How to manage IR35 assessments compliantly

Since the implementation of the IR35 reforms in April 2021, it is now the end hirer’s responsibility to conduct an accurate IR35 status assessment on their contractors and pass this down the supply chain, with HMRC often looking to the recruitment business as the first port of call for any unpaid or incorrect tax.

This means you need to be confident your entire supply chain is managing IR35 assessments compliantly to protect yourself from unnecessary risk and financial penalties.

Following the independent Taylor Review of Modern Working Practices commissioned by the Prime Minister in 2017, we have witnessed the introduction of a variety of new regulations in the recruitment industry, including the recent IR35 reforms in April 2021.

With new regulatory changes on the horizon, your staffing business must be ahead of the curve by staying abreast of your compliance responsibilities and upcoming legislative changes – and we can help. As your payroll partner, we offer your recruitment business a range of compliance and IR35 support. In this article, we detail the risks your organisation may face under the newly introduced IR35 reforms and how to protect yourself by ensuring your entire supply chain is compliant.

Is your recruitment business at risk?

Although it is the end hirer’s responsibility to conduct a status assessment and pass an accurate status determination statement (SDS) down the supply chain, if a worker’s status is determined as incorrectly ‘outside’ IR35, HMRC may look to collect any unpaid or incorrect tax from the fee payer or recruitment business first, before going to the end hirer.
Depending on the outcome of the SDS then, there are three main risks your recruitment business may face:

Risk 1: End client makes an ‘outside’ IR35 determination

If an ‘outside’ status determination is made, this in theory means the contractor can continue working through their PSC compliantly. However, if this is successfully challenged by HMRC, the liability for unpaid tax sits first with the organisation that paid the contractor’s limited company, then the top agency in the chain supplying the worker to the end client, even though the hirer made the ‘outside’ IR35 status determination. If the fee payer or top agency in the chain can’t or won’t pay, the liability moves up the chain to the end client.

Risk 2: End client makes an ‘inside’ IR35 determination

Even if the worker is treated compliantly by the client and recruitment business and is determined to be legitimately ‘inside’ IR35, there is still a risk to your staffing organisation if, further down the supply chain, the contractor is paid by another party as an ‘outside’ IR35 contractor.
In this case, the liability would sit first with the organisation that paid the contractor’s limited company. The top agency in the chain supplying the worker to the end hirer (next to the end hirer), which may be your recruitment business or another that you supply, will be next in line, even if that organisation itself acted compliantly. If that recruitment business can’t or won’t pay, the liability moves further up the chain until it reaches the end hirer.

Risk 3: Commercial risk – costs increase and talent is lost

Many contractors and contract roles have become accustomed to being paid and fulfilled using an ‘outside’ IR35/limited company route. When these are changed to ‘inside’, whether as a result of a blanket ban or a legitimate determination, contractors now have to be paid via PAYE and taxed as employees. This increases the cost of employment and the contractor faces a higher tax bill on the income they receive.

Where the same rate is then paid by the agency to the contractor, the company paying the contractor (such as the Umbrella company) now has to deduct employment expenses (Employers’ National Insurance, pension, the Apprenticeship Levy etc) from the rate they receive before passing it on to the contractor. From the reduced rate, the contractor then sees a large proportion deducted in PAYE and Employee’s National Insurance.

Some contractors may refuse to work on this basis, meaning clients and recruitment businesses may be left with a skills gap. For the contractor to receive the same net pay, the end client/recruitment company would need to add an additional amount to the contractor’s rate to cover these extra taxes and costs of employment, increasing costs to the supply chain for engaging important resources.

Protecting the entire supply chain: a collaborative approach to compliance

Despite the associated risks, the best way to ensure your recruitment business and the entire supply chain is protected and compliant in all circumstances is to employ a robust and transparent assessment process which will allow limited company contractors to continue working ‘outside’ IR35 where appropriate and alternative payment methods, like PEO and Umbrella, to be used for assignments that are ‘inside’ IR35.

The first step to this is agreeing with end clients to assess all roles through a reliable and insurance-backed assessment tool, like IR35 Complete™. This ensures that all workers are placed accurately, minimising the risk of HMRC challenge or loss of workers who feel they have been placed unfairly ‘inside’ IR35. For any legitimately ‘outside’ contractors, it also ensures determinations are safe and liability is insured. IR35 Complete™ delivers a ready-made workflow to:

• Support you with requesting determinations for your end clients that are instant, robust, and accurate
• Automate the movement of determinations through the supply chain, saving you time, money, and resource chasing determinations and checking statuses
• Provide a complete audit trail and reasons for each determination that can act as proof you’ve taken reasonable care if you’re ever challenged by HMRC
• Provide a mechanism for dealing with assessment disputes and worker migration to suitable payment options for ‘inside’ IR35 workers, such as Workwell Umbrella or other suppliers on your PSL.

 

Using an assessment tool like IR35 Complete™not only helps you manage your compliance obligations, but also enables you to keep contractors and clients happy by placing as many as possible ‘outside’ IR35. Between the introduction of the reforms in April 2021 and July 2021, IR35 Complete™ was used by over 750 hiring organisations to assess countless contractors across numerous sectors. It found that between this period, 52.9% of roles were legitimately ‘outside’ IR35, while 28.2% of determinations were ‘inside’ IR35, and the remaining 18.9% found that the end client was not responsible for the determination – exempt either due to the ‘small company exemption’ or ‘overseas exemption’.

Here to help

For more advice on our market-leading assessment tool, IR35 Complete™, and managing IR35 assessments compliantly don’t hesitate to get in touch on 01923 257257 or book a meeting with our IR35 Complete and Compliance Manager, Stuart Marquis .