Practical and contractual considerations around IR35

Many employers continue to deal with the significant impact of the Coronavirus (COVID-19) pandemic and the latest national lockdowns. But with limited time to go before the new IR35 rules come into effect on 6 April 2021, businesses cannot ignore the need to ensure compliance for their contractor populations and within their supply chain. 

There are a number of ways in which end users of contractors could find themselves taking IR35 liability for withholding tax and National Insurance, including:

  • failing to issue a status determination statement,
  • not taking reasonable care with that statement; and
  • not dealing appropriately with an appeal against the determination.

In dealing with these risks, much of the focus to date has been around how to make the status determination and the factors to take into account. However, organisations should be aware of wider supply chain and contracting issues, not least because of the new rules which say that HMRC will be able to look beyond the fee-payer (often an agency or intermediary) and recover PAYE debts from a ‘relevant person’ instead. A relevant person might be the end user in the supply chain. 

So what questions should organisations be asking themselves around these wider issues? Here are some of the main considerations.

Have I got a secure supply chain which I can monitor and audit with appropriate IR35 processes?

The primary concern for organisations has to be whether they can identify contractors’ personal service companies (PSCs) and other relevant intermediaries providing services to them. Unless this can be done, the organisation won’t be able to make a status determination. And there is no defence of using “reasonable care” if a PSC hasn’t been identified in the first place: the end user will still have responsibility for tax withholding if the PSC meets the IR35 tests. 

This can be particularly challenging when the end user has a supply chain that may well extend through a number of agencies (perhaps via a managed service provider) before reaching the PSC and end user. Although not a complete answer, it is vital that appropriate contractual provisions are in place for the supply of contingent workers. This is the case even if an organisation has decided to avoid the use of PSCs entirely. 

These contractual provisions should ensure the following:

  • all agencies throughout the supply chain identify any PSCs before any services are performed and provide adequate information about them (or exclude their use),
  • each party knows what their responsibilities are in making and communicating a determination (it is vital to bear in mind that the end user will only pass the tax withholding obligation to the actual fee payer when that determination reaches the hands of the worker),
  • there is a determination disagreement process in place that is communicated to everyone concerned. This must enable the end user to respond to any disagreement within the specified 45 day period (or again, the withholding liability will remain with that end user),
  • records are kept of the above for at least six years,
  • any change in service scope during the period of the assignment itself will result in a fresh determination where needed; and,
  • the end user has the comfort of contractual indemnities in the event of a failure on the part of agencies to comply with their obligations.

Can I avoid applying the IR35 rules by issuing statements of work to contractors?

The IR35 rules will not apply where an organisation genuinely secures packaged services rather than the supply of labour. But it can be challenging to differentiate between these types of agreement. An organisation that has robust arrangements for hiring contingent workers can still be vulnerable under the IR35 rules if parts of the business can issue a statement of work (SOW) or purchase order that inadvertently includes a contractor supplying their services under the organisation’s direction and control.

Therefore a procedure should be in place to ensure that SOWs are not issued where they may trigger application of the IR35 rules. For example, does the supplying organisation really have full responsibility for the management of the services? What direction and control over those services is retained by the end user? Are the financial arrangements consistent with an outsourced service? 

Have I trained my staff on the impact of IR35 on them?

Given the risks identified above, organisations must ensure that the formal IR35 policies introduced to comply with the new rules are followed in practice. In our experience, not training relevant individuals will mean that the danger of non-compliance will still exist. One important example is in issuing statements of work as described in the preceding paragraphs. Another example is when a contractor challenges their status determination: as mentioned above, a prescribed appeals process is vital here. However, under IR35 legislation a valid appeal can still be made outside of that process. It is therefore important that management in the business who, for instance, receive an email from a contractor challenging their status know to trigger the process so that a response can be made within the 45 day period. 

And finally, commercial considerations must be taken into account. When projects are being priced, any increased fee payable as a result of the application of IR35 must be factored into costings.

In summary, IR35 can usefully be thought of as a change management project affecting all aspects of the use of contingent workers rather than simply as the introduction of a new tax rule.

Contact us

Laura Nadel

Laura Nadel

Director

Tel: +44 (0)7725 068104

Nick Willis

Nick Willis

Director, Employment Legal

Tel: +44 (0)7880 505140

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