The IR35 reform and delay has been a hot topic of discussion over the past 6 months, with many believing that the reform would be scrapped or further delayed. Yet regardless of the scathing report from the House of Lords sub-committee recommending a wider review of the legislation and the Labour support for further delay, the Finance Bill 2019-21 has gone through and the changes will take effect from the 6th April 2021.
While the Bill is broadly similar to the draft legislation, there are some differences and a number of issues have emerged. We will discuss what recruitment agencies should be doing to prepare for reforms and which parts of the legislation we think will present the biggest challenges.
The key points are:
- The small business exemption,
- The standard of 'reasonable care',
- The 'client-led' dispute resolution process,
- Steps recruiters can take to prepare for the reforms.
Small Business Exemption
Like the rules for the public sector, the new rules for the private sector do not place an obligation on the end-client to inform a recruitment agency of their size unless asked to do so, in which case they must confirm their size within 45 days (there are separate provisions that govern notification of a change in size once a Statement Determination Statement is issued).
Therefore, it is important that recruitment agencies establish a process where the end-client has to confirm their size, either before entering into the contract or within their own standard terms, or both. Where there is a longer contractual chain, then it is important to ensure that the entity you are contracting with has a duty to confirm the end-client's size to you within a reasonable period of time.
As the test for small businesses is complex, it is preferable that the end-client makes the determination on its size rather than providing evidence of turnover, staff number etc. for the agency to make that determination.
Lastly, if you are placing a contractual obligation on an end-client (or another agency) to confirm their size, it is a good idea to cross reference both the Finance Bill 2019-21 and the Companies Act 2006 (which set out the test) within the contract in order to prevent disputes at a later stage as to the meaning of a 'small business' and any technicalities regarding subsidiaries etc.
Reasonable Care
Following concerns of blanket assessments by many recruitment agencies and contractors, HMRC have specified that a Status Determination Statement (SDS) will not be valid if the end-client has not used 'reasonable care', which means that PAYE and NIC liabilities will pass back to the end-client.
In the ESM10014, HMRC describes that reasonable care means 'acting in a way that would be expected of a prudent and reasonable person in the [end-]client's position'. Clearly, the concept of reasonable care is vague, and uses both an objective and subjective test.
This is why it is important that in your own standard terms, a recruitment agency may wish to elaborate on what reasonable care entails. For example, this could be done by setting out what would and would not amount to reasonable care, such as blanket assessments of all PSC contractors as inside IR35 being unreasonable. (For some examples of what HMRC regards as reasonable care, agencies may want to look at the ESM's, including ESM10014).
Dispute Resolution
The dispute resolution process is not going to be policed by HMRC and is going to be client-led. While the end-client will take on liability for PAYE and NICs if it does not respond to within 45 days of the challenge to the status determination being made, there is no obligation on the end-client to change the status determination.
Therefore, it is very important that agencies work with contractors and end-clients in order to ensure the dispute resolution process is as smooth as possible in order to avoid any disputes and to maintain business relationships. This would be best done by liaising with end-clients and contractors in the status determination being made so all parties understand and agree with it, and by working with the end-client in creating a dispute resolution process which is fair to the contractor.
Practical Steps Recruiters Should Follow
The new rules require a lot of cooperation and work between all parties in the contractual chain. Below we set out a non-exhaustive list of some practical steps that recruitment agencies may wish to consider in order to prepare for the changes to the off payroll working rules. This list should be considered against factors like your agency's size, the number of contractors you have, what steps your end-clients are taking, and your commercial priorities and budgets.
- Make sure your standard terms of business have been updated to incorporate the changes and set out appropriate obligations on the end-client.
- If you are going to contract with other agencies and not directly with end-clients, then ensure that the contract contains clauses that place stricter obligations on the agency you are contracting with in relation to passing information, establishing a dispute resolution process, and so on, or that the contract contains clauses that are required to be mirrored in the other agency's contract with the end-client.
- Liaise with end-clients to see what processes they have established and work with them, for example, in setting up a dispute resolution process.
- Liaise with contractors who have contracts that will be ongoing after 6th April 2021 to establish working practices, as well as to check (and amend if necessary) contractual terms so that you can minimise the risk of an inside IR35 determination.
- Familiarise yourself with HMRC's guidance and ESM's and incorporate their suggestions into your agency's contract and working practices.
- Review current HR and other processes and procedures for onboarding contractors, in order to incorporate an assessment of IR35.
- Ensure that you have a process to feed back to contractors and inform them of their status and of their right to an appeal, as well as what the status determination will mean for their pay.
Agencies Must Act NOW
While many recruiters have been affected by the COVID-19 pandemic and will be focussed on recovering from its implications, it is important for agencies to start preparing now in order to avoid a cliff-edge situation similar to the one that took place when the public sector changes came in in 2017.
Agencies and end-clients should start to set aside time to familiarise themselves with the changes and start preparing contracts, as well as building relationships with clients and contractors. Ideally, there should be a process in place by September 2020 so that all parties in the chain are prepared to be compliant from the 6th April 2021.
All parties should consider whether they should take out insurance to protect themselves, especially given the wide transfer of liability provisions set out within the Bill, which allow HMRC to recover PAYE and NIC's from another party in the contractual chain where “there is no realistic prospect of recovering [the payment] … within a reasonable time”.
We will follow up on the insurance solutions shortly but in the meantime if you have any questions, please do not hesitate to contact us.