IR35: three significant payments implications

IR35: three significant payments implications

Hannah Mellow
February 2017

Modulr is already helping multiple professional employment services firms to automate their payments processes. This is boosting competitive advantage in these businesses because they are able to offer quicker and more accurate payments than their competitors. As we now provide services to many businesses in this sector, we were delighted to attend the Recruitment Agency Expo in London last week.

We were lucky enough to see Julia Kermode, CEO at the Freelancer & Contractor Services Association (FSCA) (which has recently become Business Partners with Modulr), give a seminar about the upcoming IR35 reform, and what this means for recruitment agencies in particular.

The upcoming changes to IR35 will affect contractors working in the public sector. As of April 2017, the responsibility for paying tax moves from being the contractor’s responsibility to becoming the employment agency's.

These changes are already causing some confusion with regard to taxation, but this may also cause some significant implications for how agencies process their payments. We see this as an opportunity for agencies: it's time to review existing payment processes, and consider implementing something better instead. We've outlined three payment implications that agencies should be considering over the coming months.

Employment agencies will need to process more payments

Agencies will now need to ensure that tax is paid, so the volume and complexity of their payments processing will most likely increase substantially. For many businesses, this process is already complicated enough.

The latest IR35 changes will now see the agency having to pay VAT for their contractors, then sending the gross pay for PAYE to payroll - which is either in-house or outsourced - for processing. Then National Insurance has to be paid, and that's not even the end of it...

However you look at it, this adds up to a huge rise in payment processing, which can be time-consuming, repetitive and potentially very costly.

While existing providers and banks do provide facilities that will enable agencies to make these payments, these can be slow, expensive and were not really designed for this purpose. They tend to be one-size-fits-all solutions that don't really address this specific payment requirement, which isn't ideal for agencies.

Agencies can now obtain better payment alternatives, such as Modulr. We can simplify payments for businesses, and we offer the very latest payments technology without any hassle or excessive costs.

More payroll = more errors

At the Expo, Julia outlined some key facts and figures about payroll processing. One example she gave was some data from PwC; in 2015, they estimated that the average FTSE100 company loses between £10-£30 million every year due to payroll mistakes - a huge amount. Even when you take into account the fact that most recruitment agencies are much smaller businesses, payroll errors are still likely to be significant. Processing payroll more frequently and with added complexity will only increase the chances of error and costs being incurred.

This is because payroll processing is commonly processed in batch files, which can be very labour-intensive. Unfortunately, this is where the potential for error can creep in. For agencies that have to run payroll monthly, weekly or even daily, removing manual batch files and automating this process could deliver significant benefits.

Modulr has already helped a leading business outsourcing specialist to overhaul its payroll processes, achieving a 65% reduction in payroll processing costs by simplifying and automating its existing payment processes.

Happy customers means more business

Given the IR35 changes, it's likely that some contractors will re-evaluate the agency they work with to discover whether they are maximising revenue and getting the best service possible.

One way that agencies can stand out from the crowd is to drastically improve the speed at which they pay their contractors. Using Faster Payments is the obvious solution to this, but it's often an expensive option. Fortunately, innovative payments technology is changing this.

Modulr’s payment technology means contractors can be paid daily (or weekly, or every other day, or twice a day...), in as little time as 30 minutes after they have finished their shifts. Our payments technology is quick and easy to implement, and this can be done without having to change banks. Modulr is also regulated by the Financial Conduct Authority (FCA) as an Electronic Money Institution, so agencies can be assured that they are receiving a secure service.

 

So, despite the confusion that the IR35 changes are bringing to the employment services industry, now is the perfect time to turn it into an opportunity. Agencies can easily reduce payments processing complexity and attract more business going forward.

We're looking forward to working with Julia and the FCSA to help businesses across the freelancing and contracting industry with their payments challenges. Get in touch today to find out more about how we can help you gain the edge over your competition.

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