09th July 2024
Written by Qdos Contractor
IR35 regulations can often feel like a confusing web of legalese, leaving recruitment agencies worried about financial risks and a bumpy ride for their contractors.
In this article, we’ll explain the impact of the off-payroll working rules on all parties within the contractual chain, the importance of collaboration with clients, and some essential tools and tips to remove the headache from IR35 compliance.
What do recruitment agencies need to know about IR35?
IR35 first became law in 2000 as part of the Finance Act, aimed at thwarting what HMRC call ‘disguised employment’. Back then, responsibility for determining whether a contractor was ‘inside’ or ‘outside’ IR35 (and correctly paying the accordant rate of tax) lay with contractors themselves. However, this changed in 2017 for the public sector and 2021 for most private sector organisations. Amendments to legislation saw responsibility for determining IR35 status shift to the end client - the organisation ultimately hiring the contractor. These changes were intended to address concerns about inconsistencies and potential exploitation of the previous system.
The 2021 reforms also introduced additional financial responsibility for recruitment agencies in certain situations. ‘Fee-payers’ – most often the recruitment agency in a standard contractual chain – became responsible for paying any resultant tax liabilities to HMRC, should it be decided that contractors were incorrectly classified as outside IR35. Only if the end client has failed to exercise ‘reasonable care’ in reaching a determination would the tax liability remain with the end client, rather than shifting to the fee-payer.
Given this backdrop, it’s essential for recruitment agencies and end clients to work together in ensuring compliance with IR35 regulations to help mitigate financial risk, as well as provide a smooth experience for contractors.
Understand your clients’ pain points
Let’s face it: complying with the IR35 legislation can appear complicated. Clients want to get a contractor in place so they can get down to work, not worry about the intricacies of tax and compliance.
This gives recruitment agencies an opportunity to step in and help demystify the process. By offering knowledge and communication around IR35, and access to complimentary compliance tools, agencies can act as a bridge between clients and contractors, ensuring clear expectations and minimising risk for everyone involved. A great way to facilitate this is to engage with expert training or consultancy so that experts can educate your in-house team responsible for making contract placements.
Recommend a reliable compliance tool
Because they are most often ‘fee payers’ in the supply chain, recruitment agencies carry the majority of risk in relation to IR35 compliance. It therefore pays to be ‘in the know’ when it comes to which tools you should use!
Your clients may believe they are obligated to use HMRC’s own status determination tool, CEST. However, 20% of CEST uses result in an undetermined outcome, and HMRC has challenged a number of status assessments made using their own tool,
resulting in significant tax liability.
Recognising these limitations, Qdos created Status Review - a market-leading complete IR35 compliance solution for clients, recruiters and consultancies. Our platform provides businesses with Status Determination Statement reviewed by a team of experts, access to detailed consultancy for ad hoc or technical queries, and a comprehensive tax liability insurance policy covering all ‘outside IR35’ determinations. Crucially, this means that even in the event of an enquiry, you can rest easy knowing you have access to expert support guiding you through the process, and your financial exposure is insured.
Mediate contractual changes
When it comes to IR35 compliance, recruitment agencies play a crucial role in bridging the gap between clients and contractors. One key way to achieve this is by acting as a mediator for contractual changes.
Discrepancies between the contract you have with the end client (the upper-level contract) and the one you have with the contractor (the lower-level contract) can create a compliance headache for everyone involved. IR35 hinges on the nature of the working relationship between the contractor and the client, and conflicting terms between the two agreements can make it difficult to determine the contractor's IR35 status accurately – and could even lead to an enquiry later down the line.
By carefully reviewing both contracts and mediating any discrepancies, you can ensure a clear and consistent picture of the working arrangement. This not only benefits your clients by minimising the risk of incorrect IR35 assessments and potential penalties from HMRC, but it also protects your agency from unexpected liabilities.
Audit your processes
Complying with the IR35 legislation requires close attention, especially if your agency engages high volumes of contract workers. To ensure your agency is fully compliant, it can be useful to engage an IR35 audit service to review all stages of your contractor engagement – from initial recruitment and contract negotiation to ongoing management. Not only will this demonstrate due diligence to HMRC and minimise the risk of any unexpected tax liabilities, it will give your agency the confidence to operate efficiently and ensure a positive experience for both contractors and clients. Additionally, maintaining an efficient compliance process can significantly minimise the burden on the end hirer, positioning your agency as a valuable and trustworthy business partner.
