IR35 in the Private Sector - What should recruiters be doing now?

Tuesday 16 April 2019

Since its introduction in 2000, the tax legislation known as IR35 has determined the employment status, for tax, of individuals who provide their services through their own limited companies. Independent contractors, working through their own personal service company (“PSC”), and who are treated as truly independent workers, may be entitled to receive advantageous tax treatment on their earnings, partly to account for the business risks they are taking. Whereas, workers who are considered to be working as “disguised employees” of the end client are only entitled to receive income which is taxed on a PAYE basis.

However, the IR35 rules have been largely ineffective as, in the private sector, it is the contractor who has determined their own individual IR35 employment status, leading HMRC to estimate (rightly or wrongly) that there was a widespread non-compliance with the rules (and therefore a tax shortfall for HMRC).

From April 2017, when the Off Payroll Rules were launched in the public sector, the responsibility for determining, in the public sector, whether a contractor fell within IR35 shifted from the contractor to the end client engaging their services. However, the responsibility for deducting the necessary PAYE and NIC became that of the “fee payer” (usually the recruitment business, where there is an agency supply). Therefore, recruitment businesses in the public sector are now liable for the real-time payment of contributions to HMRC – making it vitally important that they are confident with their end clients’ determination of the role.
HMRC have declared the public sector changes to be a “success”, and have decided to level the playing field by extending the changes to the private sector from April 2020. A Consultation on the private sector changes was issued at the start of March, although we already know the fundamentals – that the private sector hirer will have to make the employment status determination and that the fee paying agency will have to make the correct deductions.


The Consultation document has created a confused liability picture for clients and their agencies. It is the case in the public sector that hirers must take “reasonable care” in making their employment status determinations, or risk being liable for any tax shortfall; that will continue to be the case in the private sector. However, the Consultation now suggests that all intermediaries in the supply chain will have an obligation to pass the status determination decisions down the supply chain and, in the event that HMRC identifies a tax shortfall, it will look, in the first instance, to the intermediary that has failed to fulfil its statutory obligation. Furthermore, the Consultation is proposing that, in the event that HMRC does not recover any tax shortfall from the failing intermediary, it will then look to the agency that has the contract will the end client.

Brookson Legal is often asked: who has the risk? This is not a simple question to answer. It is the case that clients must make all reasonable efforts to apply the legislation properly, or they are exposed to a potential tax liability. However, where clients do take “reasonable care” (and the debate about what “reasonable care” means continues), the onus will be on the agency contracting with the client to make sure that: (1) information is passed down the supply chain in a timely manner; and (2) there are no rogue or non-compliant intermediaries in the supply chain that could leave the contracting agency holding the liability if HMRC identify a tax shortfall. Brookson Legal argues that agencies’ focus should be upon helping and encouraging their clients to manage the law “properly” because, by doing that, they not only protect the client, but they also reduce the risk to the supply chain, however complicated the transfer provisions might become.

Therefore, at this point, the challenge for agencies is a relatively simple one (although probably falling into the easier said than done basket). You should be encouraging your clients to understand what is coming; to get the right advice; not to postpone action until later in the year, when there will be a huge number of businesses trying to navigate their way through the rules ahead of April 2020. Clients who are well-prepared; who understand the size of the challenge; who give themselves time to understand the employment status (for tax) of their contractors will reap the commercial, reputational and operational benefits that come with that. What’s more, the agencies who have helped those clients get there, will also see all of those benefits in their own businesses (whilst greatly reducing the risk of an unexpected tax bill landing at their door).

By Victoria McDonnell

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