IR35 legislation

The impact of IR35 for UK recruitment agencies

Sarah Linney
17 Jun
Reading time: 6 minutes
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Perhaps you’ve heard of the UK’s IR35 legislation? It aims to ensure that contractors who work in the same way and capacity as permanent full-time and part-time employees pay the same taxes and national insurance as typical employees. 

However, you may not be aware of the recent changes made to this piece of legislation. This legislation was officially created in 2000, revised in 2017, and set to go into effect in 2020. However, due to the COVID-19 outbreak, the full enactment of IR35 got postponed and it was finally implemented in April 2021.

Keep reading to get the latest news on the IR35 private sector legislation and how it impacts your recruitment agency! 

What is IR35?

IR35 is UK tax legislation created to locate and identify contractors and businesses who look to circumvent paying the appropriate amount of taxes by working as “disguised” employees.

In other words, working as a contractor is more beneficial tax wise when compared to working for an umbrella company or when working for a company as an employer. As a result, many contractors are truly acting as employees. 

Individuals in this category enjoy an unfair tax advantage over employees working in the same capacity as they do, whether intentionally or unintentionally so IR35 removes this unfair advantage.

Does IR35 affect recruitment agencies?

The government has discovered that only one out of every ten contract workers in the public sector have correctly identified their IR35 status. This statistic has caused them to tighten the criteria and extend the legislation to the private sector. 

Some experts believe that it will have both positive and negative effects on the recruitment sector. Let’s look at the risks and possible outcomes of the IR35 private sector legislation on recruitment agencies. After all, it is now the employer, not the contractor’s job, to determine IR35 status.

How can recruitment agencies comply with IR35?

Now that IR35 is in effect, collaboration will be the key to success in the immediate future. Understand the major and minor details of the extended bill to know how it affects your recruitment agency. 

Employers must now perform the following duties for all contract roles:

  1. Make an immediate determination on the contractor’s employment status to see if they are under IR35
  2. Inform the contractor and the respective agency of the decision and the reason behind it
  3. Tend to appeals or disputes by the contractor, if they disagree with the determination
  4. Be aware that any employers that have contractors under an incorrect employment status may assume responsibility for full repayment of the debt owed to the government 

There are several steps that recruitment agencies and employers can take to get their workers and the company aligned with proper protocol. 

1. Understand those impacted by this legislation. 

You’ll be relieved to know that there are still some clients that will be exempt. For example, all small private companies are excused from making any IR35 determinations at the moment and can continue normal operations. They will not get penalised for mistakes. 

Read here for what makes a company small, according to the HMRC

Also, note that any clients not based in the UK are exempt as well. 

2. Inform yourself of what qualifies a contract to fall under the IR35 private sector

If your agency supplies large public companies with contractors, you’ll probably be affected by this law. Each person’s contract must get fully assessed, so you’ll want to familiarise yourself with the HMRC criteria. 

While there isn’t a clear cut checklist with every single detail outlined for you, there are some suggestions for clients to follow since the onus is no longer on the contractor. The level of control the client has over the worker is a large determinant of their employment status. For example:

  • The contract worker should have the right to offer a substitute in their absence
  • The contracting company holds all financial risk and they are the party that is liable for errors
  • The contract worker has complete freedom to work as they desire
  • There are no additional benefits given, such as paid time off 
  • There is a definitive start and end date for the worker’s contract

Check out this tool for more info on whether a contract is under the IR35.

3. Try to maximise the IR35

There are ways that your agency can be more innovative concerning billing and working with clients. The aim is to minimise your losses while continuing to generate revenue from contractors. Here are a few ways that you can assist contractors that are directly affected by IR35:

  • Consider converting the contract workers to fixed-term contracts or permanent placements. This creates other fees that can offset the revenue loss you’ll experience.
  • Find an umbrella company to partner with; these companies will directly hire the contractors, removing liability from the client and your agency. If you create an agreement between your company and the umbrella company, you can offer this one-stop-shop solution to your clients. 

4. Discuss options with the contractors that are affected

If it gets determined that a contractor falls within IR35, they’ll probably have their pay reduced. Help the contractor to prepare for these changes and tell them what they can expect moving forward. 

Additionally, tell them about the benefits of working under IR35, such as being eligible for holidays, employee benefits, pension; perks they couldn’t previously receive. 

5. Offer a consultation for recruiters, complete with a questionnaire session

Start going over the correct questions to ask to determine whether a contract goes under the IR35 regulations. 

Knowing the answers to these important questions will reduce the risk for all parties involved and create an atmosphere to embrace the shift in legislation. 

Also, consider using software that will help you to organise contractors’ information and contract details, making the process even easier. 


It will be up to the employers, contractors and agencies to strategically create a system of checks and balances to keep things flowing smoothly. This is a possible permanent change in the way that the UK government operates when it comes to contractual work. To avoid disruptions and potential fines, recruitment agencies must understand the intricacies of the IR35 legislation.

For more insights about IR35 and its impact on the recruitment sector, please watch our webinar: Navigating IR35 in 2021: What the private sector can expect.

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