IR35 is nearly here – how is it going to affect your recruitment businesses?

05 March 2020

There are some changes planned to IR35 by HMRC from 6th April 2020, that recruitment companies need to prepare for.

All staff agencies need to ensure that they remain fully compliant with the new rules to avoid becoming liable for any additional taxes and potentially penalties as well. 

What effects will IR35 have on recruitment companies?

The IR35 roll-out places a significant new responsibility on recruitment agencies. Considering the end-user evaluation (status determination statement) or producing their own evaluation as to whether or not a contractor is ‘inside’ or ‘outside’ IR35 isn’t all that straight forward.

The client may not even have all the necessary information, and they could even simply decide to define contractor as inside IR35 to avoid having to find it. The importance of reporting this properly is paramount. Notably because, if a contractor is wrongly determined to be outside IR35, it’ll be the recruitment agency’s responsibility to pay up in the first instance.

Time plus resources will have to be spent calculating net pay over gross, deducting National Insurance and tax, and reporting more to HMRC. Fee payers will have to apply PAYE and will incur additional costs, such as the Apprenticeship Levy and will need to consider how to manage Employer’s NIC.

IR35’s introduction in the public sector saw a lot of contractors having to become part of umbrella organisations to ease the process. This can have consequences for the pool of talent available to recruitment agencies. Some contractors may simply choose to not continue working with recruiters. While the slashing of rates paid to contractors to cover additional costs can also risk contractors choosing to take their business elsewhere.

How can I protect cashflow? 

With a number of potential new costs on the horizon – and the effect this can have on your profit margins – it’s more important than ever to have a good handle on your cashflow, and a source of cash available to help buffer any unexpected costs.

If you are a recruitment company that needs help with your payroll management or working capital, we can work with you to look at wide variety of financial institutions and working capital products that are able to provide specialist help businesses to your sector.

The use of invoice finance by recruiters for example is approximately 20 times higher than the overall average, because these services naturally fit staff agencies cash requirements & billing arrangements. It means that you don't have to wait for your customers to pay before you get the cash to pay your contractors.

Another solution might be a Revolving Capital Facility (or RCF) which can provide businesses with a flexible source of cash. It works just like a business overdraft, allowing you to drawdown and make repayments whenever you like. Also, many providers have designed these solutions to be as simple to use as possible by connecting up with your cloud accounting software, and allowing easy drawdowns and repayments from online dashboards.

Just one of these two solutions could have a significant cashflow benefit to your company - smoothing out the peaks and troughs.

With the new regulations coming into place next month (April 2020), are you confident your recruitment company’s cashflow is fit for purpose?

Get in touch for expert advice

At MHA Financial Solutions, we’re already working with recruitment agencies to prepare for changes just like this. We also have a team of IR35 specialists that can provide in-depth guidance to help your agency meet these new tax standards.

To find out how MHA Financial Solutions could help your recruitment business, email: finsolutions@mhllp.co.uk or call 03330 100 538.