What do recruitment agencies need to know about IR35?
Following the success of the Public Sector IR35 reforms in April 2017, the rules were extended into the Private Sector in April 2021, delayed from April 2020 due to the COVID 19 pandemic. Previously contractors were responsible for determining their own IR35 status and the associated risk, but the IR35 reforms now mean the requirement for determining IR35 status sits with the client, whilst the responsibility of deducting appropriate taxes lies with the hiring / paying entity. This is quite clearly a significant consideration for recruitment agencies, many of whom didn't have the systems or facilities in place to make deductions for employment taxes from payments to Limited Companies.
Why do recruiters need to worry about IR35?
HMRC has commenced its compliance activity. The liability for unpaid taxes can flow back up the supply chain to the recruitment agency. HMRC may choose to target recruitment agencies as the liabilities for unpaid taxes can rest with them and it gives HMRC a more broader reach with agencies having numerous clients.
What’s the best way for recruitment agencies to prepare for IR35?
It’s sounds straightforward, but understanding the process, systems and solutions clients use, when determining IR35 status it’s still the best way to be prepared. Ensure they steer away from CEST, or don't rely on it in isolation. Ultimately, the simplest option for peace of mind is to look to partner with a specialist and reputable service provider such as CoComply, who can manage compliance and mitigate time, costs and risk for both you and your clients.
Fee-payers (i.e. the entity closest to the Contractor and responsible for facilitating payment) can become responsible for the tax liability, in the event that a client has incorrectly determined a Contractors status. From our experience of partnering with recruitment businesses we find the most common assumptions and mistakes to be:
"We've moved to a SoW model". With respect, most SoWs we've seen would not stand up to HMRC scrutiny. In most cases, contractors are still operating in a Time and Materials fashion and are not retaining complete control over the delivery of the services. It doesn't matter if the contract seems ‘water-tight’ - if it doesn't reflect the reality of the situation, it won't stand up and you are still exposed.
"We're covered by insurance". Most insurance policies are only valid if they're purchased by your client - the end client in HMRC's eyes. If the determination is incorrect then it's likely the policy will not pay out anyway. It's not a good default position.
"HMRC won't come after my clients". They will - they've already announced it. If your client gets it wrong, you're on the hook for it.
“HMRC have said they will stand by CEST determinations”. Whilst HMRC have made this statement, we have seen a number of instances of HMRC not acknowledging CEST determinations and coming to their own conclusions. If your client uses CEST to determine IR35 Status, this could be a risk to your organisation.
By adopting a complete “hands-off” approach and having no oversight into the process and solutions your clients are using, creates an existential threat to the future of your business because:
The fines may be just too great for you to pay off. If you place multiple contractors with one client over time and they get it wrong, back tax payments could run into millions as we have seen with the Public Sector fines. The liability can equate to more than double with a fine and interest on top.
Even if you do pay them off, your reputation will be shot in the industry. Although in some cases the liability and penalties may be affordable, the negative press will likely impact future business (and therefore for the success of your business) with contractors and clients feeling exposed partnering with an organisation that has allowed tax avoidance to occur.
If you’re a recruitment agency and you’d like to find out more, why not book a consultation with our compliance team here.
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