Understanding where the liability for IR35 could sit in your engagement and how IR35 insurance might be make or break for recruitment agencies.
As of April 6th 2021, the manner in which IR35 obligations are dealt with in the private sector will change considerably. IR35 obligations will no longer rest solely with the contractor. As we have seen in the public sector, it will become the end client’s responsibility to determine IR35 status.
Both end clients and recruitment agencies are expected to put new processes in place to cope with the new responsibility of assessing IR35 status and supplying status determination statements to all relevant engagements.
However, one of the biggest risks which has seen many businesses implement blanket bans of PSCs altogether is the transfer of liability for IR35 from the contractor to the “fee-payer”.
Who is the fee-payer?
The fee-payer is the party in the contractual chain that pays the contractor’s PSC for their services.
To have a better idea of where the liability for IR35 rests in the contractual chain, we must first understand who is classed as the fee-payer in any engagement and is therefore liable for any unpaid tax and national insurance contributions following the 2021 reform.
No two contractual chains are the same. Their circumstances can vary widely. For this reason, the fee-payer is not necessarily the party we would always expect.
In most cases, the recruitment agency is the fee-payer. Therefore after the reform, recruitment agencies will be liable for any unpaid tax and national insurance contributions. The example below is the most common arrangement we see here at Qdos but there are plenty of examples of engagements where the fee-payer is not a recruitment agency.
Below we demonstrate this change in liability pre and post reform for a typical contractual chain:
|Before April 2021 (private sector)||End client||Recruitment agency (Fee-payer)||Contractor|
|No IR35 responsibilities||No IR35 responsibilities||Responsible for both determination and liable for tax and NIC|
|After the April 2021 reform||End client||Recruitment agency (Fee-payer)||Contractor|
|Responsible for determining IR35 status||Liable for tax and national insurance contributions||No IR35 responsibilities|
When is the recruitment agency not the fee-payer?
In some engagements, there is no recruitment agency. Direct engagements are not entirely uncommon and are an easy way of demonstrating a contractual chain in which the recruitment agency is not the fee-payer, because there is no agency. In this case, we would see that the end client takes on the responsibility of being the fee-payer.
In some circumstances there may also be more than one agency in the contractual chain. Typically, it will be the agency who pays the contractor for their services, who will be the ‘fee payer.’ However, the agency not paying the contractor would still need to ensure that the agency who is the ‘fee payer’ is meeting its obligations under the IR35 reforms, as should all parties in the contractual chain.
If for any reason, a member of the contractual chain fails to meet their IR35 obligations, they are at risk of becoming the fee-payer in the engagement. The following paragraphs present examples of how this could be the case.
The end client must take reasonable care in assessing IR35 status. If they are proven to have not taken reasonable care, then they could be labelled as the fee-payer and therefore be responsible for any unpaid tax or NIC. We have a whole page dedicated to unravelling exactly what HMRC mean by reasonable care.
After April 6th 2021, the end client is also responsible for determining IR35 status. As such, they should be able to provide a record of any evidence or reasoning that helped to make that decision. Again, if they are unable to provide reasoning for their determination, then they may be saddled with the responsibilities of the fee-payer.
If it is a longer contractual chain with multiple parties, then the Status Determination Statement that comes from assessing the engagement for IR35 must be passed down that chain.
If any party neglects to pass that along, then the liability would fall back to “Agency 1” (the party next in the chain to the end client) and they would become the fee-payer until it is passed to the ultimate fee-payer (the business directly paying the contractor), making the direct supplier to the client the party responsible for ensuring every other party in the chain doesn’t neglect their duty to pass along the SDS.
In short, the party directly contracted to the end client will become the fee-payer should any party further up the chain to the contractor fail in their obligations.
What is IR35 insurance?
IR35 insurance provides cover should the recruitment agency come under an investigation by HMRC for compliance with the IR35 legislation. This usually provides cover for representation, and covers the tax, interest and penalties that may be due following the conclusion of an IR35 enquiry
At Qdos, our pioneering Tax Liability Cover (TLC/ Off Payroll (IR35) Tax Liability Cover) is designed to protect the fee-payer in the contractual chain. With our unique experience in the IR35 industry, we can offer you support that works for your business. We have provided protection to over 25,000 contractors under our pre-existing TLC policy which covers contractors under the existing legislation and have insured over 7,500 engagements with our IR35 insurance that is designed specifically to cover the fee-payer.
How Status Review could help:
As part of Qdos Status Review, we provide comprehensive protection for the contractual chain. Not only do we undertake robust IR35 status assessments and provide Status Determination Statements for your engagements, but we also provide our Tax Liability Cover. The insurance policy will be held by the Qdos Status Review account user but will cover all parties in the contractual chain, whoever it might be within the contractual chain. For example, where an agency is used and if the risk exposure sits with the end client, then the cover will react accordingly. Meaning that all organisations within the engagement are protected.
Why is IR35 insurance critical for recruiters?
An increased risk for recruiters that IR35 reform has brought with it is the possibility of a tax liability bill for each contractor engagement that HMRC deems to be incorrectly assessed. Even using HMRC’s own CEST tool, NHS Digital reported a bill of £4.3million following extensive discussions with HMRC around a number of their assessments. The cover provided by IR35 insurance could prove vital.
We expect to see compliance activity into IR35 status increase within the coming years. In the Governments response to the report from the Economic Affairs Finance Bill SubCommittee on off-payroll working it was stated that ‘it is estimated that non-compliance with the off-payroll working rules will cost the Exchequer £1.3 billion per year by 2023/24’. The impact of the Coronavirus alongside the reform date being delayed to 2021 may well lead to an increase in HMRC’s activities.
Contractors are increasingly likely to pick recruitment agencies and end clients who take their IR35 obligations seriously. We have seen evidence of this through offpayroll.org.uk. Through the use of this website, contractors have shown their increasing desire to engage only with those businesses that are implementing a fair process for compliance and thoroughly considering IR35 status. By insuring the financial risks, there is all the more reason to take a fair approach which benefits everyone in turn.
It may also be worth considering the potential competitive advantage that having IR35 insurance in place might give your business. By having IR35 insurance in place and, even better, by having a thorough compliance process in place this may give you the edge over the competition. It is a good way of keeping your end clients happy thanks to the mitigation of risk.
Because of the aforementioned increased risks, recruitment agencies should consider putting in place adequate IR35 insurance to protect themselves from loss. In addition to this, by putting in place a process such as Status Review recruitment agencies will not only be protecting themselves from loss but will also have robust processes in place to determine the IR35 status of their engagements.
What can recruiters do to prepare for the IR35 reform?
- Educate yourself on your IR35 obligations and relevant changes in legislation
- Put processes in place to help cope with the implementation of the reform
- Insure yourself against potential losses
- Communicate with your contractual chain
Consider getting in touch with us here at Qdos, we can take care of all of the above for you.