Written by Charlotte Fry
By now we are sure you are sick to the back teeth of hearing about IR35, the potential new legislation and whether it will still come into force in April 2020 now that the government is in disarray. More importantly though, how worried should you be about it?
What is IR35?
The new IR35 government legislation that should come into effect in April 2020 seeks to redefine the IR35 rules for contractors supplied to the private sector, (don't forget that the laws regarding IR35 for the public sector changed in April 2017). As the draft legislation has not been made public yet, the best everyone can do at the moment is speculate about the proposed changes and how it will impact recruitment agencies.
The IR35 legislation which is being rolled out to the private sector will aim to clarify how HMRC will determine if the appropriate and correct taxes are collected from contractors that work in the private sector. Previously, the government has believed that many contractors are incorrectly concluding that they are true contractors due to their relationship with the hirer. Therefore they fall outside IR35, and consequently pay little tax to HMRC. In reality the government believe that many of these contractors are actually controlled by the hirer so are inside IR35 and in effect, are hidden employees. As a result of which contractors and hirers should be paying full tax including national insurance payments. The government have further advised that due to the inconsistencies surrounding IR35 determinations, they are potentially missing out on £1.5bn of tax income a year.
Who is responsible for IR35?
The government have been clear on this point, the hirer must make the IR35 status determination. It is not up to the recruitment agency or the contractor to make issue this determination. This determination must provide reasons why the hirer has reached their determination conclusions. The hirer then must issue a status determination statement as well as pass this onto the recruitment agency.
It is not up to the recruitment agency to issue the status determination, however the recruitment agency must pass this status determination down the chain to either the contractor or if applicable, another recruitment agency beneath them.
Once this status determination is issued to the recruitment agency, they then become liable for any tax loss that HMRC request if the contractor has not paid the correct tax amount, as the recruitment agency is the fee payer. It is worth noting that if the hirer does not issue the status determination, it is the hirer who remains liable for any tax loss that the HMRC request not the recruitment agency, whom is the fee payer.
If either the recruitment agency or the contractor disagrees with the status determination, then they have the right to appeal to the hirer that has issued the determination. Once an appeal has been lodged with the hirer, the hirer has 45 days in which to respond to the appeal. The hirer must provide the appellant with reasons regarding how they reached the original determination and also reasons why they are either sticking to their decision or whether they are changing their decision, as well as issue a new determination. If the hirer does not respond to this appeal, then the hirer becomes liable for the potential tax loss (not the recruitment agency as the fee payer) as there has been a break in the chain.
To clarify one point which is causing confusion with some agencies, the status determination does not need to be issued (and the contractor is still liable for their own tax determination) if;
- The hirer is deemed to be a small company
- Their turnover of less than £10.2 million
- They have less than 50 employees
- The balance sheet of less than £5.1 million.
However, if two or more of these conditions do not apply at any time during the contract period or if the company the recruitment agency is dealing with is part of a larger company, then a status determination needs to be issued.
So what responsibilities are placed on recruitment agencies?
Put simply, if a contractor is deemed to fall inside IR35, their tax and NI contributions will be deducted by the fee payer, normally the recruitment agency or umbrella company. After April 2020, if HMRC deem that the incorrect tax has paid, then the tax loss amount requested by HMRC will need to be paid by the fee payer (agency or umbrella) and not the contractor as is the current case.
The outstanding issue is whether or not the recruitment agency should have to check the determination issued by the hirer. Whilst it is expected that the new legislation will not state that the recruitment agency must check the status determination issued to them by the hirer, it would be beneficial for the recruitment agency to check the determination issued to see if they agree or disagree with the result. If the recruitment agency does not agree with the determination issued, they should appeal the decision with the hirer because, if HMRC also disagree with the determination issued by the hirer HMRC will request the tax loss payment from the fee payer (in this case the recruitment agency), so the agency will suffer a tax loss. Many are therefore recommending that as the recruitment agency will be the fee payer and thus liable for any tax loss, they should always check the determination issued by the hirer.
The determination issued by the hirer could be checked with help from the HMRC tool called CEST, which is currently being updated. This tool enables the recruitment agency to input specific information relating to the contract and the contractor's job role to come to a status determination that HMRC should agree with. That said, there has been widespread criticism that CEST does not ask the best questions and sometimes provides a result with regards to the status determination that agencies as well as contractors do not expect. HMRC are listening to these concerns and are attempting to improve CEST so more accurate results are provided by it however, whether this will work in practice remains to be seen.
How could IR35 impact the contracts between recruitment agencies and hirers?
This is an unknown answer at the moment. Companies all agree that the contracts between the hirers and recruitment agencies will change from April 2020 and that these contracts need to be checked carefully. Some initial thoughts are:
- Hirers will change contracts, stating that in all situations the agencies become liable for all tax losses
- Hirers will state in the contracts that agencies must check the status determination issued and advise them if they disagree with the determination as well as chase up any outcome of the appeal with the hirer
- Recruitment agencies could be forced to accept more and more of the liability of the work the contractors undertake, as the workers become PAYE of the recruitment agencies due to the IR35 changes
It is even more important than ever that the contracts between recruitment agencies and hirers are assessed carefully so that agencies are fully aware of the liabilities and risks they are accepting from the other contracting party. The recruitment agency should also be ensuring that their insurance broker is arranging the correct insurance cover to reduce these liabilities.
Potential insurance policies to protect against IR35
There are many different IR35 insurance policies currently on the market. It is important to review these policies carefully and make sure they provide the cover that you need. Does the insurance policy say what it says on the tin?
The majority of insurance policies at the moment are for contractors to purchase and these policies will pay out for any tax loss suffered by contractors. However, there are some new insurance products coming onto the market that are for recruitment agencies to purchase. They will also provide tax loss cover as well as help with your IR35 compliance reviews. Once these new policies have been finalised, we will provide more details.
What is the next steps and how can Lockton help?
Firstly, do not panic. Make sure you are investing in the correct IR35 procedures for every contractor that you place with a hirer as well as every time you renew the contract with the contractor. It would be wise to put together a check list for every contract to ensure that nothing falls down any gaps;
- Has the status of determination been issued?
- Has the agency reviewed the status of determination?
- Has this determination been passed down the chain?
- Has there been an appeal to the determination and has this been conveyed to the hirer?
- Has the hirer replied to the appeal?
- Again, has this revised answer been passed down the chain?
Secondly, it would be best to get the contracts between you and the hirer checked out by a lawyer that is looking specifically at the insurance implications of the contract. This is one of the reasons why Lockton have employed me, their own in-house lawyer to help recruitment agencies review these contracts as part of our service.
Thirdly, make sure the best and correct insurance policy is arranged for your recruitment agency so that your liabilities and risks are reduced or covered by an insurance policy. This is a vital reason why you should use a specific broker who specialises in insurance for the recruitment sector and who is fully aware of these pitfalls, who can arrange the appropriate cover. Lockton have a team of brokers that just deal with recruitment agencies and are all fully aware of the pitfalls they can suffer.
Lastly, don't be afraid to ask for help and guidance. Make use of all of the tools and services available to you.
Contact Stuart Armstrong
D: +44 (0)11 7906 5056
M: +44 (0)75 5717 6679
Please note that the purpose of this article is to provide a summary of and our thoughts on IR35. It does not contain a full analysis of the law nor does it constitute a legal opinion or advice by Lockton Companies LLP on the law discussed. The contents of this article should not be relied upon and you must take specific legal advice on any matter that relates to this. Lockton Companies LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of the material contained in this article. No part of this article may be used, reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Lockton Companies LLP.