Staying on the right side of the IR35 'off payroll' rules

When the IR35 “off payroll” rules are rolled out to most of the private sector in April 2021, there are a few potential pitfalls for the unwary - and some severe penalties for firms that fail to comply. Now is the time to get ahead and get prepared.

Until recently, the engagement of limited company contractors acted as a “safe haven” for recruiters and their clients. In April 2017 things changed in the public sector but for private sector businesses, as the law stands today, the task of deciding on IR35 status falls to limited company contractors themselves. This meant that using temporary labour in this way was a no-brainer for recruiters: because the only tax risks on the table belonged to the contractor alone.

How is the IR35 legislation changing?

From 6 April 2021, the IR35 legislation will be extended from the public sector alone to most private sector businesses, bagging the Treasury revenues of an estimated £1.3 billion per year by 2030 along the way. Here are some key scenarios under which you can be penalised by HMRC:

The status determination statement

Essentially, this is designed to pinpoint the end-user client’s position on IR35 status for individual assignments, and must be provided to both the individual contractor and any intermediary the client directly contracts with – typically a recruitment company. If there are other intermediaries in the contractual chain, each one of them has to pass on the status determination statement until it reaches the “fee payer” (the party that pays the limited company contractor).And until the statement is provided, the end-client retains the responsibility for collecting Income Tax and National Insurance contributions – as does each intermediary unless it also passes on the statement to the next party down the chain.

Client-led disagreement process

This requires the end-user client to review a decision and give a reasoned response within 45 days of a challenge. Failure to comply will leave the client – not the fee payer – lumbered with the IR35 liability.

Reasonable care

If you don’t take “reasonable care” in reaching a decision on whether a contractor falls inside or outside of IR35. But, unhelpfully, the tools and information that you need to make that informed decision have come under fire, particularly the online CEST employment status tool, which many believe is skewed in the favour of HMRC and therefore not fit for purpose.

As a result, given the penalties for making an incorrect employment status determination, some end user clients in the public sector opted instead to make blanket ‘inside’ IR35 decisions, rather than taking the risk of coming own on the wrong side of the fence. Some private sector end user clients may be tempted to follow a similar path 9numerous banks have been reported as doing so), but beware, as this may lead to high class contractors who should be outside IR35 refusing to work for such clients.  End user clients will want to avoid a brain drain caused by a lazy or uninformed approach.