A big change is afoot in the contractor market in the UK. New rules — known as IR35 — mean that some businesses which currently use contractors will have to decide their status and whether they need to become full-time staff.

The updated tax rules for contractors in the UK will have an effect on the recruitment process, both on the business and contractor side. If workers that were once considered contractors now count as full-time staff, the businesses that pay them will also have to pay national insurance and provide benefits like paid holiday.

It’s particularly important news for the IT industry, where contract work is prevalent and helps hold many companies together.

The rules are also quite complex and potentially damaging to companies’ talent acquisition and retention efforts  – with a recent study by IR35 specialist law firm Brookson Legal finding that that three in five skilled UK contractors said that, if a business that had hired them for contracting work decided that they were caught by the new IR35 rules — and therefore had to be considered full-time staff — they would consider going elsewhere. The chances of a “brain drain”, the study said, are high.

Changes and solutions

This is where we, as expert tech and digital recruiters come in. Having formed RedCat back in 2000, we are experts in digital recruitment, and have a wealth of experience in contract recruitment, especially in the tech industry.

We’ve put together a workflow tool to help businesses understand what they need to do following the IR35 changes. Perhaps the most important thing to remember is that you – as the end client – is responsible for determining a worker’s status, not the individual.

In a nutshell, IR35 determines a contractor’s tax position with HMRC. Contractors working through a limited company, who fall outside IR35, are entitled to receive payment in the form of dividends. Those who fall inside IR35 are regarded as ‘disguised employees’ for tax purposes and are only entitled to receive payment on a PAYE basis.

As already covered, the new aspect is that the end client is responsible for determining the status, not the individual. The new legislation requires companies to take “reasonable care” in making this determination. Once you – as the client – have determined the status of the contractor, Our new workflow graphic shows the options that the team at RedCat has put in place.

The options

As the diagram below illustrates, there are a few options available.

RedCat IR35 Workflow Graphic

The first thing to do is for you to decide whether the candidate falls inside or outside the IR35 rules. If the answer is “outside”, the candidate gets two choices: umbrella or PSC/Ltd.

If the answer is “inside” – meaning the company has decided the new IR35 rules do apply, the next question to answer is whether the candidate is considered “high-risk talent”. High-risk talent means: if a candidate is identified as being integral to the company and/or project, the client needs to retain their services.

If the answer is no – the candidate is not considered high-risk talent – RedCat suggests the “Umbrella” option, under which candidates pay: Umbrella company Fees; NI & Employer NI; Tax at Source; Apprenticeship levy (in most cases); Employee Pensions; Holidays (in some cases), while you as the client pay the current rate.

If the answer is yes – the candidate is considered high risk – we suggest two options: the RedCat PAYE or Statement Of Work.

Under the first, candidates pay Tax & NI at Source and No Fees, while clients pay Employer NI; Employee Pension – If opted in, and holiday. These get added to the client rate, which shares the extra payments. The latter option – Statement of Work – is for where there are multiple roles or contractors where RedCat can help shape a contract and agreement for specific services.

It’s clear that the changes are going to cause some disruption to the contractor hiring process: the best way to smooth out that disruption is speaking to the expert contract recruitment team at RedCat. 

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