today on 0330 808 0050!

What is IR35 and what are the ‘IR35 Reforms’?

IR35 refers collectively to the tax legislation, introduced in 1999, which seeks to stop individual traders from avoiding tax payments by supplying as a limited company. When a company is ‘inside IR35’ this means they are in violation of the regulations because the relationship between the contractor and the buyer is more akin to that of an employee and employer than a self-employed, contracted arrangement.

But why do traders choose to do this? By working ‘off-payroll’ and acting like an employee while operating on behalf of their limited company, individuals pay less taxes and the employer buying their services does not have to pay for National Insurance or offer other employee entitlements such as paid holidays, sick leave or pension contributions. This can make IR35 working an attractive proposition as it stands to save both the buyer and contractor money in many circumstances, in exchange for the additional working entitlements of an employee.

The IR35 regulations apply to individuals who provide services to clients through intermediaries, such as Personal Service Companies (PSCs). If an individual provides services to a client through an intermediary and the arrangement would be considered employment without the intermediary, then the IR35 regulations apply. In such cases, the individual must pay income tax and National Insurance contributions as if they were an employee of the client. This also applies to the contractor, who must make the regular contributions to employee entitlements.

The Reforms and HMRC Inspections

In April 2017, The Government updated IR35 rules to transfer the responsibility of determining a working arrangement’s status under the regulations to the buyer organisation rather than the contractors.

Since these reforms were implemented, there has been a significant downturn in the use of contractors in both the public and private sectors. An IPSE (association for Independent Professionals and the Self-Employed) study reports that more than 50% of public sector managers felt they had lost skilled contractors, with 71% reporting that it was a struggle to retain contractors under the new system.

The perceived increase in the financial and time resources needed to engage skilled contractors in the public sector has led to hesitation from buyers and driven many contractors to seek permanent employment, essentially splitting the existing workforce into two. Buying from contractors has also become more difficult as a result; the number of skilled contractors available has effectively decreased as many seek permanent conventional work, coupled with the unwillingness of local authorities and other buyers in the public sector to navigate the IR35 regulations.

Until this point, buyers and contractors had the freedom to operate at their own discretion within these regulations, but with the introduction of these reforms the previously self-certified IR35 status is now subject to inspection by HMRC.

In April 2020, HMRC began investigating the tax status of contractors in order to close this loophole. HMRC does not only examine the wording of relevant contracts and written agreements, but also attempts to establish the notional structure and informal agreements under which the contractor and buyer carry out their business activities together. 

In order to determine whether a worker is a disguised employee, several factors are considered, including the level of control the worker has over their work, the degree of mutuality of obligation between the worker and the company, and the extent to which the worker is integrated into the company’s business.

If the HMRC deems that a contracted Limited or Personal Service Company is acting under an arrangement sufficiently similar to employment, the company acting as intermediary is required to treat the money with which services were bought as salary and deduct PAYE contributions as such.

Now, if a contractor is assessed as ‘inside’ IR35 by HMRC, they will be forced to pay National Insurance and income tax in the same way as a regular employee unless it can be proven that the contractor is genuinely self-employed. However, the contractor will still go without the additional benefits from the buyer organisation with which they are contracted, such as paid holidays and sick leave.

In the years since the IR35 regulations were introduced, they have been the subject of significant debate and controversy. It has been argued that the rules are overly complex and burdensome, and that they create uncertainty for workers and businesses alike. Others have argued that the rules are necessary in order to prevent tax avoidance and ensure that everyone pays their fair share of taxes.

Is the government planning to repeal the IR35 reforms?

The government’s messaging on IR35 has been confusing and mixed over the past year. Former Chancellor of the Exchequer Kwasi Karteng promised in his mini-budget that these 2017 reforms, which leave the determination of IR35 status on the buyer/ employer, would be repealed again in order to stimulate contract working once again.

However, since being succeeded by Jeremy Hunt in October 2022, Karteng’s plans for the IR35 regulations have undergone a U-turn by the government, and there are no longer any plans to repeal the 2017 reforms in this area.

How does this affect temporary staffing?

For employment agencies, who act as the kind of intermediary IR35 was intended to regulate, understanding the law is important. IR35 regulations can have a significant impact on social care temporary staffing agencies because so many workers in the social care sector are self-employed or operate via limited/ personal service companies. If HMRC finds that a care worker has been acting as a ‘disguised employee’ or ‘inside IR35,’ they may be required to pay additional taxes and receive a lower rate of pay than they would receive otherwise. 

By ensuring that workers are properly classified, your agency ensures that workers are treated fairly and that they receive the benefits and protections to which they are entitled. In addition, properly classifying workers can help to protect your agency from potential legal liabilities. The government encourages providers to do this using the Employment Status Manual.

You must ensure that workers providing services through the business are classified as employees and not independent contractors. This will typically require the business to have a certain level of control over how and when the workers provide their services, and to provide certain benefits such as sick pay and holiday pay. Failure to comply with IR35 regulations can result in significant financial penalties for the business.

To discuss how ClouDoc’s policies can help you set up and operate your social care business and navigate the ever-changing landscape of regulatory compliance, drop us an email at support@cloudoc.co.uk or give us a call on 0330 808 0050 today.